1. Chapter 9: Arguments for and against protection
Topics in chapter 9
Trade and domestic distortions
Trade to promote domestic production
The infant industry argument
The dying industry argument
Other arguments

2. Market imperfections
We have so far assumed away market imperfections so that we could rely on the price mechanism to provide correct signals
supply equals marginal cost
demand equals marginal benefit
no distortions between private or social benefits or costs
P = MB = MC
P = SMC = SMB

3. In the real world,….. Market imperfections do exist
Externalities, which can be positive or negative
Negative: Pollution (Salmon fishers in a river with a paper mill)
Positive: Bee keepers and fruit growers
With externalities, the market will not ensure optimal resource allocation
With negative externalities, production may be too high, and with positive externalities production may be too low

4. Marginal Social Benefit
Assume that MSB > MB so that production may be too low
Can domestic production be stimulated through a tariff, where the added MSB outweigh welfare loss from the tariff?
Subsidies is a better policy instrument

5. Imperfections and trade policy
Can trade barriers be used to correct distortions in the domestic economy?
If e.g. there is a distortion in the labour market where MC > SMC (unemployment risk), should the industry be protected?
Specificity rule - always correct the problem at source
If there is a problem in the labour market, this is where the problem should be addressed also

6. Infant-Industry Argument
One argument for protection which stands up to economic scrutiny is the infant-industry argument
A nation may have a potential comparative advantage in a commodity, but because of lack of know-how and the initial small level of output, the industry will not set up or be able to compete
Temporary trade protection may be justified

7. The geriatric industry argument
Should an old or “geriatric” industry be granted temporary adjustment assistance ?
Adjustment may be delayed indefinitely
Temporary assistance often becomes permanent
Again, the problems should be corrected at source (the specificity rule)

8. Strategic trade policy

9. Other arguments
Non economic goals may also be pursued through trade policy
National pride
Income redistribution
National defence
Food security