Lecture 7 Arguments for Protection

Chapter 7

AGRB 362 Global Agri-food Trade

Arguments for Protection

Valid arguments Invalid arguments

Invalid Arguments
Patriotism Employment Fallacy of composition Fair play for domestic industry Preservation of the home market

Patriotism

It is patriotic to have barriers to foreign competition.

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When country imposes protection, its national well-being falls. True patriots, it should oppose policies that lower national welfare .

Employment
Argument that it will create or at least preserve jobs. It is true that it lead to an expansion in the protected industry. But the resources for this comes from other industries that must fall.

Fallacy of Composition

Protection is justified that it is good for protected industry, it must be good for all industry.

Fair play for Domestic Industry

Allegations that foreign producers Earn low salaries Not the same law regarding pollution control Worker safety, etc Domestic industry wants level playing field on which to compete. Argument has an appealing sound But goal of each firm is to outperform rivals by producing a better product at lower price. International trade enhance this competitive process and benefit the consumer
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Preservation of the home market

Buying from ourselves are better than buying from foreigners You keep the good and keep the money If import, get the goods but money flows out of the country. Reality is that goods must pay for the goods. The money flows out comes back to the country to pay for domestic exports.

Valid Arguments
Government revenue Income redistribution Non-economic goals (national defense) Infant industry Domestic distortions Environmental protection Strategic trade policies

Government revenue
All governments need tax revenue to function When tariff, it is possibility that foreigners rather than domestic residents will actually be paying the taxes. Easy tax to collect because only few natural ports of entry or exit in a country.

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Income redistribution

Trade policy can be used to redistribute income from one sector of society to other. Make some groups in society worse off and other groups better off. Example- from consumer to producers Consumer surplus falls and while profit of domestic firms increase. Commercial policy to take a tax from the rich so as to aid the poor. High tax on luxury goods and export taxes on necessities to keep products home and low prices 11

Non-economic goals (national defense)

Aim of government to achieve an objective not related to economic welfare. Such as national defense. Output of local industry vital to the national defense should be protected from international competition. Critical product will be available at the time of war or national emergencies. Easily overused.

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Problems with National Defense Argument

This argument is over-used.

Defense needs may be better served by allowing or expanding imports rather than restricting them. A better policy for meeting defense needs is through a domestic production subsidy with free trade.

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Infant industry
Argument that certain Infant industry requires temporary protection from foreign competition. To grow and prosper Initially cost is high but expanding production, markets and learn necessary techniques to lower their cost.

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Problems with the Infant Industry Argument

The argument presumes that the protected industry will grow up and mature. It assumes that the government is capable of picking winners than the private sector is.

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Protecting the Environment

Some goods generate negative externalities-unwanted by-products of one activity that rise the cost of other activity. Example: steel production pollute the air, making harder other businesses such as restaurants/hospitals to maintain clean establishments. Role of trade policy if cross boarder externalities.

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