“Protectionist Trade Policies: A Survey of Theory, Evidence, and Rationale”,

In “Protectionist Trade Policies: A Survey of Theory, Evidence, and Rationale”, Coughlin, Chrystal and Wood examine modern arguments in favor of free trade as well as those in favor of protectionism. Gains from free trade are explained by the Theory of Comparative Advantage.  The theory states that each country specializes in producing the good in which they have the relative (rather than absolute) advantage in, and then trade for everything else, global wealth will increase.  An increase in wealth allows all states involved in the exchange to consume beyond their production possibility curves. Each country gains by exporting the good in which they have the comparative advantage in and importing the good in which they have the comparative disadvantage in.  Alternatively, gains from managed trade are generally seen through the improved position of a domestic producer relative to a foreign producer in a particular industry. This is done by increasing the market price of the foreign good relative to that of the good produced domestically or by restricting foreign access to domestic markets.  Tariffs, quotas, regulatory barriers, subsidies, and exchange controls are used to protect domestic markets.  According to a 1984 study by Tarr and Morke, annual costs to the U.S. economy from protectionist policies is $12.7 billion (1984 dollars). The chief beneficiaries of protectionist policies in the U.S. are domestic producers, particularly with respect to jobs, in protected industries.  Efficiency losses within the U.S. economy are considered small in relation to total losses borne by consumers. The OCED highlights that jobs saved by protectionist policies in industries of formerly imported goods, and equal amount of jobs are lost in export industries as total volume of trade decreases.  Coughlin, Chrystal, and Wood conclude that despite mounting evidence favoring managed trade, free trade remains the optimal policy for all states

The Case for Managed Trade 

National Defense

This argument claims that import barriers are necessary in order to ensure domestic production of critical goods in the case of a national emergency.  

Income Redistribution

While the gains from trade are not equally distributed, protectionist policies affect the distribution of income by favoring disadvantaged groups. At the same time, Coughlin, Crystal and Wood acknowledge that is often less costly to redistribute income via tax and transfer payments opposed to using trade policy. 

Optimal Tariff Argument 

If a country has global market power, a protectionist policy can make the world price for foreign goods fall by decreasing demand for the specific foreign good in the world market. A tariff decreases the demand for a foreign good in the world market by increasing the demand for a comparable domestic good. However, few states posses the market power necessary to affect world prices, and if they do, foreign retaliation is likely.

Balancing the Balance of Trade 

Protectionist policies can be used to eliminate a trade deficit or to increase a balance of trade surplus . 

Protection of Jobs 

This argument claims that a tariff will decrease prices of the domestically produced good relative to that of the foreign good. Demand will then be stimulated which will cause resources to move into the industry protected by the tariff.

Infant Industries 

A protectionist tariff can be used to facilitate growth in a young industry by initially protecting it from foreign competition. After the industry is able to grow unimpeded by foreign competition, the argument advocates the removal of protective tariffs.  However, much of the time politics thwarts opposing legislation and removal of the tariff. Additionally, aside from protecting an industry from foreign competition, tariffs have a tendency to produce weak, inefficient industries opposed to those that can eventually compete with foreign competition

Spillover Effects

The argument claims that in addition to protecting a specific industry (infant or otherwise) through the promotion of jobs and protection from foreign competition, there are additional spillover effects for individuals and industries not originally compensated. Spillover effects often include knowledge, technological progress, research and development.  The lack of market transactions to determine the appropriate subsidy placed on spillover effects, and resulting political problems that result from competition for government assistance complicate the spillover effect argument  

Strategic Trade Policy

This argument suggests that protectionism can be used strategically to alter the terms of competition to favor domestic over foreign firms and shift excess returns in monopolistic markets from foreign to domestic firms.  Coughlin, Crystal and Wood acknowledge that similar to the spillover effects argument, estimating payoffs from strategic trade policy are problematic, and the behavior of rival governments must be anticipated

Reciprocity and “Level Playing Field”

Protectionism can be used to level the playing field in the sense that if a foreign country has a protectionist policy in a specific industry putting domestic producers in a free trade country at a disadvantage, a tariff can be used to seek reciprocity in terms of the level of protection bilaterally.  Coughlin, Crystal and Woods highlight that although protectionism can favor and support a disadvantaged industry, from a national perspective, the overall costs of protectionism greatly exceed the benefits

References

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