IV. The Case Against Protection
Arguments for protection include the following:
The infant–industry argument: The so-called infant-industry argument for
protection is that protection is necessary for a new industry to enable it to grow into
a mature industry that can compete in world markets. The idea relates to dynamic
comparative advantage—comparative advantages change over time due to
learning–by-doing. However, the infant industries argument only applies if the
bene!ts of learning-by-doing spill over to other industries and if !rms have
incentives to become more competitive over time, something that protection tends
to limit.
The counteracts dumping argument: Dumping occurs when a foreign !rm sells its
exports at a lower price than its cost of production. Dumping might be used by a
!rm that wants to gain a global monopoly. However, it is di$cult to measure the cost
of production, so whether dumping is taking place is di$cult to determine. Charging
a di&erent export price than domestic price is not necessarily evidence of dumping
because !rms often sell goods and services for di&erent prices in di&erent markets.
Saves domestic jobs: The argument that trade protection saves jobs is )awed.
International trade changes the type of jobs in an economy, but it does not decrease
employment in the aggregate because jobs lost in one sector are o&set by jobs
created in other sectors.
Allows us to compete with cheap foreign labor: The argument that trade protection
allows us to compete with cheap foreign labor is )awed. Di&erences in wage rates
generally re)ect di&erences in productivity, and competitiveness is determined by
both di&erences in wages and di&erences in productivity.
Penalizes lax environmental standards: The argument that trade liberalization leads
to a “race-to-the-bottom” in environmental standards is weak. Many poorer countries
have comparable environmental standards and should not be targeted. And
environmental standards are positively related to income (they are a normal good).
The best way to encourage improved environmental standards is to allow trade and
the economic bene!ts it brings to poorer countries.
Prevents rich countries from exploiting developing countries: The argument for
protection to prevent people of the rich industrial world from exploiting the poorer
people of the developing countries is wrong. While wage rates in many developing
countries are very low, they would be even lower without foreign demand for the
goods that these countries produce. Through trade, countries gain access to capital
and new technology that will speed development and the growth of living standards.
Reduces o&shore outsourcing that sends good U.S. jobs to other countries: When U.S.
!rms send jobs that could be done in America to another country, they are
oshoring. If U.S. !rms buy !nished goods from other U.S. or foreign !rms, they are
outsourcing. O&shoring brings gains from specialization, but those who have
invested in human capital to do a speci!c job that has now gone o&shore will be
hurt. The actual number of jobs lost to o&shoring is small but these people are hurt
even though the overall economy gains.
Does oshoring help or hurt the U.S. economy? A nifty “At Issue” application
discusses this issue. It presents the conventional non-economist view that o&shoring is bad
and contrasts that with the conventional economist view that o&shoring is similar to other
(bene!cial!) international trade.
Does free trade exploit workers in developing countries? Students might be
somewhat familiar with the terminology of “exploitation.” Have the students think about
what “exploitation” means in the context of voluntary trade. If I bene!t from someone I
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trade with, did I exploit them? Did they exploit me? If trade is voluntary, how did I manage
to exploit the person whom I traded with? Is it because I am smarter than the other
person? This seems to be the condescending assumption of those who talk about
exploitation of workers in developing countries. Indeed, representatives from many
developing countries do not see trade as exploitation, but rather see it as a way to improve
standards of living. When these representatives are upset at WTO meetings, it is usually
about the trade restrictions rich countries place on imports from developing countries
keeping developing countries poor.
Why is International Trade Restricted?
Despite arguments against protection, trade is still restricted because key economic
interests bene!t from protection.
Tari& revenues provide a relatively inexpensive way for the government to collect
revenues.
Rent seeking is lobbying and other political activity that seeks to capture the gains
from trade. While the bene!ts from liberalized trade are large in the aggregate, they
are widespread across all consumers. Meanwhile, the costs are concentrated on a
smaller number of producers. It is in the interests of those who pay the costs of
liberalized trade to undertake a large quantity of political lobbying to promote
protection.
If the gains from free trade exceed the losses, it is possible to compensate the losers
so that everyone can be in favor of free trade. To some extent, unemployment
compensation and job-retraining programs are designed to serve this purpose.
However, providing compensation is di$cult because it is hard to identify exactly
who has lost a job as a result of free international trade and not because of other
reasons.
Another fable: There is also a rich heritage of stories, parables, fables, and satires on
protectionism. But it is hard to beat Bastiat’s. Claude Frederic Bastiat (1801–1850) is a
very interesting French economist. An ardent advocate of free trade, he wrote articles with
Richard Cobden (the famous English free trader and opponent of the Corn Laws). His most
wonderful piece is his satirical “Pétition des marchands de chandelles …” or “Petition from
the Manufacturers of Candles, Tapers, Lanterns, Sticks, Street Lamps, Snu&ers, and
Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of
Everything Connected with Lighting,” to give it its full title. The basic idea is that the sun
creates unfair competition for candle merchants and a law must be passed to ban all
windows and other openings that enable it to shine its light inside buildings. You can have
a lot of fun with it not only in the context of trade, but also to talk about opportunity cost
and production possibilities.
For further reading: If you haven’t already done so, read this nice little book and use its
basic ideas to illustrate and illuminate the analysis of the false arguments of protectionists:
Russell D. Roberts, The Choice: A Fable of Free Trade and Protectionism, 3rd Edition, 2007,
Prentice Hall (ISBN: 0131433547).
The book tells the story of David Ricardo being granted God’s permission to return to
Earth and meet with Ed Johnson, a 1950s U.S. television manufacturer. Ricardo has some
powers that enable him to create counterfactuals and to travel through time. The dialogue
between Ricardo and Johnson provides a powerful commentary on the bene!ts of free
trade and the costs of protectionism.
Unrestricted international trade bene!ts all the countries involved with trade.
Emphasize the key bene!ts from unrestricted international trade:
—The gains from international trade arise from the diversity of opportunity costs of
production across countries. The source of prosperity in free trade arises from each
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country generating gains from specialization in their comparative advantage, minimizing
its own opportunity cost of production, and sharing in each of the other country’s gains.
–Both exporting and importing domestic industries bene$t from free trade. Free trade
liberates each country’s consumption possibilities from the bonds of their own production
possibilities frontier, enabling the consumers in both the importing and exporting country
to enjoy consumption bundles of goods and services that would be unobtainable without
trade.
—Restrictions on international trade hurt the importing $rms, the consumers of imports,
the domestic exporting $rms, and even the non-exporting $rms. Protecting domestic
industry from international competition back!res: i) it increases the relative price that
other countries pay for domestically produced goods and services that are exported; ii) it
raises the price of the imported goods consumed by domestic consumers; and iii) it lowers
the income of producers of the goods for which the country has a comparative advantage
in production by more than the increase in the incomes of those industries that gain from
trade restrictions. Together, these in)uences decrease the total demand for domestic goods
and services in the country imposing trade restrictions by more than the increase in
demand for those domestic goods and services in industries for which the country does not
have a comparative advantage.
–International trade is a “win-win” situation for all countries involved in trade. This is the
most important message that can be delivered from this chapter. All legitimate
counterpoints are rooted in the concern over unequal distributions of the gains from trade
that are created. Emphasize that economic e$ciency and economic prosperity can be
achieved only through free trade among nations, and that the surplus generated is more
than su$cient to reimburse those individuals whose lives are made worse o& from free
trade. Point out that the di$culties of implementing such a reimbursement program are
what prevent such programs from being established on a large scale.
—There is no good economic argument in support of trade restrictions. Dispel the many
myths surrounding various justi!cations for imposing trade restrictions. The section of the
chapter entitled “Cases Against Protection” contains concise and complete
counter-arguments to the often heard justi!cations for restraining international trade.
Emphasize that economists overwhelmingly agree that there is no good argument against
free trade.
The chapter ends with a new Economics in the News on the problems with reaching an
agreement in the Transpaci!c Partnership trade negotiations. The talks have focused on
cars and agriculture. Failing to reach agreement between the United States and Japan on
these issues is a setback in terms of achieving broader agreement. The analysis shows the
potential gains from reaching a trade agreement.
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A d d i t i o n a l P r o b l e m s
1. Suppose that the world price of bananas is 18 U.S. cents a pound and that
when Australia does not trade bananas internationally, their equilibrium price
in Australia is 12 U.S. cents a pound. If Australia opens up to international
trade, does it export or import bananas? Explain how the price of bananas in
Australia changes. How does the quantity of bananas consumed in Australia
change? How does the quantity of bananas grown in Australia change?
2. Suppose that in response to huge job losses in the U.S. textile industry,
Congress imposes a 100 percent tari& on imports of textiles from China.
a. Explain how the tari& on textiles will change the price of textiles, the
quantity of textiles imported, and the quantity of textiles produced in the
United States.
b. Explain how the U.S. and Chinese gains from trade will change. Who in the
United States will lose and who will gain?
3. In the 1950s, Ford and General Motors established a small car–producing
industry in Australia and argued for a high tari& on car imports. The tari& has
remained through the years. Until 2000, the tari& was 22.5 percent. What
might have been Ford’s and General Motor’s argument for the high tari&? Is
the tari& the best way to achieve the goals of the argument?
4. Use the information below to answer the following question
U.S. Expands China Paper Anti-Dumping Tari
Responding to a case brought by the NewPage Corporation of Dayton, Ohio,
the U.S. Commerce Department announced it was imposing a tari& of 99.65
percent on imported glossy paper from China. Glossy paper is the type of
paper used to manufacture art books, high-end magazines, textbooks, and
annual reports. In 2006 imports of glossy paper from China was estimated to
be $224 million.
Reuters, May 30, 2007
a. What is dumping? Who in the United States loses from China’s dumping of
glossy paper?
b. What argument might NewPage Corp. have used to persuade the U.S.
Commerce Department to impose a 99.65 percent tari&?
c. Explain who, in the United States, will gain and who will lose from the tari&
on glossy paper. How do you expect the prices of magazines and textbooks
that you buy to change?
S o l u t i o n s t o A d d i t i o n a l P r o b l e m s
1. With no international trade, the price in Australia is less than that in the world, so
Australia has a comparative advantage in producing bananas. As a result, if Australia
opens up to international trade, it will export bananas. With international trade, the
price of bananas in Australia rises. The higher price leads to a decrease in the
quantity of bananas consumed in Australia. The higher price also leads to an increase
in the quantity of bananas grown in Australia.
2. a. Higher tari&s increase the price U.S. consumers pay for textiles imported from China.
Because the price of Chinese imported textiles rises, the quantity imported
decreases. The quantity of textiles produced in the United States increases.
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b. This trade restriction means that the U.S. and Chinese gains from trade de!nitely
decrease. Textile workers and owners of textile !rms will gain from the higher price.
Textile consumers will lose from the higher price.
3. Most likely the argument in favor of the tari& was the infant-industry argument.
According to proponents of this argument, protection is necessary to a new industry to
enable it to grow into a mature industry that can compete in world markets.
Alternatively, Ford and General Motors might also have argued that a high tari& was
necessary to protect Australian jobs. Protection is not the best way to achieve these
goals. A more e$cient way to protect infant industries is to subsidize the !rms in the
industry. And the jobs lost in the auto sector will be regained in other sectors devoted
to exporting Australian goods.
4. a. Dumping is when a foreign !rm sells its exports at a lower price than the cost of
production. U.S. producers of glossy paper lose from China’s dumping of glossy
paper.
b. Dumping is illegal under the rules of international trade, so dumping is regarded as
a justi!able reason for a temporary tari&. NewPage might have argued that Chinese
exporters of glossy paper were charging a price of (approximately) one half the cost
of production. In this case a tari& of 99.65 percent will (approximately) double the
U.S. price of the imported glossy paper, thereby raising the price to the (alleged)
cost of production.
c. The U.S. producers of glossy paper (such as NewPage!) will gain. The U.S.
government also will gain because it will receive additional tari& revenue. U.S.
consumers of glossy paper will lose. The higher price of glossy paper increases the
costs of magazine and textbook publishers. The supply of magazines and textbooks
decreases so their price rises.
A d d i t i o n a l D i s c u s s i o n Q u e s t i o n s
1. How can we know that the bene#ts to the economy from free trade
are greater than the bene#ts accruing to the domestic industry that
is protected from foreign competition? Stress to the students that if
unrestrained international trade creates the e$cient outcome for both
countries involved, it also must mean that prosperity for each country is
maximized.
Emphasize that free trade between nations encourages each country to
pursue specialization in production in those industries for which the
country has a comparative advantage relative to other countries.
If the total quantity of goods and services consumed in each country after
international trade is greater than without international trade, then total
incomes accruing to individuals must be greater, which means the
prosperity of each nation’s economy as a whole is greater under free trade.
2. How will countries know which domestic industries have a
comparative advantage in order to allocate resources towards
specialization in producing those goods and services? Specialization
and gains from international trade will arise naturally through relative price
changes on the world market.
When domestic !rms within an industry have a lower opportunity cost of
production than !rms in other countries, these !rms discover that the price
they can receive from foreign buyers (importers from other countries) is
higher than the price they can receive from domestic consumers. In other
words, the domestic price before international trade is lower than the world
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price. These domestic !rms increase output, demand more labor, capital,
and raw materials, and resources )ow toward these industries.
When domestic !rms within an industry have a higher opportunity cost of
production than !rms in other countries, domestic consumers discover that
the price they must pay to foreign sellers for a good is lower than the price
they must pay domestic producers. Domestic consumers switch their
purchases to foreign imports. The domestic !rms producing this good
decrease their production, decrease their use of labor, capital, and raw
materials, and resources )ow away from these !rms.
Each country’s economy naturally becomes specialized in producing output
in those industries for which the country enjoys a comparative advantage.
However, for each country to gain, each country must allow consumers
and producers to have free access to foreign markets.
3. Shouldn’t we protect the workers of those industries that are hurt by
foreign competition? Point out that protecting the workers in industries for
which our country does not have a comparative advantage is akin to making
everyone in the economy su&er a lower level of prosperity than under
unrestricted trade—all to ensure that a small minority of people does not
su&er the economic losses associated with relocating to another community
and !nding employment in another industry. Use some speci!c examples in
recent history:
If Congress imposes import quotas on Japanese vehicles being imported
into the United States, tens of thousands of American autoworkers would
be forced to !nd employment in another industry. Compare this to the tens
of millions of car buyers each year that must pay hundreds or even
thousands of extra dollars for their cars.
In 2002, President George W. Bush signed into law a tari& on foreign steel
by some 30 percent. He e&ectively cost the hundreds of millions of
American consumers tens of billions of dollars in higher prices for the
myriad of goods containing steel, as well as those goods and services
requiring transportation in trucks, trains, airplanes, and ships that are
made from steel. He did this seeking political support from those states
with a large presence of steel workers who work for !rms that could not
make a pro!t at the unregulated world market price of steel. The
president’s defense was that other nation’s steel industries were receiving
subsidies and had an “unfair “ advantage in production costs, e&ectively
“dumping” steel in the U.S. markets at prices below production costs. Ask
the students: What is “unfair” about having foreign governments
e&ectively subsidizing the purchase of automobiles, trucks, and rail and air
transportation by hundreds of millions of American citizens? Point out it is
only “unfair” to the tens of thousands of steel workers who stand to face
job relocation costs of !nding work in another industry.
Emphasize that in each of these cases of trade restrictions, the economy as
a whole would have gained from free international trade, even if
autoworkers and steel workers lost some jobs. When we protect steel, or
timber, or sugar, there are many more jobs in the downstream industries
that use these inputs than there are jobs being protected. Higher costs
limit expansion for those downstream industries. So why do they get
protection? Autoworkers and steel workers are groups of people that are
much more easily organized and stand to bene!t much more individually
from trade restrictions than the wide-spread American consumers. The
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result is successful lobbying e&orts to restrict trade to the detriment to all
consumers in the American economy.
4. Discuss the following: Adam Smith told British politicians in the 18th
century that they shouldn’t focus so much on producers. Free trade is
not about importing so that others will take our exports. The
argument “seems to consider production, and not consumption, as
the ultimate end and object of all industry and commerce.” But
“consumption is the sole end and purpose of all production; and the
interest of the producer ought to be attended to only so far as it may
be necessary for promoting that of the consumer,” according to
Smith.
This idea will have applications as the class studies perfect competition. In the
end, competition means that !rms make only a normal return and society’s
resources are allocated e$ciently.
5. Examine the projected increase in U.S. oil production over the next
decade and contrast this with the trade data in the #rst Economics in
Action application on U.S. trade. What eect might this change have
on the composition of U.S. trade in the future?
Currently, some legal barriers to exporting oil are being lifted. Hypothetically,
the United States might become a major energy exporter in both re!ned oil
and lique!ed natural gas. This change could have signi!cant impact on our
balance of trade with speci!c countries and the composition of trade overall
and could potentially impact global political priorities as well.
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