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Protectionism is sometimes necessary in trade

Blade-of-Truth
Posts: 5,036
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11/3/2014 5:32:51 PM
Posted: 2 years ago
I'm currently taking the Political Compass test and noticed this question. I'd like to know a little more about Protectionism and the question at hand. On a surface level, I can see pro's and con's for both sides. On the Con side, I don't really see any justification for raising an import tax on something just because it would cost less than what the country in question could produce it for. On the Pro side, not raising a tax might undermine the domestic production and cause manufacturing costs to increase when they don't have the means to do so.

Does anyone know a little more on the topic? I'd like to get a better understanding on both sides.
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MonetaryOffset
Posts: 559
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11/3/2014 8:50:38 PM
Posted: 2 years ago
At 11/3/2014 5:32:51 PM, Blade-of-Truth wrote:
I'm currently taking the Political Compass test and noticed this question. I'd like to know a little more about Protectionism and the question at hand. On a surface level, I can see pro's and con's for both sides. On the Con side, I don't really see any justification for raising an import tax on something just because it would cost less than what the country in question could produce it for. On the Pro side, not raising a tax might undermine the domestic production and cause manufacturing costs to increase when they don't have the means to do so.

Does anyone know a little more on the topic? I'd like to get a better understanding on both sides.

Ahh, free trade versus protectionism -- one of the only issues where i side almost squarely with the neoclassicals!

Here are the basic arguments as I understand them. Protectionism comes in a lot of ways and forms -- export taxes, export subsidies, quotas, etc. -- but, for simplicity, I'll just focus on tariffs (and, generally, tariffs and quotas are virtually identical in terms of their effects, anyway).

The Pro protectionism side would argue that free trade comes at the expense of domestic industry, particularly low-skilled workers. They have a point. The implication is that free trade roots out comparative advantages: X Country is better comparatively at producing wheat, Y country is better comparatively at producing rice, so X specializes in wheat, Y specializes in rice, and the two trade. It's a classic case of efficiency, so for workers from the industry of the scarce factor -- so, in the earlier example, rice workers in Country X -- their wages would generally fall, they may lose their jobs or be displaced, etc. The moral of the story from globalization is that the number of jobs hasn't changed, but the composition has -- and so, too, have wages. So, the argument for tariffs is that it bolsters worker's wages and ameliorates the increasing wealth gap. The implication -- and Krugman has alluded to this argument, though we'll be able to assess its worth after we see the numbers -- is that the gains from trade generally trickle up to the top of the income ladder, while the bottom are hurt -- or, in other words, a "does a rising tide lift all boats" type argument. We do know that countries that pursued trade liberalization grow at a much faster rate than countries that don't, but to what avail?

The argument against protectionism, and this is where I tend to fall, is that it's inefficient. Sure, you may save a few jobs, but at what cost? Imposing a tariff or a quota on an industry would drive up domestic prices such that they equal to the price of the imported goods -- domestic suppliers would say, "Hey, why should the foreign good go for X price, but not my good, which is essentially a perfect substitute?" There are obviously a lot of kinks to work out in that, and obviously goods are not perfect substitutes, so the textbook model of an apples-to-apples comparison becomes tricky in real-world terms but generally speaking, this is the case. So, sure, you saved some domestic jobs, but there's also a significant deadweight loss, and society allocated far too much of its time making Good X, which it had a comparative disadvantage in, when it could have produced more of Good Y and imported Good X, thus maximizing its "efficiency."

Now, a case where a lot of economists would support a tariff -- and this is why I think the prompt in the political compass is misleading -- is in the case of predatory dumping: X country's government decides to subsidize the production of Good A, and X country decides to dump vast amounts of Good A into country Y, thus driving down prices in Country Y and leading to a massive decline in domestic jobs and wages in Country Y. A lot of economists would argue that a tariff is justified in this case. But the counter, which you'll see Greg Mankiw from Harvard and a few others make, is, so what? Country X's government actually spent money to sell sheep goods to Country Y, and we should be thanking them for that. Moreover, Country X is operating at a substantial loss, anyway, by selling at such a cheap price -- basically, inefficiently devoting resources to that subsidy when it could allow the market to best allocate resources based on comparative advantages -- and, if it ever were to raise its prices after causing Country Y's businesses to go bankrupt, those businesses could just reenter the industry, anyway.

So, moral of the story: protectionism is probably necessary in some cases -- and that doesn't even count the moral arguments (worker safety regulations, environmental standards, human rights violations, etc.) which I think are separable from economics -- but, generally speaking, I think it's a bad idea.
~JMK

9:43 P.M. EST, Nov 5, 2014: I became a basic white girl.