0:12
Now at this point in this lesson,
you may be totally convinced that free trade is always best for a nation.
After all, I've demonstrated to you that there are economic gains from trade
and I have also shown you that there are
dead weight efficiency losses from protectionism.
Nonetheless, it is useful,
at this point, to review some of the legitimate,
as well as arguably illegitimate arguments,
for protectionist trade barriers.
Let's start then with the national defense or military self-sufficiency argument.
0:53
The national security argument in support of protectionism is not an economic one,
so much as a political and strategic one.
It runs as follows.
Protective tariffs are needed to preserve or strengthen key industries
such as steel or motor vehicles or even certain kinds of computer chips,
that are needed to produce weapon systems essential for
the defense of the homeland or to wage war on strategic rivals.
The problem here of course in evaluating this argument is that there are
no real objective criteria for weighing any benefits of an increase in national security.
It may result from protecting a domestic industry against
the costs that result from a decrease in economic efficiency.
1:46
Closely related to the national security argument in support of
protectionism is the so-called infant industry argument.
It is an argument that is seductively and intuitively simple.
By temporarily shielding young domestic firms from the severe competition,
a more mature and more efficient foreign firms,
a protectionist nation will give its own infant industries a chance to
develop and eventually become efficient producers and even national champions.
In fact, historical studies have turned up some genuine cases of
protected infant industries that grew up to stand on their own feet.
Studies in successfully industrialized countries such as
Singapore and South Korea show that nations such as
these have often protected their manufacturing industries from
imports during the early stages of industrialization.
That said, a careful review of the history of tariffs reveals
other contrary cases involving key industries like that of steel, sugar and textiles.
Far too many cases,
these perpetually protected infant industries have never shed
their figurative diapers after many years but
simply dragged down the economies of the protectionists.
3:15
A third key argument in defense of protectionism is that tariffs or quotas or
other various non-tariff barriers may sometimes be
necessary to save the jobs of a nation.
This is perhaps the most politically charged argument in defense
of protectionism and it is certainly true that elections have been
won or lost around the world by candidates who have fought over
whether protectionist policies are necessary to save jobs.
In evaluating this argument,
the key question to ask is this.
Are the protectionist measures being used to defend
that nation's markets against traders and trading partners that are
using mercantile as trade practices like illegal export subsidies or
currency manipulation or lax environmental controls to gain an unfair advantage?
In such cases where the answer is yes,
the save our jobs argument carries
far more weight than the counter example which other nations are trading fairly,
but the protectionist simply wants to gain
an unfair advantage under the rhetorical guise of save our jobs.
And in such cases where a trading partner is obviously engaged in unfair trade practices,
tariffs and quotas may be viewed as more defensive than protectionist in nature.
4:50
Closely related to the save our jobs argument is the defense against dumping argument.
As we previously discussed,
dumping occurs when foreign producers sell
their exports at a price less than the cost of production.
Just why might the companies of some nations dump products
below cost into the markets of other nations?
Here's one possible strategic reason.
The corporate goal may simply be to drive competition and competitors out of the market,
seize that market and then use the new found monopoly power to later raise prices.
In such cases, the long term economic profits resulting from
this predatory dumping strategy may more than
offset the earlier losses that accompanied the initial dumping.
So, it is a perfectly rational economic strategy for a company and
an equally national industrial policy for a mercantilist nation to adopt.
That said, the more common economic reason for dumping is this.
When a recession hits and employment rises in a nation,
desperate companies seeking to avoid bankruptcy,
may try to stay in business by dumping
their excess capacity into foreign markets at fire sale prices.
In such cases, the national government often facilitates this dumping to
keep a lid on domestic political pressure and unrest while saving jobs.
Of course, regardless of the reason for the dumping,
the imposition of so-called countervailing tariffs to defend
against such dumping are quite legitimate and arguably necessary.
Now in this lesson,
let's move onto our final module.
An interesting case example that illustrates
the frequent clashes between
the academic world of standard Ricardian Free Trade theory and
the far more rough and tumble real corporate world and
the international trading system that is often severely
constrained by protectionist and mercantilist behavior.
Dr. Peter NavarroProfessor
