[MUSIC] Now, at this point, 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 efficiency losses from protectionism. None the less, it is useful at this point to review some of the legitimate, as well as arguably illegitimate arguments for protection as trade barriers. First there is the national defense or military self sufficiency argument. This is not an economic argument, but rather a political and strategic one. In particular, protective tariffs are needed to preserve or strengthen industries, such as steel or motor vehicles, producing goods and materials essential for defense or war. Unfortunately, there is no objective criterion for weighing the worth of an increase in national security, relative to a decrease in economic efficiency. Accompanying the re-allocation of resources towards strategic industries. A second argument for protectionism is to save jobs. This is an argument that often becomes politically fashionable, when a country enters a recession. It is also an argument that is often made in the context of discussions of cheap foreign labor. As the argument goes, more highly paid workers such as in the United States, must be protected from countries like Mexico and China. Which pay workers a few dollars a day. Closely related to the jobs argument is the dumping argument. Dumping occurs when foreign producers sell their exports at a price less than the cost of production. Why might they do this? One possible reason is to drive competitors out of a market, seize that market, and then use their new found monopoly power to later raise prices. In such a case, the long term economic profits resulting from this dumping strategy, may more than offset the earlier losses which accompanied the dumping. Because dumping is a legitimate concern, it is prohibited under American trade law. Where dumping occurs and is shown to injure American firms, the federal government can impose tariffs called anti-dumping duties on the specific goods. The fact that one country may use protectionism or dumping to create jobs at the expense of its neighbors, raises a fourth argument for protectionism. Namely, to retaliate against another nation that engages in such protectionist measures. Unfortunately, it is through such retaliatory measures, that trade wars are born. A graphic case in point, is the Smoot Hawley tariff act of 1930, approved by the American Congress. [NOISE] It imposed some of the highest tariffs ever enacted in the United States. While it was designed to protect American jobs during the onset of a severe recession, it backfired miserably. As one nation after another retaliated with its own restrictions, the resultant trade war helped push the entire global economy into the Great Depression. Finally, a favorite argument in support of protectionism in developing countries, is the so-called infant industry argument. [NOISE] The idea here is that, temporarily shielding young domestic firms from the severe competition of more mature and more efficient foreign firms, will give infant industries a chance to develop. And become efficient producers. This argument must be weighed cautiously. Historical studies have turned up some genuine cases of protected infant industries, that grew up to stand on their own feet. And studies of successful, newly industrialized countries such as Singapore and South Korea. Show that they have often protected their manufacturing industries, from imports during the early stages of industrialization. But the history of tariffs reveals even more contrary cases like steel, sugar and textiles, in which perpetually protected infants have not shed their diapers after low these many years. I should [SOUND] note at this point that while we have focused primarily on tariffs, many nations also use so-called nontariff barriers or NTBs. NTBs, which include quotas, also consist of formal restrictions or regulations that make it difficult for countries to sell their goods in foreign markets. For example, a country such as Japan might restrict the import of all vegetables grown where certain pesticides are used, knowing full well that all other countries use these pesticides. The effect of such a regulation, would be to halt the import of vegetables.
