Chapter 6: Trade Restrictions: Arguments for Protection and the Cost of Protection
Chapter 6 Introduction
Learning Objectives
After reading this chapter, you should be able to
- Describe how government can intervene in international trade in instances of market failure.
- Identify the conditions under which an import tariff can boost domestic production, employment, and economic well-being.
- Compare production subsidies or similar policies to import tariffs for promoting economic well-being.
- Describe the conditions that justify promotion of an infant industry with tariff protection.
- Discuss how and why governments may provide support for industries experiencing decline from import competition.
- Identify other arguments for supporting domestic industries with import tariffs.
- Describe how the cost of protection against imports can be estimated.
Think About It!
Video: Free Trade vs. Protectionism
Before reading this chapter, watch this video outlining the basic concept of protectionism.
Source: Professor Dave Explains. (2023, July 26). Free Trade vs. Protectionism. [Video]. YouTube. https://www.youtube.com/watch?v=_tmPnH-JkNg
Reflection Questions
Before we begin, we encourage you to reflect on the following questions:
- What arguments have you heard for national governments providing protection to domestic industries?
- Can you think of some groups within the nation that tend to benefit disproportionately from protection?
- Can you think of any arguments for protection that you consider acceptable?
Introduction
In this chapter, we will examine the major arguments that are made in favour of protection. We acknowledge that free trade is generally the best policy if markets are competitive and if gains and losses in economic surplus are valued on the same basis across all sectors of society. However, markets are often not competitive, and policymakers may value the gains and losses experienced by different segments of society differently. For instance, policymakers often put greater weight on economic benefits accruing to domestic producers than those accruing to consumers.
Also, external benefits and external costs and the exercise of market power are common in markets, which causes private benefits and costs to differ from social benefits and costs. To the extent that external benefits are present in domestic production, policymakers, for instance, may choose to protect domestic producers from import competition even if consumers are hurt.
Next, we recognize that even when policymakers choose to support domestic production and workers, it is usually better to use some policy instrument other than trade policy. Therefore, we compare the economic effects of a tariff with those of a production subsidy. Last, we will discuss the cost of protection to an importing country and show how we can estimate it.
