Chapter 6 Summary

LO 6.1 Government Intervention in International Trade in Instances of Market Failure

• Free trade is usually the best policy from the standpoint of social efficiency. However, there are often good reasons for government to implement policies that protect domestic industries from import competition.
• Many arguments for protection are related and, in essence, contend that domestic industries that compete with imports might be supported if they yield additional social benefits.
• Some specific reasons advanced in favour of protection are:
  • To support domestic production and employment;
  • To protect emerging industries until they can compete internationally;
  • To support income and facilitate adjustment in shrinking industries;
  • To generate government revenue, particularly in developing countries;
  • To reduce consumption of imported products considered undesirable; and
  • To promote national security.

LO 6.2 Import Tariffs Boost Production, Employment and National Well-Being

• Protection of a domestic industry with an import tariff can increase production, employment, and national economic well-being if external benefits are enough to more than offset the usual deadweight losses of the production effect and the consumption effect.

LO 6.3 Comparing Production Subsidy or Similar Policy to Import Tariff

• A production subsidy or similar policy is usually superior to an import tariff as a means of supporting a domestic industry.
• However, if external benefits are present in the industry, a production subsidy will lead to a superior outcome.
• This is because the external benefits must be sufficient to offset only the deadweight loss due only to the production effect, as national well-being is not reduced by loss of consumption due to higher domestic prices.

LO 6.4 Conditions that Justify the Promotion of an Infant Industry with Tariff Protection

• A temporary import tariff can aid the development of an infant industry if it leads to the creation of a stream of benefits to domestic producers that exceed, in present value terms, the stream of costs due to the production and consumption effects incurred while the tariff was in effect.
• While an import tariff can be effective in providing support to an emerging industry, the government may be able to use more appropriate policies, including subsidized loans and subsidized worker training programmes.

LO 6.5 A Support for Industries that Are Experiencing Long-Term Decline

• A government may also support a shrinking industry with an import tariff. However, given the industry’s structural decline, it also makes sense for the government to assist the industry, its workers, and affected communities with trade adjustment assistance.

LO 6.6 Other Arguments for Protection Against Imports

• Other arguments include the generation of revenue, reduced consumption of undesirable imports, and the promotion of national security.
• Import tariffs can be an important means of government revenue collection for developing countries, which tend to have difficulty generating revenue through income taxes.
• Trade policy can also be used to address concerns relating to environmental and labour conditions from which imports originate and to national security.

LO 6.7 Estimating the Overall Cost of Import Protection

• The net national loss from an import tariff can be estimated using information on the size of the tariff and the reduction in imports.
• Relative to the size of the economy, the net national loss from import protection is unlikely to be large for countries which have low tariffs and are not particularly dependent on imports.

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