CAPITULO 15 ARGUMENTS FOR INTERVENTIONIST TRADE POLICIES

CAPITULO 15 ARGUMENTS FOR INTERVENTIONIST TRADE POLICIES

1. GENERAL CONTEXT:

   • Although economic theory supports free trade, many governments adopt interventionist or protectionist policies for economic, political, or social reasons.
     • These measures (tariffs, quotas, subsidies, restrictions) aim to alter the natural flow of trade to protect national interests
   • Motivations can be economic (market correction) or political (pressure from interest groups).
   • Economists must distinguish when intervention improves national welfare and when it reduces efficiency.

2. The Revenue Argument

   • In developing countries, tariffs are a major source of government revenue because collection at ports is simpler than internal taxation.
   • As nations develop, reliance on trade taxes declines since domestic tax systems become more efficient.
   • Revenue tariffs distort resource allocation and discourage trade expansion.

3. The National Defense Argument

   • Tariffs or import restrictions are sometimes proposed to reduce imports and improve the trade balance.
     • The trade balance depends on national saving and investment, not just trade policies.
   • Trade restrictions may offer temporary relief but reduce efficiency and invite foreign retaliation.

4. The Terms-of-Trade Argument

   • For a large country, imposing a tariff may improve its terms of trade by lowering the world price of its imports.
   • “optimum tariff” can, in theory, raise national welfare if foreign exporters do not retaliate.
   • In practice, retaliation by trading partners neutralizes the gain and reduces global welfare.
   • Economists agree that this argument has limited practical use due to retaliation risk and administrative complexity.

5. The Employment Argument

   • Protectionists claim that tariffs increase domestic employment by stimulating local production.
   • In reality, trade restrictions shift jobs among sectors but do not increase overall employment.
   • Consumers face higher prices and reduced real income.
   • Fiscal or labor-market policies are more effective tools to address unemployment than trade barriers.

6. The Income Redistribution Argument

   • Based on Heckscher–Ohlin and Stolper–Samuelson theories:
     • Trade benefits a country’s abundant factor and harms its scarce factor.
     • Tariffs can therefore help protect the income of the scarce factor (e.g., unskilled labor in rich countries).
     • However, tariffs reduce total welfare, so redistribution should occur through domestic fiscal policy, not trade policy.

7. The Infant Industry Argument

   • New industries may need temporary protection until they become competitive internationally.
   • When learning-by-doing or dynamic economies of scale exist.
     • Conditions for validity:
       • Industry can lower costs over time.
       • Protection is temporary and phased out once competitiveness is achieved.
     • Problems:
       • Industries often become dependent on tariffs and fail to mature.
       • Subsidies or credit facilities are better policy tools.

8. The Market Distortion and Externality Argument

   • Trade restrictions may offset domestic market distortions (e.g., monopoly power or externalities).
   • Direct domestic policy tools (taxes, subsidies, regulation) are usually more efficient.
   • When foreign governments subsidize exports or engage in dumping, a country may impose:
     • Antidumping duties
     • Countervailing duties (CVDs)
     • These measures aim to restore fair competition but can be misused for protectionist ends.

9. Unfair Trade Practices

   • DUMPING:
     • Defined as selling goods abroad at prices below domestic prices or below cost.
     • TYPES:
       • Sporadic Dumping – temporary, to unload excess inventory.
       • Predatory Dumping – aims to drive competitors out of the market.
       • Persistent Dumping – continuous, due to price discrimination across markets.
   • Export Subsidies and Countervailing Duties
     • Government payments or tax advantages to domestic exporters to make their goods more competitive.
     • Create market distortions and unfair competition.
     • Importing countries can impose countervailing duties (CVDs) to offset the subsidy’s effect.

10. Strategic Trade Policy

    • Developed in the 1980s by Brander, Spencer, and Krugman.
    • Applies to oligopolistic industries with increasing returns to scale and R&D-driven innovation.
    • Governments can enhance national welfare by supporting key industries to capture international market share.
      • EXAMPLES:
        • Boeing vs. Airbus (aerospace).
        • Semiconductor and technology industries (Japan, South Korea).
      • POLICY TOOLS:
        • R&D and export subsidies.
        • Tax incentives or targeted protection.
      • BENEFITS:
        • Can shift profits from foreign to domestic firms.
        • Promotes technological development.
      • RISKS::
        • Retaliation and subsidy wars.
        • Government misjudgment of strategic sectors.

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