8 Protectionism Protectionism 1 Definition 2 Source Political Dynamics 3 Some Protectionist Arguments a The Disappearing Demand Argument i Long Run ii Short Run b The Income Inequality Argument c The Dumping Argument Protectionism Belief that a country is harmed by trade with other countries and benefits from barriers to trade Especially applied in rich countries with regards to trade with poor countries Argument that trade is not even a PPI Assume equal population in both countries Both countries as a whole gain from trade But depending on the income substitution effects not all countries consumption of all goods might increase H O model Recall HSL relatively abundant resource LSL Relatively non abundant resource Stolper Samuelson Theorem Software Comparative advantage industry SR LR SR LR Clothing Non comparative advantage industry SR LR SR LR In the long run international trade benefits owners of a country s relatively abundant resource s and harms owners of the relatively non abundant resource In LR gains to gainers losses to losers because point C lies outside the PPF o LR harm but little political power LSL cannot organize and lobby people towards protectionism Capital owners in the SR o Do benefit as a whole in the LR o But those who will come out ahead are not necessarily the ones who lost o Capital is often specific to a particular industry and the owners of that capital suffer a LR loss even though it is the relatively abundant resource o Political source of protectionism arguments Even if there is the overall gains overall losses o Heavily concentrated gains few producing firms and widely dispersed losses many consumers Differential levels of lobbying 8 Protectionism Disappearing Demand Disappearing jobs Protectionist o Expanding trade with poor countries Americans buy more cheap foreign goods Less spending on US goods Less US production Fewer US jobs Economist Protectionist o You ignore exports o But our exports are threated too o Have to compete with their low prices o Which we can t do unless we pay their low wages Economists Protectionist Economist advantage Protectionist Economist Protectionist every year Economist o You are comparing that comparative advantage prices with non comparative advantage prices o Also prices depend not just on wages but also on productivity o But what if they develop a comparative advantage in everything o Not possible you confuse comparative advantage and absolute o Oh yeah What about the trade deficit o Other than rare temporary situations trade deficit does not affect total spending on US goods and services o Oh yeah What about US manufacturers that lose manufacturing jobs o That wasn t our argument But let s address manufacturing total manufacturing jobs 1990 2006 Total real US manufacturing output increases by 50 2006 2010 Output decreases 2010 2015 Increases beyond 2006 level o Jobs China Japan have each lost more manufacturing jobs than US o Manufacturing jobs are disappearing everywhere due to technological change Productivity increases and wages increase o Total output increases and productivity increases 8 Protectionism