Outline Reasons for Protection Reasons that DO NOT Make Economic Sense Econ 340 Pauper Labor Fairness Patriotism Retaliation Reasons the DO Make Economic Sense with Counter Arguments Lecture 7 Reasons for Protection Revenue Optimal Tariff Infant Industry National Security Culture Unfair Trade Protect Favored Industry Retaliation Production Subsidy versus Tariff Why Aren t Tariffs Higher Lecture 7 Reasons Why Do Countries Use Protection Models say that tariffs quotas etc mostly hurt the countries that use them But almost all countries do use them and always have even more than today Why Many reasons have been given I list 24 in my Glossary we ll go through some of them Of these what usually explains actual protection today is 2 Recall Effects of Tariffs P nly to o o fits g Bene e few th the cers in produ d industry cte prote a S b c Cost s are born the e cons many by ume rs of prod th prote uct of th e e cted indu stry d Protect a Favored Industry Why D Benefits of protection go to a few Costs of protection though larger are spread over many Lecture 7 Reasons Q 3 Outline Reasons for Protection Un sensible Pauper Labor Fairness Patriotism Retaliation Reasons that are based on misunderstanding of what protection will actually do Reasons the DO Make Economic Sense with Counter Arguments 4 Un sensible Reasons for Protection Reasons that DO NOT Make Economic Sense Lecture 7 Reasons Revenue Optimal Tariff Infant Industry National Security Culture Unfair Trade Protect Favored Industry Retaliation Production Subsidy versus Tariff Why Aren t Tariffs Higher Lecture 7 Reasons 5 Lecture 7 Reasons 6 1 Un sensible Reasons for Protection Un sensible Reasons for Protection Pauper Labor Argument Pauper Labor Argument Answer We hold that the most efficient way of protecting American labor is to prevent the importation of foreign pauper labor to compete with it in the home market Democratic Party Platform July 9 1896 Based on belief that trade with poor countries will drive US wages down to the very low pauper levels of poor countries Lecture 7 Reasons 7 See Ricardian Model Labor in poor countries earns low wages because it is less productive than labor in rich countries Trade will in fact raise wages in both Caveat Heckscher Ohlin Model implies Factor Price Equalization FPE At level above poor country autarky wage But below the rich country autarky wage Thus an element of truth to the pauper labor argument But empirical evidence indicates technology differences account for much of the wage difference preventing FPE Thus rich country wages may fall due to trade but not nearly to poor country levels Lecture 7 Reasons 8 Un sensible Reasons for Protection Un sensible Reasons for Protection Fairness Argument A few years ago I got an e mail from something called Third Way promoting harsher treatment of China in trade It is unfair to make workers compete with those who are either more productive or lower paid Analogy is to players in a game who want a level playing field Their report China s Trade Barrier Playbook Why America Needs a New Game Plan And their graphic Answer Trade is not a zero sum game There are benefits for both countries If field is tilted favoring another country s exports e g by a subsidy low wages or cheap currency we actually benefit from that Also even those who lose can be compensated by others in their countries who gain Lecture 7 Reasons 9 Lecture 8 US 10 Un sensible Reasons for Protection Patriotism Argument We should buy from producers inside our country so that the benefit goes to them instead of to foreigners Lecture 8 US 11 Lecture 7 Reasons 12 2 Un sensible Reasons for Protection Un sensible Reasons for Protection Patriotism Argument Answer Retaliation Argument This confuses costs and benefits in fact buyers benefit from consumption while sellers incur the cost of production If we import and don t export then we enjoy the fruits of someone else s labor If we both import and export then comparative advantage says that we and they both benefit more Lecture 7 Reasons Reasons that DO NOT Make Economic Sense From the theory foreign tariffs are irrelevant to the effects of our own tariffs If using a tariff would hurt us when others do not protect then it will also hurt us when they do So retaliation does not help us Lecture 7 Reasons 14 Sensible Reasons for Protection Sensible Pauper Labor Fairness Patriotism Retaliation Reasons based on effects that protection may actually have These too have counter arguments Reasons the DO Make Economic Sense with Counter Arguments Answer 13 Outline Reasons for Protection If others use tariffs against our exports then we should use tariffs against their exports This assumes that their tariffs hurt us which they do and that we gain by fighting back Revenue Optimal Tariff Infant Industry National Security Culture Unfair Trade Protect Favored Industry Retaliation Why they may not work Why another policy would work better that is protection is second best Production Subsidy versus Tariff Why Aren t Tariffs Higher Lecture 7 Reasons 15 Sensible Reasons for Protection Lecture 7 Reasons 16 Recall Effects of Tariffs Small Country Revenue Argument Tariffs collect revenue for government Tariffs may be the only tax that a weak government can manage Because demanders and suppliers both are led by the tariff to behave as if the good s value were PW t when in fact the country can buy or sell it for PW Tariffs are easier to collect than other taxes because you only have to monitor the border not the whole inside of the country Counter argument Tariff is 2nd best If other taxes are feasible then almost any other tax causes less distortion than a tariff Reason A tariff distorts both supply and demand Example Tax consumption Lecture 7 Reasons P S PW t PW D Q 17 Lecture 7 Reasons Revenue 18 3 Effects of a Consumption Tax Small Country Sensible Reasons for Protection Optimal Tariff Argument P A tax on say consumption of the good would produce Less dead weight loss More tax revenue We saw this when we analyzed a large country Tariff can improve the country s terms of trade and thus raise its welfare S Counter arguments Optimal tariff benefits the country only at the expense of other countries PW t Other countries lose more than this country gains Use of a tariff for this purpose is therefore both inefficient and unethical It s NOT NICE PW D Q Lecture 7 Reasons 19 More practically other countries are likely to retaliate with tariffs of their own Then everybody