Chapter 10. Arguments for and against protectionism - PowerPoint Presentation

Slide1

Chapter 10. Arguments for and against protectionism

Link to syllabus

Jobs, Jobs, Jobs

Data relating to Mfg. & Automotive Sector

Externalities

Theory of Second Best

Specificity Rule

Infant Industry

Politics of Protectionism

Lobbying

Political Economy of VotingSlide2

It is not just a theoretical issue. Remember, some argue that the cause of job loss is technological change, not trade policy.Slide3

Employment in the US, Total Non-Farm

Employment in the US. Total Private

Source: www.bls.govSlide4

Non-farm Employment, 2007; 000s

US

Michigan

Total

137,623

4,626

Private

115,420

3,969

Goods Producing

22,221791Nat'l Resource & Mining7238Construction7,614166Manufacturing13,884617Non-Gov't Service93,1992,814Trade, Transport, Utilities26,608788Information3,02966Financial8,308211Business Services17,962573Education & Health18,327595Leisure & Hospitality13,474404Other 5,491177Government22,203657

bls.govSlide5

Employment in the US. Private, Service-Providing

Employment in the US. All Governments

Source: www.bls.govSlide6

Employment in the US. Manufacturing, 1,000s

Source: www.bls.govSlide7

Michigan Total Manufacturing

Michigan Transportation Equipment

BLS data

900

800

700

600

350

300

250

200Slide8

Notice:

Canada,

Mexico

Source for the next Slides: Klier and Rubenstein (2006)

The New

Geography of the U.S. Automobile IndustrySlide9
Slide10
Slide11
Slide12
Slide13
Slide14
Slide15
Slide16
Slide17
Slide18

Cost of protecting a job: p. 210

(new chart this edition, but same message as before)

(More elaborate data on next slides)

Ultimate data source is Institute for International EconomicsSlide19

Focus on Labor: Cost of protecting a job in the US.

Previous edition: page 210

Ultimate source is research by Institute for International EconomicsSlide20

Focus on labor: Cost of protecting a job in Europe.

Previous edition. Page 211Slide21

Figure 10.1 p. 201 Incentive Distortions and their Effects.Slide22

Theory of Second Best p. 202

If several conditions are necessary for a maximum, and one

is constrained (not

attainable - due

to a distortion), then for the

second best, other conditions might need to be constrained too.

Our application is to free trade in a competitive environment.

Bend one rule, you might have to bend others, as well.

Text refers to this situation as

incentive distortions

. Can be caused by externalities or spillovers, or gov’t policies-taxes.Some free traders call it the theory of second worst.Example: standing to reach the highest point on the side of a hill.Slide23

Specificity rule (p. 204)

It is usually more efficient to use the government policy tool that actsas directly as possible on the source of the distortion separating private

and social benefits or costs.

Although a barrier against imports can be better than doing nothing in

a second best world, the specificity rule shows us that some other

instrument is usually more efficient than a trade barrier.

Standard example is that a quota is a better tool to save jobs than

a

tariff, because it doesn’t distort prices for consumer.Slide24

Figure 10.2 page 206 Two ways to promote import-competing production

Economic cost of the subsidy is less than that of the tariff.Slide25

Figure 10.3 page 209. The infant industry argument

Sdn

: domestic supply now. S

df

: domestic supply in the future.Slide26

Figure 10.4 P. 225. Can an Import Barrier be Better than Doing Nothing?

If so, is it the Best Policy?Slide27

Attempt at Summary

General principle that free trade is best: assumes full employment, and redistribution of benefits

Issue of optimum tariff for large country. Or a tariff that maximizes

government revenue. [

More important in theory than in the real world

]

Subsidies are better (

less worse

) than tariffs

That principle is an example of the specificity principle, which says

that other instruments are usually less harmful for the economy than tariffs, as they can be directed more specifically at an assumed problemAn important justification for tariffs is that the industries protected have positive externalities for societies, such as R&D, improving management skills or workers’ attitudes. Subsidies do this better, of courseA related story is the infant industry argument. (Subsidies are still better)Slide28

Conversation about National Defense: pp. 217-18

A country must have access to products to maintain the national defense, especially because imports may not be readily available during times of hostilities.

Apply the specificity rule:

Some products can be kept in stockpiles. In this case, imports during peacetime can be used to build the stockpiles.

National production capabilities are needed for other products. Best to use a subsidy to building or maintaining national production capabilities.Slide29

“Political Economy” of Protectionism

Political economy: idea that policies can be explained by a direct

analysis of the economic interests which may be affected. Sometimes

called Public Choice

--Appeals to extremes of the political spectrum; can be seen as a form

of economic determinism, as is Marxism,...

--Alternative stories would include "power", ideology, personalities, etc.

--Overlaps with Political Science. (& is a hot topic)

Note that Economics and Political Science both evolved from

“Political Economy” Names: Richard E. Baldwin, J. Bhagwati, M. Olson, G. Tullock, Dennis MuellerSlide30

Why don't we have more free trade?

In particular, why is there so much trouble expanding GATT/WTO, and expanding NAFTA?

"Rational Voter;" If everybody can be made better off with free trade,

then all should support it.

Because that doesn’t happen, we should look for weaknesses in the model’s

assumptions, and apply specificity rule to improve things. For example,

applicability will be limited by market imperfections, such as

imperfect information and time discounting. Or, maybe we don’t have

full employment. Maybe the costs of re-location of labor or capital

outweigh the benefits, to those people, of free trade.

Or, maybe the political system does not always redistribute benefits.The ‘specificity rule’ suggests several areas of improvement that would facilitate the adoption of free trade.Application of Voting Models to the analysis of trade policy.Slide31

Voting models, continued

Lobbying distorts incentives from individual voter to the representative.

It is widely believed that lobbying (a.k.a. directly unproductive

activity, rent seeking activities) has grown in importance in the

last two decades

“Majority Rule" in direct voting. Consumers should out-vote producer

interests hurt by free trade. Unclear how a direct vote would go,

if disputed only among producers. [

verdict, not helpful

]

"Representative system" (indirect voting, as in U.S.) Goes beyond rational voter, looking at Congressional reps as intermediaries. Problems arise due to information, lobbying. Votes depend on diversity of districts, time span (longer elections, more far-sighted), potential importance of factors such as leadership position (e.g. Gingrich, Boehner, Dingel), incumbency, strength of party control. Studies also emphasize importance of short term macro factors such as unemployment and inflation.Slide32

What Explains Lobbying?

Incentives to lobby depend on size of potential change, ability to

suppress "free rider“ problem (such as with unions or business

associations), dispersion/concentration of affected people, legal

arrangements such as taxes, permission for foreign lobbyists

(foreigners benefit from VERs). Studies show movement towards

greater

consistency along

sectoral

, as opposed to Heckscher-Ohlin lines. Size of change of income (total, or per person) depends on: - Specificity of policy (titanium or tobacco, vs. “food" or “manufacturing"); - Complications due to presence of intra-industry trade/outsourcing, especially foreign, which is itself related to presence of MNCs; - Cost of reallocating resources (higher in a stagnant economy, or for industry specific skills; less if there is trade adjustment assistance; will also depend on age, unionization).Obviously the extent of lobbying is affected by legislation (about which mt knows nothing).Slide33

Some Conclusions

Rational voter model, alone, doesn't explain much. But we can use it to

argue that deviations (protectionism) are due to incorrect assumptions,

as well as free riders--especially among consumers--costs of

information, and limited time horizons.

2) Nevertheless, modifications of this model appear to be able to

explain some political behavior, by suggesting that benefits of

expansion of GATT/WTO will be small compared to returns

from lobbying against it.

3) The Representative model leads to an emphasis on lobbying, which

seems to have increased, and to be more important, now that cold war concerns are less. Recent U.S. legislation appears to increase power of lobbyists.4) Several aspects of globalization should tend to lessen the demand for protectionism, especially the high current rate of technological change, MNCs and outsourcing. Also, the cost of tariff war is perceived to be much higher.Slide34

Are There Any

Conclusions about Policy from the Political Economy Analysis? What Can Be Done to Facilitate Trade Expansion?

1) Improve information; on effects of tariffs, on voting policies of

our representatives in Congress.

2) Pass legislation to limit the returns to lobbying.

3) Facilitate income redistribution as per Community Indifference

Curve analysis. Trade adjustment programs lower cost of relocation.

4)

Note that recent

changes in U.S. trade laws, concerning import surges

, etc., make NTBs easier. Slide35

Brief Review of US Trade Policy

1. Tariffs were a major source of gov’t revenue, pre-WWI. Tariff policy

depended on fiscal needs.

2. One cause of WWI was trade conflicts (Germany, England, France)

3. Smoot Hawley was widely recognized as damaging

Since WWII

1. Trade policy often mixed with politics; promoting broad geo-political

goals like restraining Communism and promoting democracy.

Increasing domestic economic pressure, especially given the

long term decline in protectionism. What is Obama’s position?

3. Reversal of positions between Republicans and Democrats, paralleling a reversal of positions by business, labor, and farm sector4. Increased use of NTBs.Slide36

Recent Initiatives in US Trade Policy

1962 Trade expansion Act: across the board tariff reductions, trade

adjustment assistance, Kennedy Round of GATT

1974 Trade Act - supported Tokyo Round, and

Section 201 relief from ‘surges’ in imports

Section 232 trade restrictions for ‘national security’

Section 301 retaliate against countries applying discriminatory

policies towards US exports

Section 701 recognizes injury from foreign subsidies to production Section 731 anti-dumping provisions.Many of these increase administrative discretion, a.k.a. NTBSuper 301 (1988) USTR to send to congress a list of countries with

unfair trading policies.Slide37

Current Major Policy Areas for US Trade Issues

Europe: CAP, MNCs (in and outward), antitrust, IPJapan: US Trade deficit (but US pressure has

relaxed)

China:

rapid

growth in US trade deficit, ‘human rights’

Cuba: Helms-Burton blockade. Extraterritoriality

FTAs with several countries (third world).Slide38

Trade Policy Issues for Developing Countries

Historical resentment: free trade was imposed on colonies – a.k.a.

the ‘Imperialism of Free Trade’ hindering industrialization

Experiences of Japan, Korea, Taiwan etc. are widely interpreted as

supportive of infant industry protectionism.

Many experiences in LDCs with trade liberalization have not been

successful. Especially true when undertaken in a context of

other reforms (exchange rates, inflation).

China and India are unexpectedly successful with trade-led growth.

Stalemate in WTO is often seen as resulting from protectionism in NorthSlide39

Question # 5 page 227

Can you describe plausible conditions under which a nation would

benefit from subsidizing imports of a good?

Question # 11 p. 228

In an earlier chapter, we discussed the one-dollar one-vote metric. If

political decisions in a small country were based on this metric, what

sort of protectionism would the country have?Slide40

Question #1 p. 227

A Single firm’s innovations in production technology often benefit

the production of other firms, because these other firms learn about the

new technology and can use it

Is there an externality here?

How would an economist rank the following two policies?

i) A tariff on imports, to encourage production and the technology

ii) A subsidy on domestic production to encourage production

c) What third policy (a tax or subsidy or something) would the economist

recommend as even better?Slide41

October 29, 2006

NYT. U.S. Jobs Shape Condoms’ Role in Foreign Aid

October 29, 2006

U.S. Jobs Shape Condoms’ Role in Foreign Aid

By

CELIA W.

DUGGER

EUFAULA, Alabama — Here in this courtly, antebellum town, Alabama’s condom production has survived an onslaught of Asian competition, thanks to the patronage of straitlaced congressmen from this Bible Belt state.

Behind the scenes, the politicians have ensured that companies in Alabama won federal contracts to make billions of condoms over the years for

AIDS

prevention and family planning programs overseas, though Asian factories could do the job at less than half the cost. In recent years, the state’s condom manufacturers fell hundreds of millions of condoms behind on orders, and the federal aid agency began buying them from Asia. The use of Asian-made condoms has contributed to layoffs that are coming next month. But Senator Jeff Sessions, Republican of Alabama, has quietly pressed to maintain the unqualified priority for American-made condoms and is likely to prevail if the past is any guide.Slide42

October 28, 2006

NYT Democrats Get Late Donations From Business

By JEFF ZELENY and ARON

PILHOFER WASHINGTON

, Oct. 27 — Corporate America is already thinking beyond Election Day, increasing its share of last-minute donations to Democratic candidates and quietly devising strategies for how to work with

Democrats

if they win control of Congress.

The shift in political giving, for the first 18 days of October, has not been this pronounced in the final stages of a campaign since 1994, when

Republicans

swept control of the House for the first time in four decades.

Though Democratic control of either chamber of Congress is far from certain, the prospect of a power shift is leading interest groups to begin rethinking well-established relationships, with business lobbyists going as far as finding potential Democratic allies in the freshman class — even if they are still trying to defeat them on the campaign trail — and preparing to extend an olive branch the morning after the election.Lobbyists, some of whom had fallen out of the habit of attending Democratic events, are even talking about making their way to the Sonnenalp Resort in Vail, Colo., where Representative Nancy Pelosi of California is holding a Speaker’s Club ski getaway on Jan. 3. It is an annual affair, but the gathering’s title could be especially apt for Ms. Pelosi, the House minority leader, who will be on hand to accept $15,000 checks, and could, if everything breaks her way, become the first woman to be House speaker. Slide43
Slide44

Externalities (pp. 183-184)

External costs SMC> p (=MB=MC=SMB) e.g. pollution

External benefits SMB>P (=MB=MC=SMC) e.g. education

Distorting tax P with tax > SMC

Distorting subsidy P with subsidy < SMC

Monopoly power P>SMC

Monopsony power P < SMB (single firm dominates labor market-not done in this book)

First-best all private incentives line up with benefits and costs to society as a whole

Second best there are distortions. Externalities or spillovers.

Pigou’s suggestion was tax or subsidy. Coase talks about expanding property rights—not pursued here.

Specificity rule—go directly to source of distortion.