Why do all governments engage in the regulation of international trade? Given the results of international trade theory, particularly those of Adam Smith and David Ricardo, it is clear that government involvement in trade simply raises prices and reduces supply. Therefore, why would any government want to have an influence on trade? REASONS FOR PROTECTIONISM Protection of domestic industries, employment, capital, and technology. Encouragement of domestic ownership and control. Improvement of the balance of trade. Protection of sovereignty and national security. Protection of domestic culture(s) and social values. ARGUMENTS FOR GOVERNMENT INTERVENTION The Unemployment Argument = simple protection of employment
The Argument — We are losing jobs and workers vote. Therefore, protect these jobs or we will vote you out of office. This argument was at the core of organized labor’s opposition to a free trade agreement with Mexico. It is also at the core of the European auto industry position vis-à-vis autos imported from Japan. At the very core of the Unemployment Argument is the presumed inability of workers to adapt to new circumstances, i.e., change comes very quickly, but humans change very slowly. Therefore, a society should protect workers at least until they retire. A solution that has been adopted in various industries is early retirement. For example, many major newspaper publishers (including the New York Times) gave their hot-lead printers early retirement so that the papers could shift to the new and more efficient photo-offset technology. Note that this plan natural resources,works best when the workers have blocking power, i.e., property rights in their jobs. Structural unemployment is unemployment resulting from shifts in market demand, and usually results from technological change.
For example, the cowboy was rendered structurally unemployed by the railroads, many low skill workers are rendered structurally unemployed by robots, and hotlead printers were rendered structurally unemployed by photo-offset technology, which is itself being replaced by desk-top publishing. Infant Industry Argument This is a very old argument–Alexander Hamilton used it in the US in 1792. Colbert (of France) put the argument as follows in 1666: “It is better to buy French rather than foreign products even if the French ones are a little less good and a little more expensive. There is a double advantage in doing so: the state does not lose liquid assets and is not impoverished and on the other hand the subjects of His Majesty make a living and develop their skills.” The logic — simple protection while the per unit cost of production is high. Why do costs come down? (1) Scale effects and (2) learning effects. Both are particularly influential in new technological developments, like computer chips and bio-technology.
However, both are slow to materialize under protection. Industrialization Argument The logic — formulate a (national) industrialization plan/policy and stick to it. This has some of the brilliance of the Soviet Five-Year Plans. However, it has been used quite successfully by MITI (Ministry of International Trade and Industry) in Japan. In the US it would be called an Industrial Policy. Relationships With Other Countries Governments often manipulate trade for simple political reasons. E.g., the US grants most favored nation status to its allies in an effort to make them better off economically. Similarly, it withholds the status from its adversaries, and it grants it to old adversaries in an effort to convert them. China recently received most favored nation status from the Clinton administration for this reason. Governments also manipulate trade for economic reasons: correct balance of payments problems; maintain monopoly prices (e.g., OPEC); expand foreign market share; and induce fairness.
The first and second are well known. The third leads to charges of dumping. (Dumping is selling goods in foreign markets below cost. The goal of dumping is to weaken or destroy the competing industry in the foreign country. Japan is regularly accused of this practice, often correctly.) The last is being invoked when you hear terms like “level playing field.” The Primary Reason for Government Involvement in Trade The primary reason for governmental involvement is politics . Large (and even some small) power groups have a remarkable influence through lobbying, financial support, organization of members, ability to mobilize voters, etc. Herein lies the source of most governmental restrictions on trade — they benefit a powerful group while hurting a harmless group. The two most traditional arguments in this category are the essential industry argument and the strategic (i.e., defense related) commodity argument.
Examples of essential industries are computers in the US, wine in France, and chemicals in Germany. Examples of strategic commodities in the US are silicon for chips and the chemicals that go into sophisticated strategic metals and materials. Food is often considered essential, e.g., rice in Japan. FORMS OF TRADE CONTROL Tariffs A tariff is a tax, and is commonly called a duty. A tariff can be applied to the exporter, the intermediary firm, or the importer. The last is the most common. The purpose of a tariff is to raise the price of the imported good or service. The goal of a tariff is to raise the price of the imported good or service above the domestic price. The rationale behind a tariff is to raise host government revenue and/or protect domestic industry.
Kinds of tariffs Specific duty: tariff = $/unit. Ad valorem tariff: tariff = % of entry price. Countervailing tariff: tariff = the export subsidy. Tariffs are the oldest form of trade policy, and traditionally have been used as a source of government revenue. For example, until the introduction of the income tax, by Lincoln, tariffs were used by the US government as its primary source of revenue.