International Trade and Trade Policy

This is Unit Sixteen of Principles of Microeconomics, part two of two: what protection is, the arguments made for it, and the one argument that settles which instrument fits. Part one measured a tariff's wedge. This part asks who wants it and why. Protection is a subsidy from consumers to producers collected through higher prices, and it reshuffles jobs rather than adding them. Each argument for it has a form in which it is right and a form in which it is a tariff by another name. The unit closes on a thought experiment: a technology that displaces workers and an import that does the same are, in the economics, the same case. By the end you will be able to describe protection as a subsidy and say what it does to jobs. To state the infant-industry and anti-dumping arguments with their limits. To assess three more arguments and say how policy is made. To classify an argument and give its counter. And to answer the jobs question in four steps and carry the technotron argument whole.

Two entries on what protection is: a subsidy from consumers, and the jobs claim.

What protection is.

MIC 1515 Protection as a Subsidy

Protection is a subsidy from consumers to producers collected through higher prices; if it did not raise producers' receipts nobody would seek it, and consumers lose more than producers gain. A domestic sugar price held near double the world price moved candy-making across the border, and sugar-using industries lost jobs many times sugar growing's whole employment.

The jobs claim.

MIC 1516 Does Protection Create Jobs?

Protection reshuffles jobs to protected industries; it does not add jobs. Consumers spend less elsewhere, firms using the protected input lose sales abroad, and the cost per job saved runs far above the wage: ten million in higher prices for fifty jobs is two hundred thousand each. Jobs have not fallen across decades of rising trade, and unemployment is the business cycle's.

Four entries on the arguments: wages and standards, the infant industry, dumping, and three more.

Wages and conditions.

MIC 1517 Wages, Distribution and Standards

Trade raises productivity, shifting labor demand right and the average wage up; it also shifts demand from import-competing to exporting industries, so the distribution moves, and whether harm concentrates on the low-skilled is contested. Forced labor is widely rejected; low wages with worse alternatives are a different question. What minimum standards should hold everywhere is a different question from restricting trade.

The first argument for protection.

MIC 1518 The Infant-Industry Argument

Protect a new industry until it has skills and scale. In practice protected industries often age without competing, and protection outlasts infancy, so the conditions are few industries, no widely used inputs, and a clear end date: tie protection to exports, so that it ends whether it worked or not. Payments, loans and research support do the same without taxing the industry's customers.

The second argument.

MIC 1519 Anti-Dumping

Dumping is selling abroad below production cost or below the home price, the two tests, and anti-dumping duties raise the price. Price can fall below cost innocently or predatorily, and measuring cost is more art than science; selling below total cost while covering variable cost is unit seven's rule, not dumping. The anchor reports no documented later price rise, and anti-dumping can mask a tariff.

Three more arguments.

MIC 1520 Environment, Safety and National Interest

A race to the bottom in environmental standards is plausible but unsupported, since compliance is a small share of plant cost. Safety standards are allowed if science-based and applied at home too. Import dependence is answered by stockpiling, not by using up domestic supply; a strategic material stayed subsidized for decades after leaving the strategic list, and strategic is decided by politicians, not analysts.

Two entries on policy and sorting: how the policy gets made, and sorting the arguments.

How the policy gets made.

MIC 1521 How Trade Policy Is Made

Three levels: the World Trade Organization, which succeeded the nineteen forty-seven tariff agreement in nineteen ninety-five; regional agreements, of which the North American agreement took effect January first, nineteen ninety-four; and national laws. Producers are few and organized, consumers many and diffuse, so benefits are concentrated and costs diffuse, and a treaty lets a legislator refuse a lobbying industry by pointing at it.

Sorting the arguments.

MIC 1522 Classifying an Argument for Protection

Given an argument for restricting imports, name which of five it is and give its standard counter. Infant industry: temporary protection to build scale; protection rarely ends, so set conditions. Anti-dumping: price below cost or home price; consumers gain and cost is hard to measure. Environment: a race to the bottom; the evidence does not show one. Safety: unsafe imports; set science-based standards for all goods. National interest: dependence on imports; stockpile and conserve. Five claims. A new battery industry needs ten years of tariffs: infant industry; ask when it ends and tie it to exports. Foreign steel sells here below its home price: dumping; ask whether cost is measured fairly and who gains from cheap steel. Factories will flee to countries with weak air rules: race to the bottom; compliance is a small share of cost. Imported toys contain lead: safety; a standard on all toys, domestic included. We must not depend on foreign oil: national interest; import now, stockpile, and keep reserves for later. Each argument has a form in which it is right and one in which it is a tariff by another name, so the counter is a test, not a refutation; and infant industry is the one the anchor concedes can work, under conditions.

Two capstones: the jobs question whole, and the argument that settles the instrument.

The jobs question whole.

MIC 1523 Does Protection Save Jobs?

Whether protection saves jobs is the question most tariffs are sold on, and the honest answer runs through four steps. First, the protected industry does gain: its price, output and employment rise, and those jobs are visible, concentrated and grateful. Second, the losses are spread where nobody counts them: consumers have less to spend on everything else, so employment falls a little across many industries, and every firm that uses the protected good as an input pays more than its foreign rivals, loses sales, and cuts jobs; an input tariff can drive a whole downstream industry abroad. Third, the arithmetic: the consumer cost per job saved runs far above the wage, because most of the higher price becomes profit, equipment and raises rather than payroll, and part is deadweight loss. Fourth, why it persists: producers are few and organized, consumers and downstream firms many and diffuse, so the side that loses more cannot organize. Protection reshuffles jobs toward the industries that lobby best, and the total is lower, not higher. A tariff on display panels raises their price forty percent and adds three hundred jobs at panel makers. Panels are half the cost of a laptop, so domestic assemblers now pay more than foreign ones; one moves abroad, one closes, one cancels a plant, two thousand assembly jobs go, and the panel makers lose the customers they were protected for. Consumers pay sixty million dollars more a year for the three hundred jobs, two hundred thousand each against wages of fifty thousand, and the two thousand lost jobs never appear in the tariff's accounting. Three cautions. The reshuffling claim is about the total; a tariff does save the jobs it names, and the people in them are real, which is why the case for retraining and income support is not a case against them. The cost-per-job figures are attributed compilations and dated, and the pattern is what to carry. And unemployment rising and falling with the business cycle is a macroeconomic matter this course does not treat.

The argument that settles the instrument.

MIC 1524 The Technotron Argument

Suppose a domestic firm invents a technology that makes its product better and cheaper with fewer workers. Its rivals lose sales, lay off workers, and some fail; whole towns built on the old method suffer. Should the law forbid the technology? Almost nobody says yes. The answers offered are support for the displaced, retraining, and research so rivals can catch up; the technology is kept, because forbidding it would forgo the gain to everyone who buys the product to spare the loss to those who made it the old way. Now suppose the firm's technology is only that it imports what it sells. Every objective fact is the same, so the response should be the same: take the gain, and deal with the loss using tools aimed at the loss. That is the economists' common position on trade, and it is a position, not a proof. It does not deny that trade has losers; it says protection is the wrong instrument for them, because it forgoes the gain to spare the loss, while income support, retraining and research spare the loss and keep the gain. A furniture maker adopts a robotic line and sells chairs at half the price; three rivals close and four hundred workers lose jobs, the town asks for a ban, and the legislature declines, funds retraining and a wage subsidy, and consumers keep the cheap chairs. A year later a different maker imports chairs at half the price, the same three rivals close, the same four hundred lose jobs, and the town asks for a tariff. The situation is identical; so is the right answer. Three cautions. The argument does not settle how much support displaced workers should get, or whether the losers are in fact compensated; only which instrument fits. The simplified analysis leaves things out, and the anchor says so about labor standards; a factory-fire disaster abroad is not captured by an argument about prices. And the average person who gains from trade is a construct covering people who did well and people who did badly; policy has a legitimate interest in the second group, in workers abroad, and in strategic industries, which is why the argument is about instruments rather than about whether to care.

Look at what you can now do. You can describe protection as a subsidy from consumers collected through prices, and say that it reshuffles jobs at a cost per job far above the wage. You can report that trade raises the average wage and moves the distribution, with the effect on the low-skilled contested, and state the infant-industry and anti-dumping arguments with the conditions and tests each requires. You can say why the race to the bottom is unsupported, when a safety standard is legitimate, and why stockpiling answers import dependence; and you can explain policy by concentrated benefits against diffuse costs. You can sort any argument for protection into one of five and give its counter as a test, not a refutation. And you can answer the jobs question in four steps, and carry the technotron argument whole: the same displacement by a technology or by an import calls for the same instrument. Unit seventeen looks back over the course's forty views.