Page 779 - Economics

CONFIRMING PAGES

PART TEN
688
International Economics
divert resources away from more socially desirable pur- CONSIDER THIS . . .
poses, trade restrictions impose that cost on society.
Conclusion: The gains that U.S. trade barriers create Shooting
for protected industries and their workers come at the ex- Yourself in
pense of much greater losses for the entire economy. The the Foot
result is economic inefficiency.
In the lore of the
Wild West, a
The Case for Protection: gunslinger on oc-
A Critical Review casion would ac-
cidentally pull
Despite the logic of specialization and trade, there are still the trigger on his
protectionists in some union halls, corporate boardrooms, pistol while re-
and the halls of Congress. What arguments do protection- trieving it from its holster, shooting himself in the foot. Since
ists make to justify trade barriers? How valid are those then, the phrase “shooting yourself in the foot” implies doing
arguments? damage to yourself rather than the intended party.
That is precisely how economist Paul Krugman sees a trade
Military Self-Sufficiency war:
Argument A trade war in which countries restrict each other’s exports
in pursuit of some illusory advantage is not much like a real
The argument here is not economic but political-military: war. On the one hand, nobody gets killed. On the other, unlike
Protective tariffs are needed to preserve or strengthen in- real wars, it is almost impossible for anyone to win, since the
dustries that produce the materials essential for national main losers when a country imposes barriers to trade are not
defense. In an uncertain world, the political-military foreign exporters but domestic residents. In effect, a trade
objectives (self-sufficiency) sometimes must take prece- war is a conflict in which each country uses most of its am-
dence over economic goals (efficiency in the use of world munition to shoot itself in the foot.*
resources). The same analysis is applicable to trade boycotts between
Unfortunately, it is difficult to measure and compare the major trading partners. Such a boycott was encouraged by
benefit of increased national security against the cost of eco- some American commentators against French imports because
nomic inefficiency when protective tariffs are imposed. The of the opposition of France to the U.S.- and British-led war in
economist can only point out that when a nation levies tariffs Iraq. But the decline of exports to the United States would
to increase military self-sufficiency it incurs economic costs. leave the French with fewer U.S. dollars to buy American ex-
All people in the United States would agree that rely- ports. So the unintended effect would be a decline in U.S. ex-
ing on hostile nations for necessary military equipment is ports to France and reduced employment in U.S. export
industries. Moreover, such a trade boycott, if effective, might
not a good idea, yet the self-sufficiency argument is open to lead French consumers to retaliate against American imports.
serious abuse. Nearly every industry can claim that it makes As with a “tariff war,” a “boycott war” typically harms oneself
direct or indirect contributions to national security and as much as the other party.
hence deserves protection from imports.
Are there not better ways than tariffs to provide needed *Paul Krugman, Peddling Prosperity (New York: Norton, 1994), p. 287.
strength in strategic industries? When it is achieved through
tariffs, this self-sufficiency increases the domestic prices of
the products of the protected industry. Thus only those
consumers who buy the industry’s products shoulder the wars, international political developments, recessions
cost of greater military security. A direct subsidy to strategic abroad, and random fluctuations in world supply and demand
industries, financed out of general tax revenues, would dis- for one or two particular goods can cause deep declines in
tribute those costs more equitably.
export revenues and therefore in domestic income. Tariff
and quota protection are allegedly needed in such nations
Diversification-for-Stability to enable greater industrial diversification. That way, these
Argument economies will not be so dependent on exporting one or
Highly specialized economies such as Saudi Arabia (based two products to obtain the other goods they need. Such
on oil) and Cuba (based on sugar) are dependent on inter- goods will be available domestically, thereby providing
national markets for their income. In these economies, greater domestic stability.

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