Page 780 - Economics

CONFIRMING PAGES

CHAPTER 35
689
International Trade
There is some truth in this diversification-for-stability tries are deemed beneficial, because the advances achieved
argument. But the argument has little or no relevance to in one domestic industry often can be transferred to other
the United States and other advanced economies. Also, domestic industries.
the economic costs of diversification may be great; for ex- Japan and South Korea, in particular, have been ac-
ample, one-crop economies may be highly inefficient at cused of using this form of strategic trade policy. The
manufacturing. problem with this strategy and therefore with this argu-
ment for tariffs is that the nations put at a disadvantage by
Infant Industry Argument strategic trade policies tend to retaliate with tariffs of their
The infant industry argument contends that protective own. The outcome may be higher tariffs worldwide, re-
tariffs are needed to allow new domestic industries to duction of world trade, and the loss of potential gains from
establish themselves. Temporarily shielding young technological advances.
domestic firms from the severe competition of more
mature and more efficient foreign firms will give in- Protection-against-Dumping
fant industries a chance to develop and become efficient Argument
producers. The protection-against dumping argument contends that
This argument for protection rests on an alleged excep- tariffs are needed to protect domestic firms from “dump-
tion to the case for free trade. The exception is that young ing” by foreign producers. Dumping is the selling of ex-
industries have not had, and if they face mature foreign com- cess goods in a foreign market at a price below cost.
petition will never have, the chance to make the long-run Economists cite two plausible reasons for this behavior.
adjustments needed for larger scale and greater efficiency in First, firms may use dumping abroad to drive out domestic
production. In this view, tariff protection for such infant competitors there, thus obtaining monopoly power and
industries will correct a misallocation of world resources monopoly prices and profits for the importing firm. The
perpetuated by historically different levels of economic long-term economic profits resulting from this strategy
development between domestic and foreign industries. may more than offset the earlier losses that accompany the
below-cost sales.
Counterarguments There are some logical prob- Second, dumping may be a form of price discrimina-
lems with the infant industry argument. In the developing tion, which is charging different prices to different cus-
nations it is difficult to determine which industries are the tomers even though costs are the same. The foreign seller
infants that are capable of achieving economic maturity and may find it can maximize its profit by charging a high price
therefore deserving protection. Also, protective tariffs may in its monopolized domestic market while unloading its
persist even after industrial maturity has been realized. surplus output at a lower price in the United States. The
Most economists feel that if infant industries are to be surplus output may be needed so that the firm can obtain
subsidized, there are better means than tariffs for doing the overall per-unit cost saving associated with large-scale
so. Direct subsidies, for example, have the advantage of production. The higher profit in the home market more
making explicit which industries are being aided and to than makes up for the losses incurred on sales abroad.
what degree. Because dumping is an “unfair trade practice,” most
nations prohibit it. For example, where dumping is shown
Strategic Trade Policy In recent years the infant to injure U.S. firms, the Federal government imposes tar-
industry argument has taken a modified form in advanced iffs called antidumping duties on the specific goods. But
economies. Now proponents contend that government relatively few documented cases of dumping occur each
should use trade barriers to reduce the risk of investing in year, and specific instances of unfair trade do not justify
product development by domestic firms, particularly widespread, permanent tariffs. Moreover, antidumping
where advanced technology is involved. Firms protected duties can be abused. Often, what appears to be dumping
from foreign competition can grow more rapidly and is simply comparative advantage at work.
achieve greater economies of scale than unprotected for-
eign competitors. The protected firms can eventually
dominate world markets because of their lower costs. Sup- Increased Domestic Employment
posedly, dominance of world markets will enable the do- Argument
mestic firms to return high profits to the home nation. Arguing for a tariff to “save U.S. jobs” becomes fashion-
These profits will exceed the domestic sacrifices caused by able when the economy encounters a recession or experi-
trade barriers. Also, advances in high-technology indus- ences slow job growth during a recovery (as in the early

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