Question

Briefly explain and rebut (No credit without rebuttal and presentation of two or more sides of the arguments) the following political arguments for intervention. Note: No opinions.

1. The Protecting Jobs and Industries argument:

2. The Retaliation argument – is there unanimity among economists and international business professionals on this issue?

3. Preserving national Security Argument:

4. The Protecting the Consumers Argument:

5 .The Infant Industry Argument:

6. Use Trade Protection to Reduce the Trade Deficit Argument:

7. Pursue Strategic Trade Policy Motive argument.

8. The Reducing Pollution Havens argument.

Answer 1

Protecting jobs and industries argument A primary argument often presented to restrict trade is that trade reduces the number of jobs available domestically. While this is true of specific industries, trade does not generally reduce jobs overall, because trade allows consumers to pay lower prices, which, in turn, allows them to buy more products and services. Since many of these products and services are domestically produced, the increased purchasing power of the consumer stimulates job creation domestically as well as internationally. Furthermore, 3rd world countries with lower wages become richer, allowing them to buy more exports from industrialized countries.

The job preservation argument is often presented by unions to protect union jobs. However, unions stifle the economy by preventing companies from getting the lowest prices for their inputs, forcing them to raise prices. Furthermore, companies are often prevented from using automation or robotics so that unions can preserve jobs, which is ironic, since automation and robotics make workers more productive, thus allowing companies to pay union wages and benefits. Furthermore, unions actually decrease jobs, since there is less demand for higher-priced labor. Moreover, restricting trade to benefit unions forces everyone else to pay higher prices for that benefit — hence, the few people in unions benefit at the expense of everyone else.

An economy can operate at maximum efficiency only if the labor force is mobile, where people would be willing to change jobs as the need requires. To protect labor so that they can keep certain jobs would reduce economic efficiency. For instance, imagine that blacksmiths were able to prevent the arrival of the automobile. People must accept that the economy, and therefore jobs, is constantly changing, so they should manage their finances to accommodate that possibility. Many people are reluctant to change jobs, but ultimately they will adopt, as they must.

Unanimity among economists It is often said that bad economic policy reflects disagreement among the experts; that if all economists gave the same advice, economic policy would be good. Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world. Yet tariffs have been the rule. The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule. The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century, especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. Tariffs have since been reduced by repeated international agreements, but they remain high, probably higher than in the nineteenth century, though the vast changes in the kinds of items entering international trade make a precise comparison impossible.

National security argument The argument is often made that an industry should be protected for national security, an argument that is often used by the industry itself because it doesn't want to compete with foreigners. In some cases, this is a legitimate argument. Certainly, manufacturing H-bombs or printing domestic currency should not be outsourced. However, the national security argument cannot be applied to most goods and services. And there are some cases where the national security argument would be plausible, but because the country does not have an absolute or comparative advantage in producing the product, it would have little choice but to trade. For instance, the United States is highly dependent on oil, which can certainly be considered a strategic resource, since a significant part of the United States economy is dependent on it, but it would be very difficult for the United States not to import oil. Even military hardware is composed of parts made in other countries.

The infant industry argument is that import competition prevents an initially uncompetitive domestic industry from starting production. But, if the industry is shielded from foreign competition, it can begin production, and over time it will be able to lower its production costs, so that it becomes competitive. At that time in the future the protection can be removed, and the industry will provide national benefits in the form of producer surplus. In this scenario, a tariff can be better than doing nothing, for national well-being over the long term. But the specificity rule indicates that the better government policy is one that acts directly on the source of distortion. If the issue is to foster initial domestic production, then a production subsidy is a better government policy. One may even wonder why this is needed. Why cannot the firms in the infant industry borrow to finance initial losses and then pay back the loans using future profits when the industry is grown up? If there are defects in the lending markets, then the government could extend loans. If the industry will create external benefits, such as training workers or new technologies, then the best government policy acts directly on the source of the external benefits (for instance, subsidies to training, or subsidies to research and development).

Many developing countries, like India, Pakistan, Sri Lanka and Bangladesh have the conditions necessary to compete success­fully in the international market, but they lack experience and expertise which take time to acquire.

The infant industry argument suggests that new industries should be given temporary protection in order to enable them to build up this experience. This argument applies where the industry is small and young, and where costs are high but fall as the industry grows.

According to this argument, there are some industries in which a country would really have comparative advantages if and only if it could get them started. If faced with foreign competition, such infant (young and growing) industries would not be able to pass the initial period of experiment and financial stresses.

But given protection for a short period, they can be expected to develop economies of mass production and they would ultimately be able to face foreign competition without protection. So, at the infant stage such indus­tries should be protected for a period till they can face competition inde­pendently.

The central idea of this argument is embodied in the saying- Nurse the baby, protect the child, and free the adult’. This argument s now widely accepted in India as a good ground of protection for a temporary period for promoting home industries at the early stages.

Critics, however, argue that most infant industries never grow up- that they continue to demand protection; so their customers continue to pay high prices. Once protection is given to such industries, it is a practice (mainly for political reasons), to remove it.

Trade protection is a type of policy that limits unfair competition from foreign industries. It's a politically motivated defensive measure. In the short run, it works. But it is very destructive in the long term. It makes the country and its industries less competitive in international trade. Trade protection is the deliberate attempt to limit imports or promote exports by putting up barriers to trade. Despite the arguments in favour of free trade and increasing trade openness, protectionism is still widely practiced.

A trade deficit is when a country imports more than it exports. It is also called a negative balance of trade. It is one way of measuring international trade. To calculate the trade deficit, subtract the total value of exports from the total value of imports.

Initially, a trade deficit is not a bad thing. It raises a country's standard of living. Its residents have access to a wider variety of goods and services for a more competitive price. It reduces the threat of inflation since it creates lower prices. A trade deficit indicates that the country's residents are feeling confident and wealthy enough to buy more than the country produces.

Over time, a trade deficit creates jobs outsourcing. As a country imports certain goods rather than buying domestically, the local companies start to go out of business. The domestic industry will lose the expertise needed to remain competitive. As a result, the home country creates fewer jobs in that industry.

Protection of domestic industries may allow they to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.

Barriers may also be erected to protect strategic industries, such as energy, water, steel, armaments, and food. The implicit aim of the EUs Common Agricultural Policy is to create food security for Europe by protecting its agricultural sector.

Strategic trade argument (sometimes appearing in literature as "strategic trade policy") describes the policy certain countries adopt in order to affect the outcome of strategic interactions between firms in an international oligopoly, an industry dominated by a small number of firms. The term ‘strategic’ in this context refers to the strategic interaction between firms; it does not refer to military objectives or importance of a specific industry.

The main idea in this theory is that trade policies can raise the level of domestic welfare in a given state by shifting profits from foreign to domestic firms. Strategic use of export subsidies, import tariffs and subsidies to R&D or investment for firms facing global competition can have strategic effects to their development in the international market. Since intervention by more than one government can lead to cases resembling the Prisoner’s dilemma, the theory emphasizes the importance of trade agreements that restrict such interventions.

Even though a state-centered approach directs our attention to the important role that states play in shaping the structure of their domestic economies, it does have some important weaknesses. A number of studies point out to some problematic issues of the strategic trade theory.

Horstmann and Markusen (1986) focus on assumptions regarding production technology. They suggest that subsidies and tariffs can promote entry by less efficient firms and raise the industry average cost. Dixit and Kyle (1985) argue that it is important to consider the question of who is behaving strategically with respect to whom. Potential responses such as government retaliation and changes to market structure are ignored in the Strategic Trade Theory.

Another critique focuses on the fact that one nation's citizens may own stock in both domestic and foreign firms. Thus the notion of a "domestic" firm is less meaningful in a world of international capital movements. Irwin (1996) argues that concern about international market share is a characteristic of mercantilism. Such a perspective views world trade as fixed and divided among a few countries.

A number of practical concerns make many observers skeptical of the theory's potential application. For example, national governments are unlikely to have the analytical capacity to determine the optimal form of trade intervention. Additionally, the national political process may compromise the government's ability to apply such policies. A government that shift rents from other exporters may invite retaliation in those or other markets.

Critics also argue that strategic trade policy cannot explain how domestic firms became research and development leaders in the absence of governmental assistance or how state-assisted industries failed. Strategic trade policy's results usually are visible after considerable time periods, sometimes longer than the electoral cycles. The successful implementation of the policy requires that the firms believe that state support will continue, irrespective of political changes

The pollution haven argument posits that, when large industrialized nations seek to set up factories or offices abroad, they will often look for the cheapest option in terms of resources and labor that offers the land and material access they require. However, this often comes at the cost of environmentally sound practices. Developing nations with cheap resources and labor tend to have less stringent environmental regulations, and conversely, nations with stricter environmental regulations become more expensive for companies as a result of the costs associated with meeting these standards. Thus, companies that choose to physically invest in foreign countries tend to (re)locate to the countries with the lowest environmental standards or weakest enforcement.

The first area of controversy with respect to the Pollution Haven Theory has to do with the formulas above. Finding an appropriate measure of regulatory stringency (R) is not simple, because we want to know how much more costly production is in a given jurisdiction relative to others due to that jurisdiction's environmental regulations. The compliance costs stemming from these regulations, however, could come in the form of environmental taxes, regulatory delays, the threat (or execution) of lawsuits, product redesign, or emissions limits. This proliferation of cost styles makes R hard to quantify.

Another major critique of the second formula is that it is difficult to measure regulatory stringency and trade barriers because the two effects are likely endogenous, so few studies have attempted to estimate the indirect effect of trade liberalization on pollution havens. Furthermore, governments at times engage in inefficient competition to actually attract polluting industries through weakening their environmental standards. However, as per conventional economic theory, welfare-maximizing governments should set standards so that the benefits justify the costs at the margin. This does not mean that environmental standards will be equal everywhere, as jurisdictions have different assimilative capacities, costs of abatement, and social attitudes regarding the environment, meaning heterogeneity in pollution standards is to be expected. By extension, this means that industry migration to less stringent jurisdictions may not raise efficiency concerns in an economic sense.