Arguments for Protectionism

This is the first of a series of posts on trade.  The first post outlines some of the reasons for protectionism.  The next one will outline why most of the reasons for protectionism are not valid, coupled with economic reasons for free trade.  The third post will provide non-economic reasons to promote free trade.  The last post will provide some individual case studies.

Rationale 1:  Mercantilism

Briefly stated the goal of mercantilism is to maximize trade surpluses.  Mercantilism was the dominant line of trade policy from the development of the nation state to the middle of the 19th Century.  Policies were designed to promote exports and limit imports.  It is closely tied to the gold standard, trade surpluses led to the accumulation of gold which could be used to fund government activities including wars.  Mercantilism is also related to imperialism in that European countries looked to their colonies as a source of raw materials and as a market to their higher valued finished goods.

While mercantilism is not popular with economists, it has a certain intuitive appeal for the general public and policymakers.  It could be argued that the Chinese Belt and Road Initiative is a mercantilist policy designed to strengthen China's trade position relative to countries in Southwest Asia and Africa.

Rationale 2:  Export Unemployment (Beggar thy Neighbor)

Another rationale for protectionism is to reduce domestic unemployment.  The idea is that by raising tariffs you protect your domestic workforce from unemployment.  This is a reason why the Smoot-Hawley Tariff was passed in 1930.  It is also one of the major concepts behind the current U.S. trade policy.  

The primary shortcoming to the policy is that other countries will retaliate.  This is what happened in the 1930s which helped contribute to World War II.  Unlike the 1930s, countries have retaliated to recent U.S. tariffs in a less aggressive manner.

Rationale 3:  Infant Industry

The argument was popular in the northern U.S. during the first few decades of the nation's existence, as well as Germany during the mid to late 19th Century.  Developing countries need protection from more developed countries with established industries who may be able to take advantage of economies of scale.  

The infant industry argument has been used by the U.S. as well as developing countries.  In Latin America, South and East Asia, and Africa well into the 1980s, under the name of import substitution.

Rationale 4:  National Security

A nation has a vested interest to protect technologies that are important to maintain national security.  This has become more important since the advent of the atomic bomb.  It is also a key source of disagreement between the U.S. and China and to a lesser extent between the U.S. and North Korea, and the U.S. and Iran.  

Issues surrounding protecting a firm's intellectual property in certain key industries can also be an aspect of using protectionism to preserve national security.  Unlike other reasons to erect trade barriers, national security is a valid rationale, but care must be used to make sure that national security is not being used as a excuse to promote the desires of special interests.

Rationale 5:  Dumping

Another proper use of trade barriers is to prevent dumping; selling of goods below the cost of production in foreign markets.  In the worst case this can be used to eliminate competition and eventually raise prices after the competition is destroyed.  

The biggest issue facing dumping cases is determining the cost of production.  A difficulty that is compounded when changes in exchange rates are considered.