International Trade Theory and Policy
by Steven M. Suranovic

Trade 105-6

The Government's Decision

How the government decides whether to offer the $5 tariff, and who decides, will depend on the procedural rules of the democratic country in question. The tariff might be determined as a part of an administered procedure such as an escape clause action or an antidumping action. Or the tariff may be determined as a part of a bill to be voted on by the legislature and approved, or not, by the executive. Rather than speaking about a particular type of government action though, we shall consider the motivations of the government more generically.

The first thing the government may notice when being petition to consider raising the tariff is that government revenues will rise, in the example, by $5 million. Relative to many government budgets, this is a small amount and so it may have very little influence on a policymakers decision. However, it will help reduce a budget deficit or add to the monies available for spending on government programs. Thus, it could have a small influence.

In a democratic society, governments are called upon to take actions which are in the interests of their constituents. If government officials, in this example, merely listen to their constituents, one thing should be obvious. The arguments of the industry seeking protection will surely resonate quite loudly while the arguments for the consumers who should be opposed to the tariff will hardly even be heard. If a government official bases his or her decision solely on the "loudness" of the constituents voices, then clearly they would vote for the tariff. This, despite the fact that the overall cost of the tariff to consumers outweighs the benefits to the industry and the government combined.

Notice that the decision to favor the tariff need not be based on anything underhanded or illegal on the part of the industry lobbyists. Bribes need not be given to secure votes. Nor does the industry lobby need to provide false or misleading information. Indeed, the lobby group could provide flawlessly accurate information and still win support of the officials. Here's why.

It would be natural for the industry lobby group to emphasize a number of things. First, jobs would be saved (or created) as a result of the tariff. If a number can be attached, it will be. For example, suppose the industry supported 25000 jobs in the initial equilibrium when 8 million pairs of jeans were produced by the domestic industry. That averages to 320 jeans produced per worker. Thus, when the industry cuts production by 2 million units, that amounts to 6,250 jobs. The lobby group would then frequently state that the "fact" that the tariff will create 6,250 jobs. Second, the lobby would emphasize how the tariff would restore the vitality of the industry. If a surge of imports contributed to the problem, then the lobby would undoubtedly blame foreign firms for taking jobs away from hard-working domestic citizens. Finally, the lobby would emphasize the positive government budget effects as a result of the tariff revenue. All of this info would clearly be quite true.

If the lobby mentioned the higher prices that would result from the tariff, surely they would argue it is a small price to pay to save so many jobs. The lobby might even convince consumers of blue jeans that it is worth paying extra for jeans because it will save domestic jobs. After all, perhaps their own job will one day be in jeopardy due to imports Plus, it is such a small price to pay ... only $5 extra ... no one will even notice!!

For a politician facing potential reelection there is another reason to support the industry over the consumers, even with full information about the effects. Support of the industry will probably generate more future votes. Here's why.

First, since industry members - management and workers - have a bigger stake in the outcome, they will be more likely to remember the politician's support (or lack of support!) on this issue at election time. Second, the politician can use his support for the industry more effectively in his political ads. Consider this political ad if he supports the industry, ... "I passed legislation which created over 6000 jobs!" Compare it with this truthful ad if he doesn't support the industry ... "By opposing protectionist legislation, I saved you 5 bucks!" Which one do you think sounds better?

International Trade Theory and Policy - Chapter 105-6: Last Updated on 3/3/01