Lesson 5E

by Steven Suranovic ©1997-2006

Trade 5-5E 





Protection may be beneficial for a country.

Sometimes the support for free trade by economists seems so strong that one might think there is very little evidence to suggest that protection could be beneficial. In actuality, there are numerous examples in the trade literature which show that protection can be beneficial for a country. The examples fall into two categories.

The first category contains trade policies which raise domestic national welfare, but which reduce aggregate world welfare at the same time. These type of policies are sometimes called "beggar-thy-neighbor" policies since benefits to one country can only arise by forcing losses upon its trading partners. The most notable example is the terms of trade argument for protection which is valid whenever a country is either a large importer or a large exporter of a product in international markets (See page 90-9). A second type of beggar-thy-neighbor policy is strategic trade policy. These policies benefit the domestic country by shifting profit away from either foreign firms or foreign consumers (See pages 100-5).

The second category of beneficial trade policies are those which not only raise domestic welfare but raise world welfare as well. Some trade policies may act to correct prevailing market imperfections or distortions. If the welfare improvement caused by correcting the imperfection or distortion exceeds any additional distortion caused by the trade policy, then world welfare may rise. Many well-known justifications for protection, including the potential for unemployment (see page 100-3), infant industries (see page 100-4), the presence of foreign monopolies, (see page 100-5) and concern for national security (see page 100-7), arise because of the assumption of market imperfections or distortions.

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International Trade Theory and Policy Lecture Notes: ©1997-2006 Steven M. Suranovic Last Updated on 6/13/06