The Political Economy of Protection 317L8

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The Political Economy of Protection 317L8

• The study of political forces that influence
  trade policies

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Why protection?

• Generally economists think that free trade is
  best. Static and dynamic arguments.
• But, as we saw last week they have provided
  several arguments for protection in certain
  circumstances
• E.g Terms of Trade and Strategic

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The general case for government intervention

• Market failure
• T.oT
• Existence of Monopoly or Oligopoly
• Internal and external economies of scale

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Economists remain sceptical

• The assumptions are extreme
• Risks of retaliation
• International treaty obligations

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Despite these factors governments still grant
protection. Why?

• Public choice theory(Mancur Olsen, 1965)
• Demands for protection
• Labour,skilled,unskilled(but also consumers and
  users)
• Capital
• Land and owners of natural resources (e.g.oil)
• Workers and owners in industries under threat
• Operate through
• Organised pressure groups, Media etc.

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Mixed motives

• Consumers are also often producers,or their
  partners are
• As consumers they want low prices and therefore
  cheap imports
• But if their income comes from an industry under
  threat they are likely to lobby for protection.

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Trading partners

• Trading partners would be expected to strongly
  oppose protection (But see Bangladesh and ending
  of MFA)
• Case of VERs in earlier years.

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Governments

• They too are subject to pressures from different
  directions.
• Promote income and growth long term objective
• Be a good member of WTO etc.
• But domestic pressures

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Supply of Protection

• Policy makers want to satisfy interest groups,
  get financial support and get elected, but,
  social welfare (conflict)
• How they act is conditioned by the electoral
  system, national finance, and international
  treaty obligations
• Whether protection is granted depends on all
  these factors.

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Conditions favouring protection

• Rising unemployment or trade deficits e.g
  US-Japan, or US-China.
• Proximity of elections
• Against
• Constraints Domestic user industries, domestic
  exporters
• WTO or Trade Treaty Rules (Getting round the
  rules)

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Rent seeking and DUP

• Rent seeking attempts to gain tariff or quota
  protection to increase profits. Involves
  lobbying, currying favours or bribery
• Directly Unproductive Activities the above plus
  other means such as cheating customs and
  smuggling.
• All of the above divert resources from production
  and cost cutting.(Eg. 7 of GDP for India, 15
  for Turkey) (Maybe exaggerated?)

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Remedies

• Assuming economists want to promote economic
  welfare what should they recommend in the context
  of political biases in favour of protection?
• Strengthen rules of WTO
• Insist on consumer representation on all bodies
  dealing with trade policy
• Transparency and objectivity.

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