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The Infant-Industry Argument
Yet a fourth common rationale for protectionism is the so-called infant-industry argument,
The infant-industry
argument for trade which has been prominent in the United States at least since Alexander Hamilton wrote his
protection holds that new Report on Manufactures. Promising new industries often need breathing room to flourish
industries need to be pro- and grow. If we expose these infants to the rigors of international competition too soon, the
tected from foreign compe-
argument goes, they may never develop to the point where they can survive on their own
tition until they develop
in the international marketplace.
and flourish.
This argument, although valid in certain instances, is less defensible than it seems at
first. Protecting an infant industry is justifiable only if the prospective future gains are suf-
ficient to repay the up-front costs of protectionism. But if the industry is likely to be
so profitable in the future, why doesn™t private capital rush in to take advantage of the
prospective net profits? After all, the annals of business are full of cases in which a new
product or a new firm lost money at first but profited handsomely later on. In recent
times, Apple, Yahoo, Google, and eBay all lost money in their early days.
The infant-industry argument for protection stands up to scrutiny only if private funds
are unavailable for some reason, despite an industry™s glowing profit prospects. Even then



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Chapter 17 353
International Trade and Comparative Advantage



it may make more sense to provide a government loan rather than to provide trade
protection.
In an advanced economy such as ours, with well-developed capital markets to fund
new businesses, it is difficult to think of legitimate examples where the infant-industry
argument applies. Even if such a case were found, we would have to be careful that the
industry not remain in diapers forever. In too many cases, industries are awarded protec-
tion when young and, somehow, never mature to the point where protection can be with-
drawn. We must be wary of infants that never grow up.


Strategic Trade Policy
A stronger argument for (temporary) protection has substantially influenced trade policy
in the United States and elsewhere. Proponents of this line of thinking agree that free
trade for all is the best system. But they point out that we live in an imperfect world in
which many nations refuse to play by the rules of the free-trade game. And they fear that
a nation that pursues free trade in a protectionist world is likely to lose out. It therefore
makes sense, they argue, to threaten to protect your markets unless other nations agree
to open theirs.
The United States has followed this strategy in trade negotiations with several coun-
tries in recent years. In one prominent case, the U.S. government threatened to impose
high tariffs on several European luxury goods unless Europe opened its markets to
imported bananas from the Americas. A few years later, the European Union turned the
tables, threatening to increase tariffs on a variety of U.S. goods unless we changed a tax
provision that amounted to an export subsidy. In each case, a dangerous trade war was
narrowly averted when an agreement was struck at the eleventh hour.
The strategic argument for protection is a difficult one for economists to counter. The strategic argument
for protection holds that
Although it recognizes the superiority of free trade, it argues that threatening protection-
a nation may sometimes
ism is the best way to achieve that end. (See the box “Can Protectionism Save Free
have to threaten protec-
Trade?”) Such a strategy might work, but it clearly involves great risks. If threats that the
tionism to induce other
United States will turn protectionist induce other countries to scrap their existing protec- countries to drop their own
tionist policies, then the gamble will have succeeded. But if the gamble fails, protection- protectionist measures.
ism increases.




CAN CHEAP IMPORTS HURT A COUNTRY?

One of the most curious”and illogical”features of the protectionist position is the fear of
low import prices. Countries that subsidize their exports are often accused of dumping” Dumping means selling
goods in a foreign market
of getting rid of their goods at unjustifiably low prices. Economists find this argument
at lower prices than those
strange. As a nation of consumers, we should be indignant when foreigners charge us high
charged in the home
prices, not low ones. That common-sense rule guides every consumer™s daily life. Only
market.
from the topsy-turvy viewpoint of an industry seeking protection are low prices seen as
counter to the public interest.
Ultimately, the best interests of any country are served when its imports are as cheap as
possible. It would be ideal for the United States if the rest of the world were willing to pro-
vide us with goods at no charge. We could then live in luxury at the expense of other
countries.
But, of course, benefits to the United States as a whole do not necessarily accrue to
every single American. If quotas on, say, sugar imports were dropped, American con-
sumers and industries that purchase sugar would gain from lower prices. At the same
time, however, owners of sugar fields and their employees would suffer serious losses in
the form of lower profits, lower wages, and lost jobs”losses they would fight fiercely to
prevent. For this reason, politics often leads to the adoption of protectionist measures that
would likely be rejected on strictly economic criteria.



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Part 4
354 The United States in the World Economy



AISSUE: LAST LOOK AT THE “CHEAP FOREIGN LABOR” ARGUMENT
The preceding discussion reveals the fundamental fallacy in the argument that
the United States as a whole should fear cheap foreign labor. The average Amer-
ican worker™s living standard must rise, not fall, if other countries willingly sup-
ply their products to us more cheaply. As long as the government™s monetary
and fiscal policies succeed in maintaining high levels of employment, we can-
not possibly lose by getting world products at bargain prices. Indeed, this is pre-
cisely what happened to the U.S. economy in the late 1990s. Even though imports poured
in at low prices, unemployment in the United States fell to its lowest rate in a generation.
Even in 2007, with a financial crisis and a massive trade deficit equal to 5.1 percent of GDP,
the U.S. unemployment rate averaged only 4.6 percent.
We must add a few important qualifications, however. First, our macroeconomic
policy may not always be effective. If workers displaced by foreign competition cannot
find new jobs, they will indeed suffer from international trade. But high unemploy-




Can Protectionism Save Free Trade?
In this classic column, William Safire shook off his long-standing Yet another way is to join the helpfuls by subsidizing our exports
attachment to free trade and argued eloquently for retaliation and permitting our companies to try monopolistic tricks abroad
against protectionist nations. not permitted at home. But all that makes us feel guilty, with
good reason.
Free trade is economic motherhood. Protectionism is economic
The other way to deal with helpfulism is through”here
evil incarnate. . . . Never should government interfere in the
comes the dreadful word”protection. Or, if you prefer a euphe-
efficiency of international competition.
mism, retaliation. Or if that is still too severe, reciprocity. What-
Since childhood, these have been the tenets of my faith. If it
ever its name, it is a way of saying to the cutthroat cartelists we
meant that certain businesses in this country went belly-up, so
sweetly call our trading partners: “You have bent the rules out
be it. . . . If it meant that Americans would be thrown out of
of shape. Change your practices to conform to the agreed-upon
work by overseas companies paying coolie wages, that was
rules, or we will export a taste of your own medicine.”
tough. . . .
A little balance, then, from the free trade theorists. The de-
The thing to keep in mind, I was taught, was the Big Picture
mand for what the Pentagon used to call “protective reaction” is
and the Long Run. America, the great exporter, had far more to
not demagoguery, not shortsighted, not self-defeating. On the
gain than to lose from free trade; attempts to protect inefficient
contrary, the overseas pirates of protectionism and exemplars of
industries here would ultimately cost more American jobs.
helpfulism need to be taught the basic lesson in trade, which is:
While playing with my David Ricardo doll and learning nurs-
tit for tat.
ery rhymes about comparative advantage, I was listening to an-
other laissez-fairy tale: Government™s role in the world of
business should be limited to keeping business honest and com-
petitive. In God we antitrusted. Let businesses operate in the
free marketplace.
Now American businesses are no longer competing with for-
eign companies. They are competing with foreign governments
SOURCE: © David Burnett/Contact Press Images




who help their local businesses. That means the world arena no
longer offers a free marketplace; instead, most other govern-
ments are pushing a policy that can be called helpfulism.
Helpfulism works like this: A government like Japan decides
to get behind its baseball-bat industry. It pumps in capital,
knocks off marginal operators, finds subtle ways to discourage
imports of Louisville Sluggers, and selects target areas for export
blitzes. Pretty soon, the favored Japanese companies are driving
foreign competitors batty.
How do we compete with helpfulism? One way is to com-
plain that it is unfair; that draws a horselaugh. Another way is
SOURCE: William Safire, “Smoot-Hawley Lives,” The New York Times, March 17,
to demand a “Reagan Round” of trade negotiations under GATT, 1983. Copyright © 1983 by The New York Times Company. Reprinted by
the Gentlemen™s Agreement To Talk, which is equally laughable. permission.




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Licensed to:

Chapter 17 355
International Trade and Comparative Advantage



ment reflects a shortcoming of the government™s monetary and fiscal policies, not of its
international trade policies.
Second, we have noted that an abrupt stiffening of foreign competition can hurt U.S.
workers by not allowing them adequate time to adapt to the new conditions. If change
occurs fairly gradually, workers can be retrained and move into the industries that now
require their services. Indeed, if the change is slow enough, normal attrition may suf-
fice. But competition that inflicts its damage overnight is certain to impose real costs on
the affected workers”costs that are no less painful for being temporary. That is why
our trade laws make provisions for people and industries damaged by import surges.
In fact, the economic world is constantly changing. The recent emergence of China, In-
dia, and other third-world countries, for example, has created stiff new competition for
workers in America and other rich nations”competition they never imagined when they
signed up for jobs that may now be imperiled by international trade. The same is true of
many workers in service jobs (ranging from call center operators to lawyers) who never
dreamed that their jobs might be done electronically from thousands of miles away. It is
not irrational, and it is certainly not protectionist, for countries like the United States to
use trade adjustment assistance and other tools to cushion the blow for these workers.
But these are, after all, only qualifications to an overwhelming argument. They call
for intelligent monetary and fiscal policies and for transitional assistance to unem-
ployed workers, not for abandonment of free trade. In general, the nation as a whole
need not fear competition from cheap foreign labor.
In the long run, labor will be “cheap” only where it is not very productive. Wages will
be high in countries with high labor productivity, and this high productivity will en-
able those countries to compete effectively in international trade despite their high
wages. It is thus misleading to say that the United States held its own in the interna-
tional marketplace until recently despite high wages. Rather, it is much more
accurate to note that the higher wages of American workers were a result of higher




Unfair Foreign Competition
Satire and ridicule are often more persuasive than logic and statis- We foresee your objections, gentlemen; but there is not one
tics. Exasperated by the spread of protectionism under the prevail- that you can oppose to us . . . which is not equally opposed to your
ing mercantilist philosophy, the French economist Fr©d©ric Bastiat own practice and the principle which guides your policy. . . . Labor
decided to take the protectionist argument to its illogical conclu- and nature concur in different proportions, according to country
sion. The fictitious petition of the French candlemakers to the and climate, in every article of production. . . . If a Lisbon orange
Chamber of Deputies, written in 1845 and excerpted below, has can be sold at half the price of a Parisian one, it is because a natu-
become a classic in the battle for free trade. ral and gratuitous heat does for the one what the other only ob-
tains from an artificial and consequently expensive one. . . .
We are subject to the intolerable competition of a foreign rival,
Does it not argue the
who enjoys, it would seem, such superior facilities for the pro-
greatest inconsistency to
duction of light, that he is enabled to inundate our national
check as you do the im-
market at so exceedingly reduced a price, that, the moment he
portation of coal, iron,
makes his appearance, he draws off all custom for us; and thus
cheese, and goods of for-
an important branch of French industry, with all its innumer-
eign manufacture, merely
able ramifications, is suddenly reduced to a state of complete
because and even in pro-
stagnation. This rival is no other than the sun.
portion as their price ap-
Our petition is, that it would please your honorable body to
SOURCE: © Culver Pictures




proaches zero, while at
pass a law whereby shall be directed the shutting up of all win-
the same time you freely
dows, dormers, skylights, shutters, curtains, in a word, all open-
admit, and without limi-
ings, holes, chinks, and fissures through which the light of
tation, the light of the
the sun is used to penetrate our dwellings, to the prejudice
sun, whose price is during
of the profitable manufactures which we flatter ourselves we
the whole day at zero?
have been enabled to bestow upon the country. . . .
SOURCE: F. Bastiat, Economic Sophisms (New York: G. P. Putnam™s Sons, 1922).

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