The Political Economy of Protection 317L8

1. The Political Economy of Protection 317L8 The study of political forces that influence trade policies

2. 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

3. The general case for government intervention • Market failure • T.oT • Existence of Monopoly or Oligopoly • Internal and external economies of scale

4. Economists remain sceptical • The assumptions are extreme • Risks of retaliation • International treaty obligations

5. 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.

6. 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.

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

8. 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

9. 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.

10. 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)

11. 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?)

12. 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.