Chapter 34 — Globalization and Protectionism

International trade brings benefits through comparative advantage, specialization, and economies of scale—but it also creates winners and losers. Protectionism shields domestic industries from foreign competition through tariffs, quotas, and regulations, but at a cost to consumers and overall economic efficiency. This chapter examines how protectionism works, its impact on jobs, wages, and the environment, and how trade policy is enacted at global, regional, and national levels.

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1. Protectionism: An Indirect Subsidy from Consumers to Producers

1.1 Three Main Forms of Protectionism

Tool	Definition	Example
Tariffs	Taxes imposed on imported goods, making them more expensive for consumers	In 2018, President Trump raised tariffs 2–25% on Chinese-manufactured goods (TVs, monitors, PCs, smartwatches). China retaliated, launching a trade war. President Biden retained many of these tariffs.
Import Quotas	Numerical limits on the quantity of products a country can import	The Reagan Administration imposed a quota on Japanese auto imports in the early 1980s. The Multifiber Agreement (1974–2004) divided textile export quotas among countries. U.S. sugar imports are still governed by quotas.
Nontariff Barriers	Rules, regulations, inspections, and paperwork that make it more costly or difficult to import products	Safety standards, “rules-of-origin” regulations (the “Made in Country X” label based on where the last substantial change occurred), labeling requirements.

1.2 Demand and Supply Analysis of Protectionism

Consider two countries: Brazil (low-cost sugar) and the United States (high-cost sugar).

Without trade:

• Brazil: equilibrium price = 12 cents/lb, quantity = 30 tons
• U.S.: equilibrium price = 24 cents/lb, quantity = 80 tons

With free trade, profit-seeking firms buy cheap sugar in Brazil and sell it in the U.S.:

• Price converges to 16 cents/lb in both countries
• Brazil exports 15 tons (produces 40, consumes 25)
• U.S. imports 15 tons (produces 72, consumes 87)

Price (cents/lb)	Brazil Qs	Brazil Qd	U.S. Qs	U.S. Qd
8	20	35	60	100
12	30	30	66	93
14	35	28	69	90
16	40	25	72	87
20	45	21	76	83
24	50	18	80	80
28	55	15	82	78

Free trade creates gains from trade — total surplus increases in both countries. However, there are income distribution effects:

• Exporting country (Brazil): Producers gain (higher price, more sales); consumers lose (higher domestic price)
• Importing country (U.S.): Consumers gain (lower price, more quantity); producers lose (lower price, fewer sales)

1.3 Effects of Trade Barriers

If the U.S. imposes a tariff or quota sufficient to eliminate trade:

1. U.S. price rises back to 24 cents (no-trade level)
2. Producer surplus increases (higher price, more domestic output)
3. Consumer surplus decreases by a larger amount
4. Net effect: Social surplus falls — consumers lose more than producers gain

With partial protectionism (e.g., import quota of 7 tons):

• U.S. price rises to 20 cents (quantity demanded exceeds domestic supply by exactly 7 tons)
• Brazil price falls to 14 cents (domestic supply exceeds demand by exactly 7 tons)

The welfare effects of a tariff can be calculated as:

\[\text{Consumer Loss} = (P_t - P_w) \times Q_{d2} + \tfrac{1}{2}(P_t - P_w)(Q_{d1} - Q_{d2})\] \[\text{Net Deadweight Loss} = \underbrace{\tfrac{1}{2}(P_t - P_w)(Q_{s2} - Q_{s1})}_{\text{Triangle B}} + \underbrace{\tfrac{1}{2}(P_t - P_w)(Q_{d1} - Q_{d2})}_{\text{Triangle D}}\]

1.4 Why Are There Low-Income Countries?

High-income countries (U.S., EU, Japan) subsidize their domestic farmers collectively by about $200 billion per year. These subsidies:

• Cause overproduction, driving world prices below cost of production
• Devastate livelihoods of farmers in low-income countries even when climate and land are well-suited to crops like cotton, rice, sugar, or milk
• Sometimes result in excess farm products being given away in poor countries, driving local farmers out of business entirely (e.g., EU milk shipments to Jamaica; U.S. rice to Haiti)

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2. International Trade and Its Effects on Jobs, Wages, and Working Conditions

2.1 Fewer Jobs?

When NAFTA was being negotiated in the early 1990s, presidential candidate H. Ross Perot predicted a “giant sucking sound” as U.S. employers relocated to Mexico (average wages ~1/8 of U.S. wages). NAFTA took effect in 1995 — the next six years saw some of the most rapid job growth and lowest unemployment in U.S. history.

Key facts:

• U.S. jobs rose from 71 million (1970) to 150 million (2021) despite decades of expanding trade
• Trade does not reduce total jobs — it reshuffles jobs from unprotected to protected industries
• If consumers pay higher prices in protected industries, they have less money for other industries → jobs lost elsewhere

2.2 The Cost of Saving Jobs Through Protectionism

The cost to consumers per job saved is typically far higher than the worker’s actual salary:

Industry	Annual Cost per Job Saved
Sugar	$826,000
Polyethylene resins	$812,000
Dairy products	$685,000
Frozen concentrated orange juice	$635,000
Ball bearings	$603,000
Machine tools	$479,000
Women’s handbags	$263,000
Glassware	$247,000
Apparel and textiles	$199,000
Rubber footwear	$168,000
Women’s nonathletic footwear	$139,000

Source: Federal Reserve Bank of Dallas

Why so expensive? Not all of the extra money consumers pay goes to saving jobs. It also funds higher profits, new equipment, bigger bonuses for managers, and pay raises for existing employees. And the economy loses the benefits of comparative advantage — a deadweight loss.

2.3 Trade and Wages

• Trade raises the average level of wages by increasing productivity (comparative advantage)
• But effects are unevenly distributed — workers in import-competing industries may see wage declines, while export-industry workers benefit
• Mitigating factors for low-skilled U.S. workers:
  1. ~50% of U.S. trade is intra-industry with other high-wage economies (Canada, Japan, Germany, UK)
  2. Many low-skilled service jobs (lawn care, hotel maids, movers) cannot be imported from distant countries
  3. Low-wage workers are hurt by protectionism too — they pay higher prices for protected goods like food and clothing

2.4 Labor Standards and Working Conditions

• Workers in low-income countries often face conditions illegal in the U.S. (wages of $7.25/day or less, unsafe conditions, child labor)
• Most U.S. trade is with high-income countries with similar labor standards — these concerns affect a subset of trade
• Moral distinctions matter: Forced labor and child exploitation are morally unacceptable, but low wages alone reflect limited alternatives, not exploitation per se

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3. Arguments in Support of Restricting Imports

3.1 The Infant Industry Argument

In theory: Sensible — a short-term indirect subsidy leads to long-term competitive strength.

In practice: Often fails — industries go “from babyhood to senility” without ever reaching profitable maturity, and the “temporary” protection becomes permanent.

Case	Outcome
Brazil’s computer industry (late 1970s–1990)	Barred computer imports for decades. By mid-1980s, lagged world standards by 3–5 years in price and performance. Industry never became competitive. Policy phased out.
East Asian Tigers (Japan, Korea, Thailand)	Package of targeted subsidies + protection + government loans → successful steel and auto industries. Korea linked protection to export performance: rising exports → phase out protection; no exports → still phase out.

World Bank Guidelines (1990 study):

1. Focus on a few industries with realistic chances of world-class success
2. Be very hesitant about protecting industries (like computers) that many other industries depend on
3. Have clear guidelines for when protection ends

3.2 The Anti-Dumping Argument

Two possible explanations for dumping:

1. Innocent: Market prices fall below cost due to shifts in demand or supply (excess supply driving prices down — normal market forces)
2. Sinister (Predatory Pricing): Sell below cost to drive out domestic competitors, then raise prices once competition is eliminated

Economic assessment:

• The theoretical case for anti-dumping laws is weak
• There are zero documented cases where foreign producers drove out domestic firms and then raised prices — they typically continue competing and providing low prices
• Anti-dumping investigations are often more political than analytical — the U.S. Commerce Department’s “cost of production” calculations are as much art as science
• Common pattern: domestic industry files complaint → governments negotiate import reduction → industry drops the suit

Trends: In the 1980s, anti-dumping cases were filed mainly by the U.S., Canada, EU, Australia, and New Zealand. By the 2000s, Argentina, Brazil, South Korea, South Africa, Mexico, and India were filing the majority of cases. Anti-dumping filings are countercyclical — they increase during recessions and decrease during booms.

3.3 The Environmental Protection Argument

Race to the Bottom scenario: Multinational firms shift production to countries with weak environmental standards → countries reduce standards to attract firms → global production concentrates where firms can pollute most → environmental laws “race to the bottom.”

Why the race to the bottom largely hasn’t happened:

• Environmental regulation costs are typically only 1–2% of a large industrial plant’s total costs — other factors (labor, capital, suppliers, transportation, taxes, government quality) matter far more
• International companies often build similar plants everywhere — redesigning for weaker standards is complex and costly
• Companies fear the reputational and financial costs of environmental disasters in any country
• Foreign-owned plants in low-income countries often have better environmental compliance than locally-owned plants

Pressuring low-income countries:

• Trade restrictions on ivory imports + stronger enforcement have helped reduce elephant poaching
• But it would be undemocratic for well-fed citizens to dictate priorities to ill-fed citizens
• Better alternatives: pay for anti-pollution equipment, fund environmental studies, establish product labeling standards (“dolphin-safe tuna,” “rainforest-free wood”), support UN environmental treaties

3.4 The Unsafe Consumer Products Argument

• The WTO allows countries to set their own safety standards but requires:
  1. Standards must have a scientific basis
  2. Standards must be the same for domestic and imported products
  3. Standards must not arbitrarily discriminate between countries
• Example: In 2007, Mattel recalled nearly 2 million toys from China over high lead levels. In 2013, Japan blocked U.S. wheat imports over GMO concerns.

3.5 The National Interest Argument

• Argument: Don’t depend too heavily on other countries for key products (oil, defense materials)
• Critique for oil: If worried about cutoff, it’s more rational to import 100% now and save domestic reserves for emergencies. Alternatives: Strategic Petroleum Reserve (started 1977), taxes on oil, alternative energy R&D, fracking/shale oil
• For defense materials: Stockpiling (U.S. Defense National Stockpile Center) is more efficient than trade restrictions
• Political abuse: Almost any product can be labeled “strategic” — e.g., wool and mohair were declared strategic materials in 1954; mohair subsidies continued for nearly 40 years after wool was removed from the strategic list in 1960

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4. How Governments Enact Trade Policy: Globally, Regionally, and Nationally

4.1 The World Trade Organization (WTO)

• In the post-WWII era, the world built institutions to tie nations together: United Nations (1945), World Bank and IMF (1946)
• A planned International Trade Organization failed; instead, 27 nations signed GATT (General Agreement on Tariffs and Trade) in Geneva on October 30, 1947
• In 1995, GATT transformed into the WTO (~150 member nations)
• WTO Secretariat (2021): 625 staff, annual budget $197 million — “smaller than many large universities”

4.2 GATT/WTO Negotiating Rounds

Year	Round	Main Subjects	Countries
1947	Geneva	Tariff reduction	23
1949	Annecy	Tariff reduction	13
1951	Torquay	Tariff reduction	38
1956	Geneva	Tariff reduction	26
1960–61	Dillon Round	Tariff reduction	26
1964–67	Kennedy Round	Tariffs, anti-dumping measures	62
1973–79	Tokyo Round	Tariffs, nontariff barriers	102
1986–94	Uruguay Round	Tariffs, nontariff barriers, services, IP, dispute settlement, textiles, agriculture, creation of WTO	123
2001–	Doha Round	Agriculture, services, IP, competition, investment, environment, dispute settlement	147

Pattern: Early rounds were quick, small, and focused on tariffs. Later rounds took years, included more countries, and covered ever-broader issues. Old joke: GATT stands for “Gentleman’s Agreement to Talk and Talk.”

4.3 Regional Trading Agreements

Type	Definition
Free Trade Agreement	Members allow each other’s imports without tariffs or quotas
Common Market	Free trade among members + common external trade policy
Economic Union	Common market + coordinated monetary and fiscal policies

Major regional agreements:

Agreement	Key Members
EU (European Union)	27 European nations; introduced the euro; UK left in January 2020 (Brexit)
NAFTA → USMCA (2020)	U.S., Mexico, Canada
APEC	21 Pacific Rim economies
ASEAN	10 Southeast Asian nations
LAIA	12 Latin American nations
SADC	16 Southern African nations

About 100 regional trade agreements are now in place — one economist described the web of treaties as a “spaghetti bowl.” Concern exists that some regional agreements may actually limit trade from outside the bloc.

4.4 Trade Policy at the National Level

• National agencies (U.S. Department of Commerce, U.S. International Trade Commission) investigate dumping and impose tariffs
• Tension: National laws increase protectionism while international agreements try to reduce it
• One resolution: International treaties give politicians cover against domestic lobbying — “Sure would like to help you, but that pesky WTO agreement just won’t let me.”

4.5 Long-Term Trends in Barriers to Trade

• Average tariffs on imports charged by industrialized countries: 40% in 1946 → less than 5% by 1990 → less than 2% by end of century
• Import quotas and nontariff barriers have also generally declined
• Technological advances (transportation, communication, information management) have further facilitated trade growth

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5. The Tradeoffs of Trade Policy

5.1 Trade as Technology — The Technotron Analogy

Imagine U.S. company Technotron invents a new technology that:

• Increases output and quality at lower cost
• Causes competing firms to lose money and lay off workers
• Some competitors go bankrupt

Should the government ban this technology? Most people would say no — few would advocate giving up electricity to protect the kerosene industry, or blocking medical advances to protect snake oil sellers.

Now imagine Technotron’s “technology” is simply importing goods from another country. The situation is identical — yet many would suddenly support restrictions. The economic analysis shows that the disruption from international trade is not fundamentally different from disruptions caused by any other market force.

5.2 Dealing with Disruption

Some workers and firms will always experience disruptions — from bad management, tough domestic competitors, consumer preferences, bad luck, or international trade. The solution is not to prevent disruption but to provide a safety net and adaptation mechanisms.

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Key Takeaways

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Practice Questions

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Glossary

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