New industries sometimes argue for temporary trade restrictions to help them get started. After a period of protection the argument goes, and these industries will mature and be able to compete with foreign firms.
Similarly older industries sometimes argue that they need temporary protection to help them adjust to new conditions. For example, in 2002, President Bush imposed temporary tariffs on imported steel. He said ‘I decided that imports were severely affecting our industry an important industry’. The tariff which ended up lasting 20months, would offer temporary relief so that the industry could restructure itself.
Economists are often sceptical about such claims. The primary reason is that the infant industry argument is difficult to implement in practice. To apply protection successfully, the government would need to decide which industries will eventually be profitable and decide whether the benefits of establishing these industries exceeds the cost to consumers of protection. Yet, picking winners is extraordinarily difficult. It is made even more difficult by the political process, which often awards protection to those industries that are politically powerful. And once a powerful industry is protected from foreign competition the temporary policy is sometimes hard to remove.
In addition many economists are skeptical about the infant industry argument even in principle. Suppose, for instance, that the Isolandian steel industry is young and unable to compete profitably against foreign rivals, but there is reason to believe that the industry can be profitable in the long term. In this case, the owners of the firms should be willing to incur temporary losses to obtain the eventual profits. Protection is not necessary for an industry to grow. Firms in various industries such as many Internet firms today incur temporary losses in the hope of growing and becoming profitable in the future and many of them succeed even without protection from foreign competition.
The protection as a bargaining chip argument:
Another argument for trade restriction concerns the strategy of bargaining Many policymakers claim to support free trade but, at the same time, argue that trade restrictions can be useful when we bargain with our trading partners. They claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government. For example Isoland might threaten to impose a tariff on steel unless Neighbourhood removes its tariff on wheat. If Neighbourhood responds to this threat by removing its tariffs the result can be freer trade.
The problem with this bargaining strategy is that the threat may not work. If it doesn’t work, the country has a difficult choice. It can carry out its threats and implement the trade restrictions which would reduce its own economic welfare. Or it can back down from its threat which would cause it to lose prestige in international affairs. Faced with this choice the country would probably wish that it never made the threat in the first phase.
Economists and the general public often disagree about free trade. In May 2000, for example, the US Congress debated whether to grant China Permanent Normal trade Relations which would keep trade barriers low between the two countries. The public was split on the issue. In a Wall Street Journal poll, 48 per cent cheap imports hurt wages and cost jobs. Only 34 per cent agreed that Foreign trade is good for the US economy, resulting in economic growth and jobs for Americans. By contrast economies overwhelmingly supported the proposal. They viewed free trade as a way of allocating production efficiency and raising living standards in both countries. In the end, Congress agreed with the economists and the bill was passed by the House of Representatives by a vote of 237 to 197.
Source: Principles of Economics