From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Newsgroups: sci.econ
Subject: Re: Protectionism as investment
Date: 11 Nov 92 16:23:25 GMT
Article-I.D.: daphne.thompson.721499005
Reply-To: thompson@atlas.socsci.umn.edu
Organization: Economics Department, University of Minnesota

mbk@lyapunov.ucsd.edu (Matt Kennel) writes:

>Re:  the articles that talk about how protectionism costs us 2x for
>each job saved.

>Could not one view this cost as an "investment"---in that if you save
>this job now from foreign competition, then perhaps the industry will
>survive long enough that sometime in the future it has the capability
>to compete in some new product area not yet invented?

>By this measure, government protectionism and industrial policy is forced
>investment by citizens in these industries.

>What is more valuable?  Cheap cameras, or a camera industry?  Its probably
>a tossup on that level---but what if 5 years down the line, you find that
>the camera manufacturers have unique facilities and abilities to manufacture
>nonlinear optics?

This sounds suspiciously similar to the "infant industry" argument for
protectionism.  The argument goes something like this:

	"Society should subsidize a currently unprofitable industry if
	it will pay positive net returns in the future.  The
	government should protect such an industry through trade
	barriers."

The problem with this argument is that it replaces "Society" and
"subsidize" in the first sentence with with "government" and "trade
barriers" in the second.  Specifically, it ignores the following
arguments about whether or not government intervention is needed and
where it should be directed if so:

(1) Presumably financial markets are good (or at least no worse than
anyone else) at identifying firms/industries that have positive net
present value.  If a firm is going to generate profits in the future
whose present value exceeds the subsidy that the firm needs to stay
afloat today, then that is a good investment opportunity for the
private sector.  In other words, if the enterprise is worth saving on
purely economic grounds then an efficient financial sector will do the
saving without any need for government intervention.

(This argument does not presume that financial markets always make the
right call about long term profitability.  It does presume that they
do as good a job as possible given the inherent uncertainty involved
in forecasting.)

(2) Suppose that (1) does not work because the private financial
investment markets are inefficient.  Then the focus should be on
fixing the problems in the financial markets (if this is possible)
rather than intervening in the market for internationally traded
goods.  It is difficult to justify protectionism on economic grounds
when the economic problem has nothing to do with international trade
per se.

(3) Suppose that private financial markets are broken _and_ we don't
know how to fix them.  Then perhaps some direct government support for
industry is justified as a "second best" policy.  There is still no
compelling reason why this should take the form of protectionism
rather than, say, direct subsidies, which tend to be less costly for
the nation as a whole.  Furthermore, the "second best" argument
presumes that the government can do a better job of identifying the
jobs that are worth saving than the private sector can.  Many people
question whether this is possible.

>Notice that the Japanese trade practice appears desgined to completely
>and qualitatively *wipe out* foreign competition, often at great initial
>cost, in order to have a lock on entire segements of a future economy.
>If the competition isn't fully killed off, then it can jump back later
>on.

The Japanese clearly made large investments in developing new
technologies and bringing them to market.  This resulted in vast
improvements in the quality of many consumer goods, and lower prices
as well.  While there is some evidence of dumping/predatory pricing by
Japanese firms, I don't think that you can conclude that Japan's
practices have had a negative overall impact on long term U.S.
welfare.

Even if you believe that large investments in R & D by the Japanese
government gave their companies an "unfair" advantage in world markets
the appropriate U.S. response would be to respond in kind (through
investment subsidies) rather than protectionism.

>Would we be better off now if we didn't bail out Chrysler?

This is debatable.  The bailout of Chrysler was largely achieved
through restrictions on auto imports.  These substantially drove up
the price that consumers had to pay for automobiles for the better
part of a decade.  It is not obvious that the current benefits make up
for the costs imposed on consumers during the bail-out.

Furthermore, Chrysler's current success is almost exclusively due to
the extreme popularity of their minivans and the inability of other
manufacturers to come up with something that consumers like better.
Did the people who advocated bailing out Chrysler see this coming?  I
think not.  Chrysler got lucky.  This example appeals to our 20-20
hindsight rather than making a rational argument.

--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209