3.10 The case for government intervention (political)
The closing comment in the previous section suggested that restrictions on trade seldom achieve what they are designed to achieve. The argument against trade barriers is well presented in your textbook and it will not be repeated here. Instead, in this section we will draw attention to the political reasons for trade barriers and issue some cautionary comment. Despite the often overwhelming logic of economic arguments against trade barriers, there are often compelling political reasons for their imposition.
- Protect infant industry
Advocates for the protection of an infant industry claim that in the long run, the industry does have a comparative advantage but needs protection from imports until the labour force is trained, production techniques mastered and economies of scale achieved. This protection is meant to be temporary, but firms rarely admit that they have matured. The usual government reaction to force a competitive stance is to withdraw the subsidy to the industry. Belatedly, this has happened within the Australian automobile industry, established after World War II. The industry is now almost able to stand on its own feet, despite the absence of economies of scale enjoyed by overseas competition. However, if there had been no support to get the industry started, there would now be no Australian car industry. - Protect jobs from cheap foreign labour
This argument compares wages in the exporting country with those in the home country. There are two fallacies with this argument:- Productivity per worker is often much greater in the developed country, so labour costs are lower even though wages are higher.
- Wages are not the only - and frequently not the major - cost of production. Where wage rates are low, capital costs are usually high and thus production costs may actually be higher in a low-wage nation. This is the situation in the Brazilian car industry.
- National security
Countries sometimes wish to protect industries considered vital for national defence even though they are at a comparative disadvantage with respect to foreign competitors. There are some compelling examples of this. Both Israel and South Africa built up their defence industries to avoid embargoes being imposed on them by other countries. Both countries are now self-sufficient in arms and both are exporters of high quality equipment (for example, the Uzi machine pistol from Israel and a 105mm howitzer from South Africa ). - Retaliation
In the world of realpolitik, nations use trade barriers as weapons to gain better deals with other countries. The sparring between the US and China in the late 1990s over a range of issues including bananas and copyright is testimony to the effectiveness of this weapon. - Protecting consumers
Lobby groups increasingly pursue governments to protect consumers from real and potential environmental hazards. Examples include hormone treated animal products (see the Country Focus section in Hill 2005, p. 189), genetically modified foods and the formulation of dieseline to reduce harmful particulates. - Furthering foreign policy objectives
The examples given in your textbook (Hill 2005, p. 190) are largely concerns of the US . Governments may decide to grant preferential trade or use trade sanctions depending on their foreign policy objectives. - Protecting human rights
Throughout the world, the last few decades have seen increasing concern for the rights of the individual. (See pages 190-191 of your textbook and note that human rights sometimes take precedence over trade but perhaps just as frequently, trade takes precedence over human rights. In this context, think about Australian relations with Indonesia and China .)
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