ChainWhat it assumes · how to break it
Start
The government imposes a tariff on imported steel, as the US did in 2018 when it placed a 25% tariff on most steel imports.
1
As a result, resources move into domestic steel production, where the country produces at a higher cost than foreign suppliers, and consumers buy less steel at the higher price.
comparative advantage · deadweight loss
comparative advantage · deadweight loss
Assumes: Foreign producers are cheaper because of comparative advantage.
But: If imports are being dumped below cost, the tariff may correct an unfair price rather than distort trade.
2
This means protected domestic firms face less competition, so incentives to cut costs and innovate weaken.
X-inefficiency · dynamic efficiency
X-inefficiency · dynamic efficiency
Best link to attack
Assumes: Protection is open-ended and firms feel no pressure to improve.
Assumes: Protection is open-ended and firms feel no pressure to improve.
But: Time-limited protection of an infant industry can give firms time to grow, gain economies of scale and become competitive.
3
Consequently, trading partners may retaliate with tariffs on the country's exports, reducing net exports and AD.
retaliation · net exports
retaliation · net exports
Assumes: Partners respond with tariffs of their own.
But: A partner that depends heavily on the country's market, or wants to avoid a trade war, may not retaliate.
4
Therefore, productivity grows more slowly and LRAS shifts right by less, reducing the long-run rate of economic growth.
productivity · LRAS
productivity · LRAS
Assumes: The efficiency losses outweigh any short-run boost to domestic output.
But: In the short run, switching spending to domestic firms raises AD and output, especially if the economy has spare capacity.
End
Resources are used less efficiently and productivity grows more slowly, reducing long-run economic growth.
Evaluation chain
- E1However, whether protection reduces efficiency depends on how long it lasts and what firms do while protected.
- E2When protection is temporary and tied to targets, a young industry can grow, gain economies of scale and move down its average cost curve.
- E3As a result, it may become competitive enough to survive once the tariff is removed, and even reach a comparative advantage.
- E4So a tariff may raise long-run growth for an infant industry in a developing economy, while for a mature industry such as steel in a developed economy it is more likely to preserve inefficiency and lower growth.
Another way to attack it: If the tariff switches spending from imports to domestic output when there is spare capacity, AD and actual growth may rise in the short run, so the effect on growth depends on the time period.
Any short-run boost to domestic output comes first; the efficiency losses build up over years.
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Questions this answers
- Evaluate the view that protectionism reduces economic growth.
- Discuss the infant industry argument for protection.
- Assess the costs of tariffs for an economy.
Diagram
Tariff diagram: world supply at Pw shifts up to Pw + tariff. Label the two deadweight loss triangles (production and consumption). On an AD/AS diagram, LRAS shifts right by less than it otherwise would.
Reverse and related
Tariff removed → more competition and specialisation raise productivity and long-run growth (see lib-gro).