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The Cost of Protectionism with High International Mobility of Factors*

Published online by Cambridge University Press:  07 November 2014

J. H. Dales
J. H. Dales*
Affiliation:
University of Toronto
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Extract

Given the Ricardian assumption that factors of production, though completely mobile nationally, are completely immobile internationally, trade theory proves that real income per capita in a country with an effective protective tariff will be lower than it would be in a free trade situation. Does the proposition hold if we assume international mobility of the factors of production? Our first inclination is to say that it does, because (a) the excess costs above world costs of producing protected commodities must be paid for by the consumers of the commodities, and (b) the consumers must be the domestic population, since commodities produced at costs above world costs cannot be sold to foreign consumers. On the other hand, it seems paradoxical to talk of imposing costs on people who are internationally mobile, and who can therefore avoid the burden of a protective tariff in whole or in part by emigration to a country where the burden is either non-existent or lighter. If there is protected production there must be a burden; but since the costs of protection can be avoided by emigration there can be no burden. The apparent contradiction could, of course, be avoided by taking the position that it is impossible to create, or expand, protected industry by means of a tariff in a country whose population is not imprisoned within its own borders by the Ricardian assumption. The contention of this paper, however, is that a country can establish protected industry—manufacturing, let us say—within its borders even when its population is free to emigrate. Our problem is to show how this outcome is possible.

The problem may be rephrased by noting the converse of the proposition stated in our introductory sentence, namely, that a tariff must effect a reduction in real income per capita in a country in order to be effective, i.e., to lead to the development of protected production. Accordingly, if we can describe a mechanism by which a protective tariff results in a reduction of real income per capita in a country whose population is free to emigrate, we will have shown the tariff to be effective.

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Articles
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Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 30 , Issue 4 , November 1964 , pp. 512 - 525
Copyright
Copyright © Canadian Political Science Association 1964

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Footnotes

*

I wish to thank Professor H. C. Eastman for many helpful criticisms of early drafts of this paper, without in any way implicating him in the final results.

References

1 By effective protection we mean protection that results in protected production, i.e., production at costs above world costs. Whatever the intent of a tariff, it is not protective unless it actually protects something. If a tariff does not result in domestic production, or if domestic production takes no advantage of a tariff (i.e., if domestic costs in the “protected” industry are not above world costs) the tariff is ineffective. Industries which produce commodities that are subject to import duties, but which nevertheless export these commodities in significant volume, must by definition produce at costs no higher than world costs; the domestic tariffs on the commodities concerned are therefore ineffective. Tariffs that are ineffective according to the above definition may nevertheless have income-redistributing effects.

2 A standard exception to this proposition can be derived by assuming that a country enjoys some degree of monopsony on monopoly power in the international market.

3 By mobility we mean, not movement, but the freedom to move. The existence of transfer costs hinders movement, but implies no reduction of mobility. Essentially, mobility means the legal freedom to move. By “incomplete mobility” we refer to a situation where there are legal restrictions on movement under certain specified conditions, and freedom to move under all other conditions.

4 We therefore contend that comparative advantage or disadvantage, in manufacturing as well as in primary production, depends on natural-resource endowment. Support for this contention may be found in my Hydroelectricity and Industrial Development (Cambridge, Mass., 1957), 156–77.Google Scholar

5 The reader may, if he wishes, think of B as a small country and of A as a large country. I shall not in this paper attempt to analyse the effects of protection in B on the economics of A and C; but I doubt that it is necessary to assume that B's economy is small relative to A's.

6 “Comparative advantage” must be thought of as a combination of two components, (1) the cost of advantages at zero output and (2) the change, if any, in cost advantage as output increases. The second component will be zero if the industry in question produces at constant costs. Under increasing costs comparative advantage will decline as output expands. Even with constant costs for each industry, the comparative disadvantage of a protected sector will increase as new industries, with larger and larger comparative disadvantages at zero output, are added to the sector.

7 The analytical effect of this assumption, together with the assumption of full employment, is to freeze the money wage rate in B. The invariant money wage rate in B is not a rigidity in the analysis; it simply serves as a standard against which to compare the movement of other variables. In particular, it does not fix the ratio of money wage in B to the money wage elsewhere. If, for example, money wages in B remain unchanged as labour productivity improves in all countries (including B), B's money wage will fall in relation to money wages in other countries.

8 It will be objected that the United States is not a free trade country. Our argument requires only the weaker assumption that the burden of protectionism in A is lighter than the burden of protectionism in B, a proposition that will be more readily granted. Nevertheless, the large-scale export of a wide range of manufactured goods from the United States throughout the second quarter of the twentieth century implies a very low degree of effective protection to manufacturing industry in that country (see footnote 1), and leads me to believe that the stronger assumption is not wildly unrealistic.

It will also be objected that we overlook the severe restrictions on immigration to the United States inherent in the quota system adopted by that country in the early 1920's. However, native Canadian, and some native-born nationals of some countries, are not subject to immigration quotas. The quota system probably has a greater effect on the national composition of immigration to the United States than on its size. American restrictions do, however, reduce the mobility of many naturalized Canadians so far as emigration to the United States is concerned, and in this respect our model is at odds with the real world situation. Whether American immigration laws reduce emigration to the United States from Canada, or whether the inability of some Canadians to emigrate increases the amount of emigration undertaken by native Canadians is not known.

The suggested “time period” has not been chosen at random. During the second quarter of the twentieth century, unlike the situation in more recent years, there was an almost unlimited supply of potential emigrants from Europe to North America, and the world superiority of American manufacturing was virtually unchallenged.

9 If our provisional conclusions hold, namely, that protectionism will increase B's population and national income, it is probable that B's balance of trade will be adversely affected despite the growth of import-competing industries. Even though per capita imports of consumers goods fall, total imports of consumers goods may rise; similarly, if the import content of protected production is large the imports of intermediate goods may also rise. On the other hand, protection will do nothing to increase exports, and will reduce them if domestic sales to the protected sector are substituted for export sales. Protec-tionism's influence on the balance of trade is therefore likely to tend to depreciate B's currency. This tendency may be offset by protection-induced imports of capital during the period of expansion in the protected sector, but this effect will disappear when the equilibrium level of protected production is reached.

10 We identify the non-protected sector with the primary industry sector, and ignore the effect of protectionism on the other non-protected sectors of the economy, e.g., service industries, and non-protected manufacturing industries.

11 We thus assume that the prices of primary industry inputs into the protected sector are unchanged by protectionism. Implicitly, we also assume that the protected sector and the primary sector do not compete for natural resources. This assumption is true by definition except in the case of land sites. Protectionism will undoubtedly tend to raise land rents in areas where the protected industries are located. See Fowke, V. C., The National Policy and the Wheat Economy (Toronto, 1957), 67–8.Google Scholar

12 The real income of resident capitalists will rise if the percentage increase in interest rates is greater than the percentage increase in the price level. But rear wages will fall, and, given the normal weights of labour and capital in national income, real income per capita will almost certainly fall.

13 The “displacement theory” of the relationship between immigration and emigration in Canada suggested that immigration led to the emigration of native Canadians. See Timlin, M., Does Canada Need More People? (Toronto, 1951), 14–20, 76–82 Google Scholar, for a statement of this theory, and for what I consider a successful ridiculing of it. We are suggesting that a “replacement mechanism” whereby emigrants are replaced by immigrants is at work in the Canadian economy; we do not suggest any replacement theory of either the motives of emigrants or immigrants or of the size of emigration and immigration. See ibid., 69–75.

14 Throughout much of Canada's history emigration and immigration have been of the same order of magnitude, and it was this observation that led to the “displacement theory.” Our argument applies not to total immigration and emigration, but only to that part of both movements that is induced by protectionism.

15 We consider the case typical because protective tariffs of reasonable levels in countries where manufacturing is subject to severe comparative disadvantages will probably not result in any significant amount of protected production, i.e., the tariffs will be largely ineffective. It is mainly those countries in which manufacturing is only moderately uneconomic that suffer significantly from protective tariffs on manufacturing.

16 See n. 6.

17 See Johnson, H. G., “The Cost of Protection and the Scientific Tariff,” Journal of Political Economy, 08, 1960, 327–45CrossRefGoogle Scholar; Young, J. H., Canadian Commercial Policy, (Ottawa, 1957), chap. 7.Google Scholar In passing it may be noted that Young's refutation (pp. 89–93) of arguments to the effect that protectionism has increased Canada's population does not touch our argument. Young always supposes that a fall in real wages in B will result in an increase in emigration and a decrease in immigration; our model supposes that both emigration and immigration will be increased, the latter by a greater amount than the former. It should also be noted that Young's total cost of protection is the difference between national income with a tariff and the supposed national income without a tariff, factor supplies and money incomes remaining unchanged. If we define the total burden as the difference between pre-protection and post-protection national income, the total cost of protectionism in our model is negative. Since protectionism in our model raises the real wages of immigrants by comparison with their real wages in their country of origin, the only unambiguous meaning that can be attached to “the cost of protection” is the reduction in the per capita real income of the non-immigrant portion of B's post-protection population. We argue in the text that the per capita cost of protectionism implicit in Young's calculation is likely seriously to underestimate the burden of protectionism so defined.

18 See Eastman, H. C., “The Canadian Tariff and the Efficiency of the Canadian Tariff,” American Economic Review, 05, 1964, 437–48.Google Scholar