[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

they can raise prices. In such a case, American consumers gain only in the short
run. In competitive markets, however, this scenario simply cannot occur, for firms
will have no power to raise prices. In almost all of the cases in which dumping has
been found, markets are sufficiently competitive that foreign firms have no hope
of establishing monopoly positions.
As administered, the antidumping laws are more frequently used as a protectionist
tool. If dumping is discovered, a duty (tariff) is levied equal to the difference
between the (calculated) cost of production and the price. Critics of the dumping
laws worry that other countries will imitate American practices. If so, just as the
international community has eliminated tariff barriers, a whole new set of trade
barriers will have been erected.
Countervailing Duties A second trade practice widely viewed as unfair is
for governments to subsidize domestic firms’ production or exports. For example,
the government may give certain domestic industries tax breaks or pay a portion
of the firms’ costs. These subsidies give the companies receiving them an unfair
advantage. Trade is determined on the basis not of comparative advantage but of
relative subsidy levels.
The usual logic of economics seems to be reversed. If some foreign government
wants to subsidize American consumers, who benefit from the lower prices, why
should they complain? Presumably, they would have a grievance only if the subsidies
are part of a policy intended to drive American firms out of business and establish
a monopoly position, after which prices will be raised. Most foreign subsidies
do not fall into this category.
Opposition to these subsidies arises from the companies who see their businesses
hurt. While the gains to consumers outweigh the losses to businesses, the
gain to each consumer is small, and consumers are not well organized. Producers,
being far better organized, are able and willing to bring their case to Washington.
In response, Congress has passed laws allowing the U.S. government to impose
countervailing duties, that is, taxes that offset any advantage provided by
these subsidies.
But even governments that preach against other countries providing subsidies
engage in the practice themselves, most commonly in agriculture. At various times,
the U.S. government has subsidized the export and production of wheat, pork,
peaches, and a host of other commodities.
Political and Economic Rationale
for Protection
Free trade, by enabling each country to concentrate production where it has
a comparative advantage, can make all countries better off. Why is protection
nevertheless so popular? The basic reason is simple: protection raises prices.
While the losses to consumers from higher prices exceed the gains to producers
in higher profits, producers are well organized and consumers are not;
POLITICAL AND ECONOMIC RATIONALE FOR PROTECTION ∂ 439