International Trade - Theory and Policy, 2010a

elieves that it would be very difficult to raise domestic production rapidly in the event that imported
products were ever cut off, as might occur during a war. In this case, a government may decide that its
imports are too high and thus pose a threat to the country’s national security.
A natural response in this instance is to put high tariffs in place to prevent imports from crowding out
domestic production. Surely, a tariff exists that will reduce imports to 10 percent and subsequently cause
domestic production to rise to 90 percent. We know from tariff analysis that in the case of a small country,
a tariff will cause a net welfare loss for the nation in a perfectly competitive market. These same gains and
losses and net welfare effects can be expected to prevail here. However, because of the presence of the
public good characteristics of national security, there is more to the story. Although the tariff alone causes
a net welfare loss for the economy, the effect is offset with a positive benefit to the nation in the form of
greater security. If the added security adds more to national welfare than the economic losses caused by
the tariff, then overall national welfare will rise. Thus protectionism can be beneficial for the country.
The national security argument for protection is perfectly valid and sound. It is perfectly logical under
these conditions that protectionism can improve the nation’s welfare. However, because of the theory of
the second best, many economists remain opposed to the use of protectionism, even in these
circumstances. The reason is that protectionism turns out to be a second-best policy option.
Recall that the first-best policy response to a market imperfection is a policy that is targeted as directly as
possible at the imperfection itself. Thus, if the imperfection arises because of some production
characteristic, a production subsidy or tax should be used. If the problem is in the labor market, a tax or
subsidy in that market would be best, and if the market imperfection is associated with international
trade, then a trade policy should be used.
In this case, one might argue that the problem is trade related, since one can say that national security is
diminished because there are too many imports of, say, agricultural goods. Thus an import tariff should
be used. However, this logic is wrong. The actual problem is maintaining an adequate food supply in a
time of war. The problem is really a production problem because if imports were to be cut off in an
emergency, the level of production would be too low. The most cost-effective way, in this situation, to
maintain production at adequate levels will be a production subsidy. The production subsidy will raise
domestic production of the good and can be set high enough to assure that an adequate quantity is
produced each year. The subsidy will cost the government money and it will generate a net production
Saylor URL: http://www.saylor.org/books
Saylor.org
492