International Trade - Theory and Policy, 2010a

efficiency loss. Nevertheless, the efficiency loss from a tariff, one that generates the same level of output as
a production subsidy, will cause an even greater loss. This is because an import tariff generates both a
production efficiency loss and a consumption efficiency loss. Thus, to achieve the same level of production
of agricultural goods, a production subsidy will cost less overall than an import tariff. We say, then, that
an import tariff is a second-best policy. The first-best policy option is a production subsidy.
Another Case in Which a Trade Policy Is First Best
There is one case in which a trade policy, used to protect or enhance national security, is the first-best
policy option. Consider a country that produces goods that could be used by other countries to attack or
harm the first country. An example would be nuclear materials. Some countries use nuclear power plants
to produce electricity. Some of the products used in this production process, or the knowledge gained by
operating a nuclear facility, could be used as an input in the production of more dangerous nuclear
weapons. To prevent such materials from reaching countries, especially materials that may potentially
threaten a country, export bans are often put into place. The argument to justify an export ban is that
preventing certain countries from obtaining materials that may be used for offensive military purposes is
necessary to maintain adequate national security.
In the United States, export bans are in place to prevent the proliferation of a variety of products. Many
other products require a license from the government to export the product to certain countries. This
allows the government to monitor what is being exported to whom and gives them the prerogative to deny
a license if it is deemed to be a national security threat. In the United States, licenses are required for
goods in short supply domestically; goods related to nuclear proliferation, missile technology, and
chemical and biological weapons; and other goods that might affect regional stability, crime, or terrorist
activities. In addition, the United States maintains a Special Designated Nationals list, which contains
names of organizations to which sales of products are restricted, and a Denied Persons list, which
contains names of individuals with whom business is prohibited. In recent years the United States has
maintained export bans to several countries, including Cuba, Iran, Syria, and Sudan.
In this case, the export control policy is the first-best policy to enhance national security. This is because
the fundamental problem is certain domestic goods getting into the hands of certain foreign nations,
groups, or individuals. The problem is atrade problem best corrected with a trade policy. Indeed, there is no
effective way to control these sales, and thus to enhance national security, using a purely domestic policy.
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