ECN500 Global Economics

Why Nations Protect Their Industries

Read the section in your text called “Why Nations Protect Their Industries” . After reading that section, go to the World Trade Organization website and find Trade Topics. You may select any product that has been in a dispute but it might be interesting for you to perform a search on the “Find Disputes” section. Even something as innocuous as apples have been involved in disputes. Then, go to the library and find three articles from peer-reviewed journals to include in your analysis.

Your report must discuss each of the following topics, however, you will find that at least one of the arguments will apply to the dispute you selected from the WTO website. Define and discuss all four arguments, but be sure that you select the one that is most applicable to the product that you selected and explain why it is applicable.

Taxation of foreign firm revenues

This report discusses why nations protect their industries basing on the analysis of the four arguments. These arguments include the following; the Labor Argument, Infant Industry Argument, National Security Argument and the Retaliation Argument. It also identifies which argument is economic and noneconomic with the effects on the consumers and the government.

Statement of the thesis

Nations impose taxes on foreign firms due to various social, political and economic factors.

Overview of the paper

The paper explains some of the reasons as to why nations impose taxes on foreign firms. The paper also discusses some of the arguments used in protection of industries against foreign markets. It also analyzes the findings found during the study and compares them with other scholars. The paper ends with a conclusion, recommendations and lessons learned during the study.

The Labor Argument

These are the trade barrier used by most developing countries to protect their infant industries against foreign markets (Frederick, 2009). The argument emphasizes the protection of domestic markets by their nations against the imported goods from countries with low wages.

The Infant Industry Argument

The Infant Industry Argument refers to an economic protection of infant industries by their nations against the other firms with high economies of scale. The argument is most applicable to the product of taxing foreign firms. Taxing foreign firms would be good for domestic firm industries to operate efficiently as they would not face stiff competition from foreign markets (Darren e t al, 2011). 

The National Security Argument

The argument is concerned mostly on protection of industries in away to protect the national security such as weapon industries and technologies. Most countries do not trade such activities in the world market to protect it infrastructure and citizens (Hines and James, 2010).

The Cultural Protection Argument

The cultural protection involves restricting and guarding the domestic cultural firms against the foreign culture. It is believed that, cultural industries such as music, movies and theater need to be protected as these can neglected and forgotten once foreign culture is not restricted (Irwin and Douglas, 2010).

The Retaliation Argument

The retaliation argument is where the nation retaliates against the other country that has restricted its imports and exports. In most cases, this happens when one country realizes unfairly practices and decides to discriminate against it. To overcome this, both countries have to come and negotiate the best response to use.

Analysis of the study findings

The analysis found of the results found out that there is a clear difference between the four arguments in protecting the industries (Panagariya, 2011).  The labor argument is different from infant industry argument in the way that it mostly concentrates on labor productivity of workers. While the later, emphasizes the protection of young industries as they do not have enough economies of scale as compared to the older firms (Luttmer  e t al,2011) .

Conclusion

There are so many arguments that support protection of industries like the Environment protection Argument and the Unsafe Consumer Products Argument (Saez and Emmanuel, 2010). In most cases they are industry based on environmental concerns, competition and security. Most developing countries use the infant industry argument to be more efficient in protecting their young industries. Finally, protection for industries isn good and countries should always select the most appropriate argument to use.

Lessons learned and recommendations

The researcher learnt some new things like new arguments for industry protection such as the Environment Protection Argument. New skills of research about industry protection were acquired by the researcher. Finally, the researcher would recommend that all nations should protect their infant industries so as boast domestic production.

Quantitative Analysis

The graph below shows the supply and demand for a good that is both domestically produced and imported.

The figure shows the supply (S) and demand (D) curve for a good which is produced domestically and imported. The supply curve is the at price Pw which is the horizontal line.  Supposing the producers are willing to supply Q1 then the domestic demand is Q2. The difference between the supply and the demand as Q1-Q2 will be the imports (Panagariya, 2011).

The effects of a tariff of a small country on the world prices

When the tariffs are incurred, imported goods become more expensive to purchase. With this increase, the domestically produced goods will have a price increase to compensate the increased competition. As result, consumers in the domestic country will pay higher prices. The figure below illustrates the effects of the world trade with the presence of tariffs (Panagariya, 2011).

Income distribution effects

Income distribution effect shows how total Gross Domestic Product of a nation is distributed among the citizens of that country. The Lorenz curve helps to explain the distribution of income of individuals within the same society (Suranovic, 2016).

Resource allocation effects 

Resource allocation effect can simply mean how factors of production say capital and labor are equally distributed amongst producers. Resource allocation effect can lead to changes in allocation of resources due to imposing taxes on any economic activity (Tejvan, 2010).

Domestic production and consumption effects 

Consumption affects results from the change of consumption bundles as a result of either an increase or a decrease in the price of the commodity. For example, an increase in the price of a good, reduces the purchasing power of the individuals hence change in consumption (Blomquist and Selin, 2010).

Government revenue effects

Government revenue effects refer to generation of revenues from different entities. The collection of revenues is carried out by the government to facilitate its operations (Hines and James, 2010).

Price of the good effects

This results from the effect that occurs on the good as its price changes. The nature of the good as a result of price will cause the price effect phenomenon. For example, complementary goods have cross elasticity of negative (Hines  and James, 2010).

References

Arvind Panagariya. (2011). A Re-examination of the infant Industry Argument for Protection. Margin-The Journal of Applied Economics Research. SAGE Publications, London. Vol 5 (1): 7-30. Retrieved from: https://journals.sagepub.com/doi/pdf/10.1177/097380101000500102

Darren Halpin, Carsten Daugbjerg and Yonatan Schvartzman. (2011). Interest-group capacities and infant industry development: State-sponsored growth in organic farming. International Political Science Review. SAGE publications, university of London. Retrieved from:https://journals.sagepub.com/doi/pdf/10.1177/0192512110372435

Hines and James. R. (2010). "Treasure Islands." Journal of Economic Perspectives. Department of Economics, University of Michigan Law School University of Michigan Law School Scholarship Repository. Vol 24(4): 103–26. Retrieved from:https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1716&context=articles

Irwin and Douglas. A. (2010). "Trade Restrictiveness and Deadweight Losses from US Tariffs." American Economic Journal: Economic Policy, London University 2(3): 111–33. Retrieved from:https://www.dartmouth.edu/~dirwin/docs/TRI.pdf

Luttmer, Erzo F. P., and Monica Singhal. (2011). "Culture, Context, and the Taste for Redistribution." American Economic Journal: Economic Policy, university of London. Vol 3(1): 157–79.Retrieved from:https://users.nber.org/~luttmer/cultureandredistribution.pdf

Steve Suranovic, (2016). International Finance: Introductory Finance Issues: Current Patterns, Past History and International Institutions. Flat World. Washington University (GW). Retrieved from:https://scholar.flatworldknowledge.com/books/26/preview

Stacey Frederick, (2009). Review and Analysis of Protectionist Actions in the Textile & Apparel Industries. Department of Sociology, Center on Globalization, Governance & Competitiveness, Duke University.Retrievedfrom:https://siteresources.worldbank.org/INTRANETTRADE/Resources/239054-1239120299171/5998577-1244842549684/6205205-1247069686974/Frederick_Gereffi.pdf

Sallee and James.  M,(2011). "The Surprising Incidence of Tax Credits for the Toyota Prius." American Economic Journal: Economic Policy. Vol 3(2): 189–219. Retrieved from:

https://nature.berkeley.edu/~sallee/sallee-aej.pdf

Saez and Emmanuel. (2010). "Do Taxpayers Bunch at Kink Points?" American Economic Journal: Economic Policy, School of Economic, London University. Vol 2(3): 180–212. Retrieved from:

https://eml.berkeley.edu/~saez/saezAEJ10bunching.pdf

Blomquist, and H. Selin, (2010). Hourly wage rate and taxable labor income responsiveness to changes in marginal tax rates. Journal of Public Economics. University of London. Vol 94  878–889. Retrieved from:

https://faculty.smu.edu/millimet/classes/eco7321/papers/blomquist%20selin%202010.pdf

Tejvan, (2010). Effects of tariffs:Economics, Helping to Simply Economics. Department of economics, university of Oxford. Retrieved from:https://www.economicshelp.org/blog/glossary/tariffs/