The fight over the economics of protection has been going on, with Harry Clarke at Kalimna saying
The argument that Nicholas Gruen has propounded, and which John Quiggin seems to have supported, that low levels of tariff protection are justified by the existence of market power in export markets, is just wrong.
I don’t think Harry’s argument actually proves his claims – he just shows that the simple version of this argument is too simple, which is true of all simple arguments, including simple arguments for free trade.
My view, for what it’s worth, is that any terms of trade benefit from protecting the industry is likely to be negligibly small and that the standard counterarguments about retaliation make it a bad idea to try to impose optimal tariffs to extract such benefits. But the allocative efficiency benefits of reducing small tariffs.
But if neither of these effects is significant what are we arguing about? A couple of things.
First, there’s a general question about the way in which economic modelling is used for policy purposes. As Nick Gruen points out here when the Productivity Commission applied its standard Computable General Equilibrium model to the proposal to cut car tariffs, the small terms of trade effect outweighed the even smaller allocative effect, so the proposal came out with negative net benefits. Rather than bite the bullet and go with the results, or admit that the effects were too small to form the basis of a policy decision, the PC put its thumb on the scales and threw in some ‘cold shower’ effects. This is really tennis with the net down – if you’re allowed to impute productivity benefits to policies you like you can justify anything, and there’s no point in doing any modelling. The whole process becomes an elaborate and extensive way of coming up with the number you first thought of. Via The Progressive Economics Forum there’s a nice piece at the Economist making this and other points I’ve been banging on about for years.
Second, not all economic policy decisions are best described in terms of triangles and rectangles. In this case, it seems clear that the industry is going to contract a bit further, though it no longer seems doomed as it did in the 1970s. So the problem is to make the adjustment path reasonably smooth, and to try and avoid unnecessary hardship. The Button Car Plan did a good job of managing the adjustment away from the huge tariffs of the 1980s, and it ought not to be beyond the wit of policymakers to manage the comparatively tractable problems present today.