Economic theory argues that free trade leads to the most efficient allocation of resources and maximizes on country's economic welfare. Empirical research shows that unilateral and multilateral tariff reduction yield significant welfare gains. In real...
Economic theory argues that free trade leads to the most efficient allocation of resources and maximizes on country's economic welfare. Empirical research shows that unilateral and multilateral tariff reduction yield significant welfare gains. In reality, however, we have shown that tariffs and other trade restrictions are prevalent in all periods and countries, and that there is a continual danger of increasing protectionism in the world.
Until recently, there has been a strong tendency to assume that protection structures were dicided upon by persons who were ignorant of economic principles. More recently, however, there has been increasing concerns about the political market for protection. Protection is demanded by particular groups such as firms and associated interest groups and parties, and supplied by politicians and public bureaucrats. They improve their position by turning to the political system. Interest groups(e.g. protected producers and nonprotected producers) invest resources in order to influence political decision in their favor. Such activities, which are directly unproductive, are a special form of profit-maximization which can be gained by lobbying for trade barriers.
In this papers, we are attempting to demonstrate the political determinants of trade barriers, and suggesting that tariff structures themselves may be in part endogeneous, as political decisions may be made in responsive to economic phenomena and vice versa. We also have shown that a declining industry well continue to decline which is established by Hillman (1982). He uses a Stigler/Peltzman political support model in which he assumes political support and blame is aimed at the component of price for which the government is directly responsible in this case the tariff. Suppose an industry is faced with a fall in the world price of its good, it is possible to show that the domestic price of the good must fall as represented in mathematical proof in the context and to suggest structural change will proceed in the right direction because of diminishing maginal return to political pressure.
To develop the argument, the next section briefly reviews the trade protection and public choices which can help why larger groups have been unsuccessful in forming a coalition to oppose tariffs and other distortions. Then, in section 3, we are attempting to demonstrate the political determintants of trade barriers, and associated with declining industry, Section 4 considers alternative trade restrictions such as quota and VERs. A final section provides conclusions.