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Protectionism and Increasing Returns

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Trade, Globalization and Development

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Abstract

We reconsider the economics of protection with an industry subject to increasing returns. On the whole the case for free trade is actually greater than without increasing returns. Exceptionally high tariffs are required to protect a high-cost increasing-returns industry. However, beneficial tariffs or subsidies for a country with a comparative disadvantage become prominent when its partner country with a comparative advantage faces a relevant capacity constraint.

We thank Douglas Irwin, Ronald Jones, Kieth Maskus, Albert Schweinberger, and participants in a festschrift conference for Ehsan Choudhri at Carleton University for helpful comments.

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Notes

  1. 1.

    Antweiler and Trefler (2002) and Caballero and Lyons (1990) present evidence of the practical importance of internal and external scale economies respectively.

  2. 2.

    Graham (1923), Jones (1968), Kemp and Negishi (1970), Eaton and Panagariya (1979), Panagariya (1981), Ethier (1982), Helpman (1984), Helpman and Krugman (1985, Ch. 5), Matsuyama (1991), Kemp and Schweinberger (1991), and Ethier and Ruffin (2009) all make the assumption of average-cost pricing. For yet another variation, see Grossman and Rossi-Hansberg (2010).

  3. 3.

    External economies may also exist because a larger industry can result in a government providing an infrastructure more in accord with that industry’s needs. Though important in practice, this consideration has not been modeled in the literature, and we shall not do so here.

  4. 4.

    See Helpman and Krugman (1985, p. 71).

  5. 5.

    Helpman (1984) shows that this is unrealistic in the Ethier (1982) example of general equilibrium between two identical countries; but Fig. 1 shows that it is probably more likely than suggested by the functional forms chosen by Helpman and Ethier.

  6. 6.

    With national external economies, there may be an equilibrium, in addition to those described in Proposition 2, where a single firm from the comparative-advantage country supplies the world market. But we do not discuss this in the text since it in effect consists only of allowing a possibility that the externality is somehow internalized, and so is covered by Proposition 3.

  7. 7.

    For such a regime change to be desirable, the permanent benefit of the new regime must outweigh the earlier cost of the temporary protection (Bastable 1903, pp. 139–140).

  8. 8.

    The reader is invited to consider an export subsidy.

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Authors and Affiliations

  1. Department of Economics, University of Houston, Houston, TX, 77204-5019, USA

    Roy Ruffin

  2. Department of Economics, University of Pennsylvania, Philadelphia, PA, 19104-6297, USA

    Wilfred J. Ethier

Authors
  1. Roy Ruffin
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  2. Wilfred J. Ethier
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Correspondence to Roy Ruffin .

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Editors and Affiliations

  1. , Department of Economics, Jadavpur University, Kolkata, 700 032, West Bengal, India

    Rajat Acharyya

  2. Calcutta (CSSSC), Center for Studies in Social Sciences, Kolkata, 700 094, West Bengal, India

    Sugata Marjit

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Ruffin, R., Ethier, W.J. (2014). Protectionism and Increasing Returns. In: Acharyya, R., Marjit, S. (eds) Trade, Globalization and Development. Springer, India. https://doi.org/10.1007/978-81-322-1151-8_3

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