Protection Costs

Economies have experienced a myriad of types of protection costs over the centuries; some of these arose naturally, such as transportation costs, whereas others, such as tariffs and embargoes, were imposed by the state. The reasons for imposed protection costs have varied greatly, from military needs, efforts to raise state revenue, the protection of inefficient economic operations owned by governing elites or special interest groups, to efforts to promote productive and efficient sectors.

There remains much debate as to whether imposed protection costs such as tariffs or subsidies have historically positively affected the course of economic development, and whether such action can serve the cause of economic development in the future. Much of contemporary economic praxis, following upon the tradition of Adam Smith's Wealth of Nations, is cynical of any positive effects, making the case that such protection results in artificially high prices, inefficient production (both in terms of price distortions yielding resource misallocations and x-inefficiencies in production), lower quality output, and lower rates of technological change. Few would dispute the argument that reducing "natural" protection costs positively impacts upon development. Thus, reductions in transportation costs serve to reduce imports and export costs, resulting in more efficient and competitive economies. The same would be true of reducing the risk of violence (such as piracy) in transporting goods. It is important to note that transportation and the like are analogous to tariffs and related protection costs insofar as they protect domestic firms from foreign competitors whose product prices increase by the cost of transporting their goods to foreign markets. Falling transportation costs also reduce the costs to domestic producers hoping to export their output.

Historically, transportation costs fell most dramatically in the nineteenth century with the advent of the railroad, the steamship, and innovations and increased investment in canals and road construction. Such transportation cost reductions continued with the advent of the automobile and the airplane, for example, further facilitating the competitive process. It is important to mention, however, that important but lesser cuts to transportation costs took place in prior eras, such as during Roman times with investment in roads and protection, and during the sixteenth and seventeenth centuries with advances in sail-powered shipping. There is some debate as to whether transportation cost reduction is largely a product of organization or technological change. Both are important, but technological change appears to have been especially dominant since the late nineteenth century (Harley 1988).

Discussed most in the subject's literature are tariffs and subsidies as forms of protection. This discourse is often linked with, and confused with, narratives on the importance of trade as an engine of economic development and growth. For the twentieth century, the evidence of a positive relationship between free trade and economic growth is mixed at best, and, where positive, the relationship is a weak one. The United States and Canada were leading protectionist nations until the end of the World War II, and England dropped its protectionist barriers only after becoming the leading industrial powerhouse in the mid-nineteenth century. More recently, Japan, Taiwan, South Korea, and mainland China developed in the context of relatively high tariffs and other forms of managed protection. Historically, eras of high tariffs tended to coincide with relatively high rates of per capita GDP growth, and eras of low tariffs often coincided with low rates of economic growth, albeit this does not demonstrate a causal relationship (Bairoch 1993; Hikino and Amsden 1994; O'Rourke 2000; Wade 2003). However, one should note that the historically high per-person output growth rates that took place in the post–World War II period, especially in the developed economies but also in Japan, coincided with dramatic average reductions in tariffs, especially in high-growth economies with the formalization of the General Agreement on Tariffs and Trade of GATT in 1948. Here, too, the relationship might also be a spurious one (Baier and Bergstrand 2001)

A fundamental concern of many economic theorists is that for sociopolitical reasons, tariffs and subsidies cannot be easily removed once imposed, yielding long-term economic costs to society. What remains a critical question is whether such protection was and remains necessary to the process of development, and related to this, how have the developed economies and the currently developing economies been able to engage the development process in the context of tariffs and subsidies? Also of note is that historically, tariffs were often imposed as a revenue-generating machine; protection was not intended, or was an afterthought. And prior to the twentieth century, tariffs were one of the most efficient and accessible means to raise state revenue.

Recently economists have discovered border effects, or border costs, as a natural but socioeconomically based protection against foreign competition (Helliwell 2002; McCallum 1995). In the absence of tariffs and related protection costs, and accounting for distance, one would expect trade to occur to the same extent within a country as between countries. However, the evidence suggests that trade within a country is very much larger than trade between countries; even when only marginal protection costs are in place, and controlling for distance. This appears to be related to lower transaction costs of doing business in one's home domain, where there are established networks and norms and a level of trust that provides some advantage to domestic producers and suppliers. Border effects provide domestic producers with a "natural" barrier against foreign competition above and beyond what is afforded by tariffs and transportation costs. Indeed, to the extent that border effects are signifi-cant, even in the absence of other forms of protection, domestic firms are protected from foreign suppliers. However, unlike tariffs, border effects afford protection by reducing domestic costs of production, not by increasing the costs of imports to domestic consumers and producers.

SEE ALSO Transaction Costs.

BIBLIOGRAPHY

Altman, Morris. "Staple Theory and Export-Led Growth: Constructing Differential Growth." Australian Economic History Review 43, no. 3 (2003): 230–255.

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Bairoch, Paul. Economics and World History: Myths and Paradoxes. Chicago: University of Chicago Press, 1993.

Harley, C. Knick. "Ocean Freight Rates and Productivity, 1740–1913: The Primacy of Mechanical Invention Reaffirmed." Journal of Economic History 48, no. 4 (1988): 851–876.

Helliwell, J. Globalization and Well-Being. Vancouver: University of British Columbia Press, 2002.

Hikino, Takashi., and Amsden, Alice H. "Staying Behind, Stumbling Back, Sneaking Up, Soaring Ahead: Late Industrialization in Historical Perspective." In Convergence of Productivity: Cross-National Studies and Historical Evidence, ed. William J. Baumol; Richard R. Nelson; and Edward N. Wolff. New York: Oxford University Press, 1994.

Irwin, D. A. Free Trade Under Fire. Princeton, NJ: Princeton University Press, 2002.

McCallum, John. "National Borders Matter: Canada–U.S. Regional Trade Patterns." American Economic Review 85, no. 3 (1995): 615–623.

O'Rourke, Kevin. "Tariffs and Growth in the Late Nineteenth Century." Economic Journal 110. (2000): 456–483.

Wade, Richard H. "The Disturbing Rise in Poverty and Inequality: Is It All a 'Big Lie'?" In Taming Globalization: Frontiers of Governance, ed. David Held and Mathias Koenig-Archibugi. Cambridge, U.K.: Polity Press, 2003.

Morris Altman