What is the declining or dying industry argument for establishing barriers to imports? What are its merits and weaknesses? What measure(s) is/are more efficient than an import tariff if the intention is to help workers who would be displaced from a dying industry? Why? What measure(s) is/are more efficient than an import tariff if maintaining current production levels is the goal of government policy?

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: The dying industry argument is based on the assertion that in a second-best world, production resources such as workers, managers, capital, and land cannot quickly be reemployed to other uses. Especially for workers there are significant extra costs to switching to jobs in other industries. Because this transition cannot take place smoothly, there is a case for government intervention in industries which lose their competitiveness to foreign producers. A temporary trade barrier may help to retain domestic jobs. It prevents the labor market from "congestion," the situation in which many workers do not have the skills that match the available jobs. There might be circumstances in which government protection indeed causes less damage than the extra costs of shifting resources to other industries. 

However, using a tariff on imports is not the most efficient measure for the government. According to the specificity rule, the government should use policies that target as directly as possible the source of distortion. If the goal of the government is to help displaced workers, the government should use policies such as trade adjustment assistance which helps in workers' transition to other industries or occupations. The trade adjustment assistance provides workers with unemployment compensation that gives them income during the time they need to acquire the skills to be successful in their new employment. If the country is just interested in maintaining the current production level, the country should grant subsidies to producers. This measure will assist domestic producers in competing against imports, resulting in the production effect loss but avoiding the consumption effect loss.