The Cost of Protectionism with High International Mobility of Factors

Abstract

Given the Ricardian assumption that factors of production, though completely mobile nationally, are completely immobile internationally, trade theory proves that real income per capita in a country with an effective protective tariff will be lower than it would be in a free trade situation. Does the proposition hold if we assume international mobility of the factors of production? Our first inclination is to say that it does, because (a) the excess costs above world costs of producing protected commodities must be paid for by the consumers of the commodities, and (b) the consumers must be the domestic population, since commodities produced at costs above world costs cannot be sold to foreign consumers. On the other hand, it seems paradoxical to talk of imposing costs on people who are internationally mobile, and who can therefore avoid the burden of a protective tariff in whole or in part by emigration to a country where the burden is either non-existent or lighter. If there is protected production there must be a burden; but since the costs of protection can be avoided by emigration there can be no burden. The apparent contradiction could, of course, be avoided by taking the position that it is impossible to create, or expand, protected industry by means of a tariff in a country whose population is not imprisoned within its own borders by the Ricardian assumption. The contention of this paper, however, is that a country can establish protected industry—manufacturing, let us say—within its borders even when its population is free to emigrate. Our problem is to show how this outcome is possible.The problem may be rephrased by noting the converse of the proposition stated in our introductory sentence, namely, that a tariff must effect a reduction in real income per capita in a country in order to be effective, i.e., to lead to the development of protected production. Accordingly, if we can describe a mechanism by which a protective tariff results in a reduction of real income per capita in a country whose population is free to emigrate, we will have shown the tariff to be effective.