Question

“The potentially valid arguments for tariff protection—military self-sufficiency, infant industry protection, and diversification for stability—are also the most easily abused.” Why are these arguments susceptible to abuse?

Short answer

The military self-sufficiency argument is susceptible to abuse because it is difficult to compare the benefits of national security against the cost of economic inefficiency when protective tariffs are imposed.

The infant industry argument is susceptible to abuse because it leads to misallocation of resources and it is difficult to identify which industries need protection. Hence direct subsidy is a better measure.

The diversification for stability argument is susceptible to abuse because it is valid only for highly specialized industries and not for highly diversified economies.

Step-by-step solution

Step 1. The argument for military self-sufficiency 

Certain countries impose tariffs to preserve industries that produce goods for national defense. Therefore such a tariff enhances national security. Conversely, tariff also leads to deadweight loss or loss in economic efficiency.

Hence, most economists criticize military self-sufficiency as an argument for tariff protection because it is not possible to compare the benefits of national security against the cost of economic inefficiency when protective tariffs are imposed. Therefore, it is controversial whether the domestic industries should be protected by tariff for military self-sufficiency.

Step 2. The argument for infant industry protection 

According to the infant industry argument, young domestic firms should be protected from foreign competition by imposing tariffs. However. some economists are against this as such tariff protection leads to inefficient allocation of resources and thus creates welfare loss. Again, it is difficult to identify which industries require protection. Also, sometimes, protection continues even after the industries have been successfully established.

Therefore, the economists discourage tariff as a way to protect infant industries rather they feel that direct subsidy is a better measure.

Step 3. The argument for diversification for stability 

Some highly specialized countries like Saudi Arabia and Cuba are heavily dependent on exports for their income. So adverse situations abroad affect the world demand and supply for goods and reduce domestic income. Hence, these economies impose tariffs for industrial diversification and to protect the economies during bad times.

However, the economists argue that such protection is only valid for highly specialized countries and invalid for highly diversified countries like the United States.