1995 Reports

Protectionist Response to Import Competition in Declining Industries Reconsidered

Choi, Jay Pil

"In a seminal article on the political economy of trade protection, Hillman (1982)
proposed a theory of endogeneous protection in which the level of protection provided to
an import-competing industry is determined as an outcome of political competition by
agents in the economy. Hillman adapts the regulation model of Stigler-Peltzman to this
international setting in which the government is viewed as a less benign, political
support-maximizing agent.

More specifically, he uses a Ricardo-Viner type specific factors model of
international trade where owners of the factor specific to the import-competing sector
lobby for protection whereas owners of other factors oppose it. Adopting the StiglerPeltzman
assumption employed in the context of regulation, he first specifies a political
support function which depends on the welfare levels of two competing groups which, in
turn, depend on the level of the regulated domestic industry price. The implication of
this set-up is that the industry's domestic price is invariant to import price changes
because the political support-seeking policy-maker will always ensure that the domestic
price is maintained at the level where the political support function is maximized.
Therefore, the import tariff will be adjusted to exactly offset any exogenous changes in
the world price."