Time Inconsistency of Protectionist Programs

Protectionist trade policies have long been advocated as second best instruments to achieve certain national objectives in situations where there is a market imperfection. In essence, protection provides time and resources for firms to undertake cost-reducing investments. Recently there has been an emergence of new arguments to justify the implementation of "a national industrial policy" to encourage investment and to ensure the competitiveness of targeted industries. Also, at the theoretical level a new argument known as "strategic trade policy" has emerged. According to this argument, protectionism gives domestic firms strategic advantage against foreign firms to capture a greater share of export markets where rents are not competed away.' Actually, the performance of protectionist programs has been grim. Industries have not adapted, and protection has had to be renewed again and again. Arguments justifying protection have avoided this issue by implicitly assuming that authorities can credibly precommit to eliminate protection. This is a very strong assumption. In fact, government actions are not exogenous, but they are rather the result of an optimization process, or they are best responses to political pressures, as stressed in the public choice literature.2 Therefore, if authorities capitulate to protectionist pressures in the present, they are unlikely to resist them in the future, in the event that the targeted firm would not have adapted. The inability of authorities to precommit to the unconditional elimination of protection generates a trade-off for the firm. If, during the program, the firm does not invest sufficiently in cost