Protection as Targeting: Why Governments Protect Declining Industries

A key question for trade policy is why governments so often protect declining industries. The argument presented here is that governments protect declining industries in order to target benefits to particular places. Protection raises the domestic price of a good, increasing output and employment. In expanding industries, in which firms operate near full capacity, additional output will be supplied by new firms, whose location is uncertain. Declining industries, by contrast, have unused capacity that can be used to expand output at existing firms, whose location is determined ex ante. Thus decline enables governments to target benefits effectively and governments are biased towards protecting declining industries. Further, the declining industries that offer the greatest potential for increasing local employment will be the most likely to gain protection. This prediction is confirmed by data on trade barriers in the U.S., even when controlling for industry fixed effects and campaign contributions. Lucy Goodhart Brandeis University lgoodhar@brandeis.edu