Arguments for Protective Measures

Let us consider the reasons the protectionists hold for justifying trade barriers. The main one is an argument in support of the retention of a protective import tariff to promote the creation of a local industry. It is held to apply in cases where an industry cannot operate at an optimum least-cost output until it has reached a sufficient size to obtain significant economies of scale. A new industry, therefore, in, say, a developing country, will always be in a competitively vulnerable position vis-a-vis an established industry in an advanced country. It follows that the stage of growth at which the industry (or country) can “take off” (Rostow, W. W.) industrially will be postponed indefinitely. The argument concludes that protection is necessary until the industry has reached its optimum size.

The second argument is that countries or firms which create new industries or products first may establish a competitive advantage that makes it hard or impossible for other countries to follow in the same area. The advantage is most likely to prevail in sectors of large economies of scale, and especially in cases where the most efficient scale represents a high proportion of the global market. It would certainly be difficult for, say, China or Japan to enter wide-bodied aircraft manufacture in competition with Boeing and Airbus. The frequency with which airframe manufacture is quoted as an example of potential first-mover advantage, suggests it may be one of very few special cases requiring a large supplier chain and technological depth. It is not difficult to think of examples of other first movers — for example, motor-cycles industry in the UK — which have failed to sustain an early advantage. The argument is not new; it is a variant of the infant-industry argument for protection against imports. But it reemerged in the late 1980s, under the guise of strategic trade theory associated with Paul Krugman. He suggested that the traditional arguments for nations to allow free trade were undermined. In practice, however, he has argued that so few industries meet the right conditions to justify strategic trade policy, and the gains are so small, that a presumption in favor of free trade is justified.

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Securities — Bonds

A bond can be thought of as basically a loan agreement. It is a certificate showing that the bondholder has lent a specific amount of money to a corporation or to a government agency and expects to be repaid with interest at some specified date. Interest is usually paid periodically. Bonds confer no rights of ownership, but they do carry a legally enforceable promise to repay.

Most bonds are offered in 1,000-dollar denominations. Others, called baby bonds, come in 500- or 100-dollar denominations. Bonds are not sold singly, however, but in round lots — usually of 100,000 dollars. Consequently, the small investor is not the usual bond buyer. Most bonds are purchased by institutional investors’ insurance companies, foundations, colleges and universities, and pension funds.

Most bonds used to be issued in bearer form — the owner was considered to be whoever possessed the certificates. The certificates could be passed from one person to another. Most bonds now are fully registered: the owner’s name is on the certificate, and when it is sold it must be sent to the issuer for a transfer of title. With bearer bonds the interest is claimed by clipping off attached coupons and presenting them for payment to an agent of the issuing corporation or government agency. Because bearer bonds proved difficult to trace when they were lost or stolen, the federal government has forbidden further issuance of them, but there are many outstanding bearer bonds that will not be fully redeemed until well into the 21st century.

Registered bonds are more secure. They do not have interest coupons. The interest payments are made by check to the registered bearer.

Bonds have different maturity rates. Short-term bonds mature in from one to five years, intermediate bonds in from five to ten years, and most long-term bonds in from 15 to 20 years. Long term bonds are not necessarily held to maturity. It is to the advantage of the issuing company to redeem them early. Thus many bonds have a call feature: the corporation has the right to call them in and pay a premium over the price at which the bonds are currently selling.

Different types of bonds may be categorized according to the use to which the money will be put. Mortgage bonds, for example, are backed by the property of the corporation. Equipment trust certificates are used by railroads and airlines to purchase rolling stock and airplanes.

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