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4064 Ann Harrison and Andrés Rodríguez-Clare

its marginal cost curve and be competitive on world markets. However, Baldwin and
Krugman (1986) also find that the costs to Japanese consumers outweighed the benefits,
leading to net welfare losses for both Japan and the United States. Thus, although the
semiconductor sector in Japan satisfied the Mill test, it did not satisfy the Bastable test.
Baldwin and Krugman (1989) estimate the impact on US and European welfare of
Airbus’s entry into the imperfectly competitive aircraft model. They show that subsi-
dies to Airbus may have resulted in net welfare gains for Europe, primarily due to
the high degree of imperfect competition (and monopoly rents) that characterized
the industry. However, their simulation also makes clear that these results depend
heavily on the assumed parameters, including the elasticity of demand. In any case, it
is possible to evaluate that sector in such a way that the European subsidy to Airbus
passes both the Mill and the Bastable test.
Head (1994) studies the effect of tariff protection on the emergence of the steel rail
industry in the United States. This case fits the infant-industry protection view almost
perfectly: the local industry was initially uncompetitive (1860s), but a few decades after
the imposition of an import tariff the United States was the world leader in this market
and the duty was repealed. Head concludes that “the domestic industry did ‘grow up’
and the duty was eventually removed. Hence, protection certainly did not cause stag-
nation and gross inefficiencies. Furthermore, the duty led to long-run reductions in
domestic prices. While the savings to railroad builders were too small and came too late
to yield a net gain to consumers, the overall effect on welfare appears to have been pos-
itive” (p. 163).
Hansen et al. (2003) examine the effect of production subsidies in Denmark for the
production of electricity from wind power. They conclude that the subsidies elicited
strong learning by doing in the industry, which achieved a dominant position in the
world market. Moreover, according to their calculations, the direct and indirect (envi-
ronmental) benefits outweighed the overall costs of the policy.
Irwin (2000) evaluates the effects of protection in the tinplate industry in the
United States. The industry flourished after receiving tariff protection in 1890.
Whereas there were no US producers at all prior to the imposition of the tariff, after
the imposition of the tariff (at rates exceeding 70%) the industry became entirely
self-sufficient. According to his counterfactual simulations, the tariff accelerated the
industry’s development by about 10 years, which would have developed anyway due
to falling costs of iron ore. However, the costs to consumer surplus were so large that
welfare declined as a consequence of protection. Irwin concludes that a lower tariff of
around 50% could have improved welfare, but that the actual tariff imposed exceeded
the optimal level and actually decreased welfare.
All the previous studies are for cases of protection or subsidies in developed
countries. One single-industry study of infant-industry protection in a developing
country is that of Luzio and Greenstein (1995), who study the effects of protection