04 Mar Protectionism Is Bad for Everybody

L.A. Times 3/4/80

Amid the crash and clatter of the presidential primaries, a quiet assault on America is proceeding unnoticed. The combatants are Americans and Japanese. Ironically, the assault on the American standard of living is being mounted by the Americans, while the Japanese defend us against our own worst inclinations.

President Carter’s personally commissioned field commander is none other than Douglas Frazier of the United Auto Workers. His Job? To restrict imports from Japan. The new twist? To convince the Japanese to voluntarily withhold their products from American consumers. If successful, Frazier will be able to return triumphantly from the Far East to throngs of resultantly poorer Americans.

“Protectionism,” the use of government barriers to shield domestic workers and business from the competition of imported products, has long been a disease to which Americans are readily susceptible. One major bout lost to protectionist sentiments was perhaps the single most important cause of the Great Depression. In 1929, legislation referred to as the Smoot-Hawley Tariff, was proposed with the intent to raise taxes by enormous amounts on imported products. It was passed by both Houses of Congress and was signed into law by President Herbert Hoover. The effects on the stock market as this legislation wound its way through Congress and ultimately was signed by Hoover are documented in detail by Jude Wanniski in his book “The Way the World Works.” The impoverishment of America ensued.

Later bouts with the protectionists also had significant, although less dramatic, consequences on the American economy. In the mid 1960s when the disease again became infectious, the initial manifestations were relatively harmless. Following on the heels of the enlightened Kennedy Round tariff reductions, mild attempts to restrict capital outflows were being proffered. These attempts soon spread in to specific commodity import restriction, “buy American” programs and the like. This stage of protectionism culminated in the 1971 dollar devaluation, gold-export prohibitions and a temporary across-the-board tariff surcharge on imports. Investments in foreign-made machinery were also excluded from the highly advantageous investment tax credit, and anti-dumping and countervailing duty programs, each of which furthers protectionism, were enforced with renewed vigor.

While not exactly dormant, protectionist anti-foreign sentiments seemed to be arrested as the economy’s attention focused on other issues. It is now surfacing again, however.

In fact, many of the problems encountered by the U.S. auto industry may well be attributable to U.S. restrictions on steel imports. The denial of access to low-cost and high-quality foreign steel has placed artificial impediments in the path of an already ailing domestic industry.

The so-called gains from trade are legendary in scholarly writings on the subject of international trade. Economists and historians for generations have pointed to the substantial losses incurred by countries when they attempt trade restrictions. The average American consumer, for example, spends a sizable portion of his income on foreign-made products. Even when products are manufactured in the United States, many of the ingredients going into them come from abroad. As a result, restrictions on the importation of foreign-made products raise the costs and lower the quality of the products available to the consuming public. This has one immediate effect. It makes Americans poorer.

Other less direct but equally powerful forces are also at work. As anomalous as it appears at first blush, import restrictions reduce exports as well as imports. Exports represent the means by which one country acquires the wherewithal to purchase goods from other countries. Thus, if other countries are restricted in their efforts to sell to us, if they are less likely to buy form us, as well. Import restrictions therefore cost jobs in our nation’s exporting industries. That is one reason why a majority of America’s export industries oppose import restrictions.

Perhaps the strongest argument against the protectionism is that foreigners are much better at producing some products than we are. We in turn are much better at producing other goods. If restricted from trading, we then have to squander our resources producing items we produce less well, instead of buying them from abroad. We all become poorer and productivity declines.

Trade restrictions also grant immense market power to industries within the United States. Without the threat of external competition, protected industries soon find that they don’t have to be on their toes to sell their products. Consumers have no choice. They must buy from the protected domestic industry or not buy at all. Monopoly power follows and ultimately results in wasteful production – and in firms that are insensitive to the needs of their customers. It is precisely these deleterious results of excessive market power to which our antitrust legislation is directed. Trade restrictions further enhance the concentration of power in industry – a result which we all abhor.

Studies show that those countries which have permitted the most rapid growth in imports are on average those countries which have enjoyed the most rapid growth in output. More rapid output growth is a prerequisite for more rapid growth in employment and a country’s standard of living. The benefits from freer trade are more than just an academic issue. They really work.

One would hope that in this year of heightened political activity, the issue of trade restrictions versus freer trade would take center stage. The quality of life in America is at stake, as it is with so many other issues. In the meantime let’s hope that the Japanese maintain their resolve in protecting us from ourselves.