The Cost of the U.S. Protectionism

By Clifford Cui

Seeing the shoppers teeming with bags of just purchased goods at Macy’s store front on 34th street in New York City, I couldn’t help but asking: fellow shoppers, have you had any idea that you may have paid too much for your purchases because of Washington’s newly erected trade barriers on imports?

In February this year, President Obama signed into law the $778 billion stimulus package: The American Recovery and Reinvestment Act. The subtitle of Section 1605 of this Act reads “Buy American,” which requires that “None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building, or public work unless all of the iron or steel, and manufactured goods used in the project are produced in the United States.” Another autarchic provision in the same Act (Section 1612) makes it harder to hire foreign-born workers for banks and other large companies receiving government subsidies.

Encouraged by this signal, American producers and special interest groups are lobbying harder, and filing outrageously large numbers of anti dumping or anti subsidy petitions against foreign competitors. The U.S. is running an unemployment rate as high as 10.2% now, and many people are mad at cheap imports. The threshold of winning protection litigation is not stiff. Very often, the Commerce Department will find that foreign competitor under review are selling “less than fair value” in the U.S. even the underlying exporter is making a good profit from the export; and the International Trade Commission (ITC) may very well verify that the export surge “injured” the domestic production even if both sides in the case have different cost structures. Anti dumping and anti subsidy measures are the safeguards to guarantee the smooth operation of global commerce system. As the cost for filing petition is low, and the odds of winning it is high; special interest groups are abusing the system now.

Contrary to the special interest groups’ allegation, protectionist measures protect nothing, but destroying American jobs. It is unhealthy to the speedy global economic recovery, and also morally wrong.

Whatever the guise protectionist measures take, countervailing duties, quotas, or any other discriminatory measures, they are counterproductive. They restrict the free flow of goods across borders, raise the prices on consumers, and limit consumer’s choices. They act as surtaxes on the people who may need the help most. One study conducted a few years ago estimated the induced price increase of textiles protection is about 21%. A more recent study estimated the price increase was about 28%. In case of apparel protection, the estimated cost increase varies from 39%, 50%, 46% to 76%, and 53% respectively.

Protection only thwarts the process, and it can't deliver what it promises to workers or industry anyway. A prime example is the "voluntary" export restraint imposed on Japanese automakers in 1981. On a cost per auto basis, one study estimated that import quotas added $2,400 to the price of a Japanese car, on average. The voluntary export restriction was unable to protect the American auto industry from foreign competition. The Japanese carmakers kept innovating, improving, and getting better. The American carmakers such as General Motors and Chrysler keep losing market share to foreign competitors. During the current recession, they were unable to survive on their own, and needed a government bailout package to create room for them to breath.

Indeed, the protectionist measures saved some auto jobs, but at staggeringly high costs; the cost per auto job saved by the quotas was estimated to be $241,235, several times higher than the average wage per saved worker. According to a report on cost of protection filed by Federal Reserve Bank of Dallas in 2002, the trade protection saved 216 U.S. jobs in the production of benzenoid chemicals, used in suntan lotion and other products—but at a cost of nearly $1.4 million per worker. The average figure across 20 of the most protected industries was $231,289, ranging from $132,870 per job saved in the costume jewelry business to $1,376,435 in the benzenoid chemical industry. Protectionism costs U.S. consumers nearly $100 billion annually. America will be better off by simply paying them not to work!

History also proved that protectionist measures are ineffective. During the great depression, Senator Reed Smoot and Representative Willis c. Hawley sponsored a bill to raise U.S. tariffs on over 20,000 imported goods to record levels. In may 1930, more than 1000 economists in the U.S, organized by Paul Douglas, Irving Fisher, etc., asked President Herbert Hoover to veto the legislation. Automobile executive Henry Ford, and J.P. Morgan’s chief executive Thomas w. Lamont went to personally convince or even beg President Hoover to veto the bill. However, President Hoover yielded to the influence from his own party and business leaders and signed the famous Smoot–Hawley Tariff Act of 1930 into law on June 17, 1930. As expected, the legislation met with furious retaliation from trading partners. The U.S. trade and GDP suffered heavily. Imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion; both decreased much more than the 50% decrease of the GDP, which sent the unemployment to an EVER high rate - 25%! Bruce Bartlett called it ‘the greatest policy blunder in American economic history” in his research paper on the Act.

To get out of the current economic mess, nations need to work together. Interestingly, expanding international trade can be a new kind of mutual stimulus package. By doing so, countries specialize in the production that they have comparative advantage, which will raise each other’s productivities, and lift each other’s living standards and employment levels. Instead of begging-thy-neighbors, countries should be lifting-thy-neighbors, and adopt a strategy as people in Oracle suggest: Do what you do best, and trade for the rest.