I'm All for Free Trade, But . . .
Tariffs and Quotas Hurt Consumers
OCTOBER 01, 1994 by MARK SKOUSEN
“The dogma [of free trade] does not stand up . . . . Import relief in the 1980s saved America’s industrial base—and countless jobs—at tiny cost.”
—Pat Buchanan, “How the Rust Belt was Revived,” Washington Times, July 20, 1994
Conservative columnist and political commentator Pat Buchanan needs to take a refresher course in Econ 101. He cites a study by economist Alan Tonelson in Foreign Affairs magazine (July/August 1994) supporting his “America First” doctrine of economic protectionism. “The United States ought not to surrender any weapon in its arsenal of defense for vital U.S. economic interests,” says Buchanan.
Tonelson concurs: “Five major American industries—automotive, steel, machine tool, semiconductor, and textile—received significant relief from imports through intelligently structured trade laws. Those industries have confounded the predictions of laissez-faire economic ideologies by gaining market share at home and in some cases abroad, contributing to job creation and reinvigorating American competitiveness.”
Thus, after Tokyo agreed to voluntary import limits in 1981, American auto makers achieved an astonishing comeback. The Big Three came out with new products such as the minivan and compact utility vehicles. Investment in new plant and equipment resulted in a substantial increase in productivity and quality of U.S. cars.
After Reagan negotiated bilateral agreements limiting imports of finished steel in 1984, investment and worker productivity in the U.S. steel industry soared, making the U.S. one of the lowest-cost producers in the world. Import curbs on machine tools, semiconductors, and textiles saw similar results—increased research and development, investment, cost-cutting, job creation, and retooling. The U.S. improved its competitiveness in all these markets.
Buchanan concludes: “The conventional wisdom was wrong.”
Is This the Whole Story?
Before we reject two centuries of sound economic wisdom, let us consider all the relevant factors. Messrs. Buchanan and Tonelson conveniently forget to mention the environment in which these five industries performed so well. The reality is that virtually all industrial groups expanded sharply during the “Seven Fat Years” of the Reagan era, as Robert Bartley calls it. The free-trade critics have committed the classic post hoc, ergo propter hoc argument. Just because an event (import restrictions) occurs simultaneously to another event (economic recovery) does not mean that one is the primary cause of the other. There may be other, more powerful forces at work. Indeed, in the midst of a sharp recession (1981), Congress cut tax rates substantially for individuals, corporations, and investors, thus stimulating a “supply-side” revolution. Furthermore, in the summer of 1982, the Federal Reserve reversed its tight money, high-interest-rate policy in favor of easy money and lower interest rates. The low-interest rate, tax-cutting era continued almost throughout the 1980s, factors which most likely dwarfed the impact of import restrictions.
One should also not ignore the impact of a falling dollar since 1985 on the improvement in U.S. exports and foreign competition.
In short, the Rust Belt was revived primarily because of the “supply-side” revolution of tax cuts, deregulation, and an accommodating monetary policy—not protectionism. At least Messrs. Buchanan and Tonelson provide little evidence that the protected industries outperformed all other industries.
Global Trade Is Inevitable
This is not to say that U.S. producers didn’t benefit from import relief. Undoubtedly, they did benefit. After all, tariffs and quotas aren’t the measles. Yet the benefits may not have been all that great. The auto, steel, and textile industries would probably have done almost as well without the import restrictions.
Even before the import quotas were imposed in the 1980s, most of the leaders in these industries had recognized that the world was rapidly moving toward global free trade. Ford, for example, had already decided to take the Japanese and the Germans head on in building high-tech automobiles. Gradually more and more of the components of “American” products are made in foreign countries. Despite all kinds of restrictions and regulations in the textile and apparel industries, more and more shoes and clothing are being made in Asia and Latin America—by American-based companies. Global free trade is a simple fact of life and any manufacturer in the United States who doesn’t recognize its inevitability is headed straight for bankruptcy court.
In his great book Economics in One Lesson, Henry Hazlitt says that a good economist looks at how a policy affects all groups, not just one group. His story of the broken window is a classic.
We need to apply his “one lesson” to the free-trade debate. Yes, import relief helps the 21 highly protected sectors of the U.S. economy. It maintains thousands of American jobs in these industries. It keeps prices and wages higher than what they would be.
But what about the other groups in the economy—are they helped or hurt by import restrictions? According to the latest study by the Institute for International Economics, American consumers paid $70 billion more for goods and services as a direct result of import protection in 1990. Now, in a $6 trillion dollar economy, that may not seem like much. And, in fact, it demonstrates the high degree of free trade which already exists in the U.S.
Nevertheless, the consumer cost per job saved averages about $170,000. Economists Hufbauer and Elliott conclude: “This is far higher than the average annual wage in the protected industries and far more than any current or proposed labor adjustment program would cost.”1
Tariffs and quotas affect the U.S. economy in many obscure, subtle ways. For example, the voluntary import quotas on Japan resulted in a substantial increase in the importing of higher-priced, larger Japanese cars. Import limits on finished steel forced U.S. automobile companies to pay higher prices on their inputs.
Clearly, most producers benefit from tariffs and quotas, while consumers are hurt. Why don’t consumers complain more loudly? Probably because of the nature of the political system. As public-choice economists demonstrate, industry and labor are much better lobbyists than consumers. Moreover, consumers are also producers and may work in protected industries as well. The protectionist story is the same everywhere, in the U.S., Japan, or Germany. Everyone favors promoting exports, but not imports.
A Better Idea
While the debate over protectionism rages on, economists and journalists should consider a far better alternative to import relief tax and regulatory relief for domestic business. One of the primary reasons the auto, steel, and textile industries have had difficulty competing in the world economy is because they lack the capital investment to adopt the latest technology and rebuild their markets. Imagine the impact on American industry if the corporate income tax and the capital gains tax were eliminated? If red tape and regulations were streamlined? Economic growth would be so rapid that we wouldn’t even think twice about the need for “import relief” and “fair trade.”