Protectionism and Unemployment
MARCH 01, 1985 by HANS SENNHOLZ
There is a disturbing thing about foreign affairs: they are foreign. They do not conform to the world we admire, which is our own. Foreign matters are viewed with suspicion, yea, even dislike and contempt. Protectionism, which proposes to use the authority of government and its instruments of coercion to restrict trade with foreigners, builds on this psychological foundation.
In the minds of many people the ancient association of foreigner with enemy still lingers. Foreigners are blamed for all kinds of evil, real and imagined. They are censured for being inscrutable and unpredictable in their trade relations, engaging in ruthless competition, gouging their trade partners through prices too high or too low, exploiting their workers through sweatshop wages and conditions. But above all, trade with foreigners is believed to be most disruptive to commerce and industry, ever changing in composition and structure, requiring painful readjustment.
Protectionists offer instant gains through removal of foreign competition and protection from the pains of readjustment. Appealing to people who do not care to change and others who uphold domestic changes, but are set at odds with foreign changes, they promise peace and profit through legislation, regulation and the use of police power. But despite all the opposition to change, the world is a scene of changes. Today is not yesterday. We ourselves change as do our thoughts and works. Change may be painful, yet ever needful.
In our economic lives we may face important changes that require our attention and adjustment. The tastes, habits, choices and preferences of consumers may change, which may dictate production adjustments. The world-wide pattern of division of labor may change, which affects the structure of trade and commerce. The costs of production may change either here or abroad, which may create competitive advantages or disadvantages. There may be a never-ending sequence of changes in labor costs, capital costs, material costs, transportation costs, government costs, and many other costs.
Man faces changes in international trade and commerce to which he must adjust. After all, foreign trade is merely an extension of domestic trade, which is a corollary from the principles of division of labor. Cooperation and specialization bring the same kinds of benefits to all people regardless of race, religion or nationality. They make human labor more productive through ex change rather than direct production. If trade between the people in California, Texas, Florida and Maine is advantageous, it follows that free trade between people in Guatemala and Mexico, or Canada and Costa Rica may also be advantageous.
Protectionism, Old and New
Most of the arguments in favor of restriction stem from the distant past. Many are crudely Mercantilistic; they favor exports and oppose imports. Mercantilists are concerned about an unfavorable balance of trade which, they believe, inflicts loss and waste. In the past they restricted imports and promoted exports in order to bring money into the country. The Neo- Mercantilists of our time favor exports for bringing in jobs and profits, and oppose imports for taking them out.
Mercantilistic notions, although discarded by most economists, live on regardless of the criticism that is levied against them. Businessmen remember them when they are encountering difficulties and calling on government, pleading protection from foreign competitors. The agents of labor retreat to the armory of Mercantilism when they are enmeshed in depression and unemployment. And government officials may plead the case for Mercantilism when they impose their regulations and controls on foreign trade and commerce, or grant subsidies, set rates, or gather information to promote exports and limit imports. They all hold to the persistent belief that exports are especially beneficial and praiseworthy, and imports ipso facto harmful.
The recrudescence of Mercantilism dates back to the early part of this century, and came to a head during the 1930s. Guided by a spirit of nationalism it sought national self-sufficiency through restrictive tariffs, import quotas, and exchange restrictions. It differed from the older Mercantilism in that it received strength and support from a philosophy of militant nationalism and economic welfarism. It was associated with comprehensive central planning by powerful governments engaging in economic warfare and military struggle.
The Neo-Mercantilism of the 1970s and 1980s differs from the 1930s’ version in two important respects: it is devoid of the blatant nationalism of the first half of the century and its beggar-my-neighbor attitude; but it is saturated with the notions and doctrines of full employment by government fiat. Mindful of international sensibilities, it resorts to more subtle but equally deadly restrictions, to subsidies rather than tariffs and quotas. It does not aim at eco nomic autarky for nationalistic ends, but at income and employment in favored industries. It does not spring from international confrontation, but from an inter-industry conflict that pits some industries against all others.
In the American steel industry, for example, capital and labor together conspire to restrict imports in order to boost corporate earnings and labor benefits. Embarassed by the low rates of production and the high rates of unemployment, they both call on government to restrain com petition in any shape or form. They both plead as ardently for minimum wage legislation, which is designed to handicap other industries, as they argue forcefully against the competition of foreigners. For labor unions especially, government protection is of crucial importance. After all, to win substantial boosts in wages and benefits and subsequently suffer from staggering unemployment is casting serious doubt on the rationale of unionism.
Workers’ Rights Movements in Europe and the U.S.A.
The labor movement in the U.S. closely resembles the workers’ rights movements in the European welfare states. They both expound the doctrine that workers have an inherent right to a job, in their particular industry, at their present location and at rates of pay that exceed the market rates. To secure their right, government is expected to restrain foreign competition in any possible way and, if needed, subsidize both labor and capital. In this respect, protectionism is a symptom of relatively weak national governments catering to powerful domestic interest groups, especially labor.
Protectionism also draws strength and support from the Keynesian mandate that government is responsible for full employment and that it must use its fiscal powers in a contracyclical manner. Such use of powers for purposes of market intervention may necessitate protection from foreign competition. After all, Keynesian recipes are national recipes that differ from those for world markets and international division of labor.
When Keynesian efforts succeed in raising goods prices, domestic producers suffer in competitiveness at home and abroad. Threatened by foreign competition, they may call for protection through import restrictions. When Keynesian efforts fail to achieve full employment the Keynesian planners further express their faith in government intervention as they turn to protectionist measures. The failure of Keynesianism breeds protectionism. Many Keynesians are joining the workers’ rights movement and lending new luster to the promises of protection.
Old Notions in New Garb
The labor movement and its Keynesian allies like to parade as champions of the less- developed countries. They are quick to disburse foreign aid to any and all applicants and finance their schemes of government enterprise. But many immediately draw the line when jobs are “exported” for the benefit of foreigners. They are dead set against capital and labor mobility that permits capital to move to less-developed countries and labor to more productive countries. In all such matters they plead for restrictions that are said to bestow net benefits on society.
Man often errs through selfishness. Economic restrictions always benefit some people at the expense of others, and inflict net losses on society. Protectionists do not look beyond the range of direct involvement and dealing. American steel workers may see only their own wages and benefits which trade restrictions are meant to protect. They point at the market of goods and services catering to the steel industry in general and to steel workers in particular, and warn of dire consequences if these markets be permitted to decline. They completely ignore all other consequences and ramifications of restrictions, and refuse to admit that any favor bestowed on the steel industry is a disfavor to all others. Domestic trade is substituted for foreign trade, and domestic steel for foreign steel. The quantity of steel offered in exchange for other goods is reduced, which makes economic society universally poorer. The sellers of food, clothing, housing, education, and the like receive less steel in exchange for their goods and services. They would have been better off if they had been permitted to trade with foreign steel makers.
The protection argument for full employment is similar to that for net benefits. To working people it seems self-evident that import restrictions add to the demand for labor, and that steel and automobile quotas provide employment for steel and auto workers. Such evidence, unfortunately, is rather shallow and deceptive; it fails to consider other effects that are bound to follow. Import restrictions are restraints imposed by politicians and enforced by the apparatus of coercion, the courts and police. They constitute the use of brute force against people who voluntarily and peacefully are engaged in international exchange, in order to force them to act in a way they would not act if they were free.
Methods of Restriction Are Widely Available
The methods of restriction may vary greatly, from monetary exactions to outright confiscation of private property; they are highly effective in setting bounds to human action. When trade restrictions are imposed, the protected industry may temporarily enjoy special gains, which may cause it to expand and hire more labor, or retain more labor than it otherwise would. But this ex tra demand for labor, for instance, steel labor, is marred by a simultaneous decline in the demand for other labor, e.g., for food, clothing, housing. After all, the extra money spent on steel and steel products cannot be spent on other products, and the economic resources employed in the production of steel cannot be employed in other production. And the labor needed for the production of steel is no longer available for the production of food, clothing, housing, and so on.
At this point protectionists are quick to object that there is always unemployed labor and capital waiting to be called provided government lends a helping hand by restraining foreign competition. They point at mass unemployment in basic industries, such as steel, autos, mining, and transportation, and demand immediate correction through protection.
Unemployment undoubtedly is a great social evil that concerns us all. It is an economic phenomenon of loss and waste that harms not only the jobless but also their fellow workers who are forced to support them. In time it tends to turn into a political issue that breeds confrontation and conflict. To alleviate the evils of unemployment becomes an important political task. But it also raises the basic question of the suitability of the policies that are to create employment. In particular, it poses the question: can tariff barriers and other trade restrictions raise the demand for labor and alleviate the evils of unemployment?
Unemployment is a cost and wage phenomenon; foreign trade is exchange by individuals separated by political boundaries. The former is a manifestation of the law of price, which rests on the valuations by all members of society; the latter pertains to the scope of the division of labor which man is willing to practice. This scope does affect goods prices, including the price of labor. Improvements in the division of labor generally raise labor productivity and wage rates; deterioration reduces them. When government imposes trade restrictions it reduces the marginal productivity of labor and thereby lowers wage rates. If, in this situation, workers should refuse to suffer wage cuts, they are inviting mass unemployment. When seen in this light, trade barriers are effective instruments for causing unemployment.
In many respects production restrictions and trade barriers are like natural obstacles that thwart human effort and impair man’s productivity. They both may increase the demand for specific labor. Destruction of housing by war, flood, earthquake or fire increases the demand for housing material and construction labor. But it also reduces the demand for a myriad of other goods which the destruction victims now must forgo. Similarly, import restrictions on steel may boost the demand for domestic steel, but they also reduce the demand for other goods which the restriction victims, that is, consumers must forgo. Steel producers and their workers may benefit from the new barriers; but the producers and workers in all other industries are likely to suffer losses.
Many workingmen welcome trade restrictions in the same way as they greet the breakdown and destruction of labor-saving tools and appliances. They are aware of the demand for their particular kind of labor and know how to increase it through protection and elimination of labor- saving tools. They apply the particular to the general and conclude that protection provides employment and destruction creates jobs. Unfortunately, they fail to see that both, restriction and destruction, are bound to reduce the marginal productivity of labor throughout the labor market. If, in this situation, affected workers should resist a prompt reduction of wage rates, which organized labor is likely to support with conviction and force, they face mass unemployment. After all, unemployment always visits that labor the cost of which exceeds its productivity.
Trade Restrictions Offer Temporary Relief
Trade restrictions may temporarily create new employment opportunities for a protected industry while other industries are forced to contract. But even in the protected industry they do not provide long-term employment, as the root causes of unemployment continue to be at work. The basic industries suffering from stagnation and unemployment generally are unionized industries with wages and benefits far in excess of nonunion market compensation. Labor unions enforce their rates through restriction of labor competition; the basic effect is unemployment. They apply their unrelenting pressures until they are enmeshed in depression and unemployment. To come to their rescue and grant them protection from foreign competition is to invite new restriction and more unemployment.
In a profound study, M. Kreinin recently demonstrated that labor compensation in the American automobile industry, in 1982, amounted to some 165 percent of that in all man ufactures. To become competitive with Japanese car makers, he concluded, United Auto Workers’ compensation would have to fall by 24 percent, which would leave their compensation still 25 percent above the U.S. manufacturing average. Similarly, in iron and steel production workers’ wages and benefits amount to 189 percent of those in all manufactures. To restore competitiveness with Japan they would have to fall by 39 percent, which would leave their compensation still 15 percent above the U.S. manufacturing average. But no such solution to the chronic unemployment in the steel and auto industries is under consideration. Instead, their spokesmen are clamoring ever louder for protection from “unfair” foreign competition.
Trade barriers destroy more jobs than they create. And yet, they have retained their popularity because most workers are convinced that they safeguard wage rates from the competition of low- cost labor. Without trade barriers, many Americans believe, foreign products made by cheap labor would flood the markets and force American labor to suffer substantial wage cuts or face unemployment. Free trade is said to be advantageous only between countries that have similar wage rates and similar standards of living, but thought to be harmful to people with high wages trading with people earning less. Americans and Canadians can trade with each other because they are similar in income and living conditions; but they must not trade with Mexicans who engage in unfair pauper-labor competition and cause U.S. living conditions to fall.
There are few arguments in favor of protection that are more popular and yet so specious and fallacious. When carried to its logical conclusion the wage-rate argument bars all trade across political boundaries as no two countries are identical in labor productivity and income. U.S. wage rates are generally higher than Canadian rates, which would call for American government protection from low-cost labor competition in Canada. Labor conditions may differ from state to state, yea, from community to community. Wage rates in New York state are generally higher than in Maine and Mississippi, which would call for government intervention in favor of labor in New York.
Differences in Productivity and Income Lead to Trade
In freedom, differences in labor productivity and income lead to exchanges of goods and services. As individual inequality brings forth man’s division of labor so does his inequality in national productivity and output lead to international division of labor and goods exchanges. Adam Smith already taught that it is advantageous for a country to specialize in the production of those goods in which it has a cost advantage. David Ricardo added the law of comparative cost according to which it also is advantageous to a country to specialize in those items in which it has a comparative advantage.
To reap the advantages of an international division of labor a country may concentrate on production with greatest comparative advantage, importing even some items that can be produced at lower cost at home than abroad. Improvements in international division of labor raise labor productivity and, wherever institutional restrictions have created unemployment, may actually lift some labor over the threshold of employability and thereby create jobs.
The competitive position of an industry may depend on the capital-labor composition of the product. A labor-intensive product, such as a hand-embroidered tablecloth, may be manufactured most advantageously in a low-wage country. A capital-intensive product requiring the application of large sums of capital may be manufactured most efficiently in the country with the largest per capita supply of capital and lowest interest rates. The manufacturers of Hong Kong, where wage rates are rather low when compared with U.S. standards, have a clear advantage in the production of hand-embroidery; U.S. manufacturers who benefit from efficient capital markets and relatively low capital costs have a clear cost advantage in the manufacture of capital-intensive products, for instance, $50-million airplanes.
Trade advantages may change when factor costs change. Where capital is being formed and made available at ever lower interest cost, capital-intensive industries are likely to prosper and expand. Where society and its political institutions consume productive capital, the industries can be expected to contract and discharge labor. When Toyota may secure capital for modernization and expansion at 7 percent while General Motors is forced to pay 14 percent in a depleted capital market, it becomes rather obvious that Toyota will continue to expand and employ more labor while GM must be expected to contract and dismiss some labor.
Many Factors Affect the Degree of Competition
The costs of capital and labor are merely two of many factors that determine the competitiveness of an industry. There are many other factors such as the methods of production and the state of technology, transportation costs for materials and supplies and for products to their markets, government regulation, taxation, environmental costs and other institutional costs. A change of any one, at home or abroad, may materially alter the competitive position of an industry. The formation of capital per head of the population generally raises labor productivity and reduces unemployment; the consumption of capital lowers labor productivity and depresses wage rates. Where labor resists the reduction and insists on remuneration that exceeds market rates, it invites mass unemployment.
It is significant that governments generally do not protect industries with relatively low rates of productivity and wages, industries with a great deal of unskilled labor. In the U.S. these industries are forced to labor under great difficulties created by minimum wage legislation. The U.S. government, under the influence of powerful labor interests, apparently prefers foreign imports from low-wage countries such as Korea, Hong Kong, and Taiwan over domestic production in the South and especially Puerto Rico. But it is granting considerable protection to industries that are known to pay the highest wage rates in the world.
The U.S. government is guided by the doctrine of “no injury,” which brought into being the “escape clause” where injury is reported, and the “peril points” below which import duties must not be reduced. Protectionism is visible in the trade adjustment assistance granted to workers, in agreements with foreign exporters, the establishment of the International Trade Commission, and other concessions granted to interests with congressional clout. Protectionism springs ever anew from the efforts of “distributional coalitions,” which use political power to restrict competition and output.
U.S.-Japanese Trade Relations
Protectionists in the U.S. spend a great deal of time and effort worrying and complaining about Japanese trade practices. They focus their concern on Japan with which the United States is running a huge deficit in its merchandise trade account. According to the Council of Economic Advisers Annual Report, the 1976-83 deficit amounted to some $95 billion primarily as a result of Japanese sales of textiles, television sets, automobiles, motorcycles, radios, photographic equipment, video tape recorders, watches, machine tools, and steel. A Business Week cover story calls it “America’s Hidden Problem: The Huge Trade Deficit is Sapping Growth and Exporting Jobs.” (August 29, 1983)
American complaints about Japanese trade practices may have some merit, but they do not lead to the conclusions drawn by Business Week and other protectionists. They do not justify making Japan the “whipping boy” for trade deficits for which the U.S. government is primarily responsible. After all, it is an undeniable fact that U.S. trade restrictions completely bar Japanese buyers from important U.S. markets and thereby inflict visible losses not only on American producers but also on the Japanese people as consumers. Trade deficits may spring from a number of causes among which disruptive policies conducted by the U.S. government must not be overlooked.
There is transcendent power in example. U.S. leadership in international policy-making may be slipping because the U.S. example is unconvincing. The U.S. surely is no free-trade country; the U.S. government has entered into international trade agreements on cocoa, coffee, rubber, sugar, and tea. It has built trigger price mechanisms in steel and imposed “voluntary” quotas on autos and textiles. The maritime industry represented by seamen’s unions and unionized domestic shipbuilders has managed to obtain legislation that forces Alaskan oil producers to ship their products in high cost U.S. tankers to uneconomic destinations in the U.S. The legislation hit hard at Japanese levels of living by cutting the Japanese people off from Alaskan crude oil. It is estimated that, under free-trade conditions, they could be expected to buy some $15 billion annually, which alone would eliminate the merchandise trade deficit with Japan.
The Japanese people must import almost all of their oil. In a free world unhampered by trade barriers Alaskan producers would be their least-cost suppliers. In the political world of trade restrictions special interests in the U.S. deny them access to the Alaskan market. The Trans-Alaska Pipeline Authorization Act of 1973 and the 1977 and 1979 amendments to the Export Administration Act virtually shut the Alaskan door to foreigners and forced them to seek supplies in far-distant Arabian and African markets. It is obvious that transport charges per barrel of Saudi oil are substantially higher than for Alaskan oil, and materially higher for Alaskan oil shipped to the West Coast and the Gulf Coast than for oil shipped to Japan.
Higher Shipping Costs
The higher transportation costs visibly raise total cost, which increases world prices, reduces labor productivity and impairs economic well-being. But a few American seamen and shipbuilders are enjoying a windfall through trade disruption. It is estimated that more than 90 percent of U.S. shipping capacity, measured in deadweight tonnage, and probably more than half of all American seamen serve to carry oil from Alaska to U.S. ports.
Notions of full employment and favors to organized labor have led the U.S. government to impose an embargo not only on the shipment of Alaskan crude but also on the sale of timber to Japan. There are 20,000 saw mills in Japan, supplying housing and furnishings for 120 million people, but U.S. legislation passed in 1968 practically bars them from American markets. It bans exports of unfinished logs cut on Federally owned land, which amount to some 65 percent of the softwood sawtimber inventory in the U.S., and dictates that all such logs must be processed prior to export. The law even prohibits “substitution,” that is, the purchase of Federal timber by American merchants who export timber cut on private lands.
Surely, such measures neither reduce the U.S. merchandise trade deficit with Japan nor improve U.S. Japanese relations. And yet, they continue to spring forth from the primitive notion that the log export ban forces foreigners to purchase finished products and thereby provides employment to wood processors and furniture makers. Fortunately, political force does not produce sales and employment; both obey only the laws of the market. The timber legislation actually has reduced employment in the American timber industry and prevents employment in cutting and shipping timber to Japan. It serves to reduce the marginal productivity of labor, to lower wage rates in both the U.S. and Japan and, wherever labor resists the downward pressure, contributes to mass unemployment. It puts the misunderstood interest of a powerful special- interest group ahead of national interest and gives much ammunition to the Neo-Mercantilists who are fretting about the merchandise trade imbalances.
There are many more U.S. barriers to trade with Japan and other countries. The most noticeable probably are “Buy American” statutes that give preference to domestic products in Federal and state government contracts. Federal agencies are required to pay up to 6 percent more for products made in the U.S. The Federal aid program to mass transit systems requires that only American materials be used. The foreign aid program requires that at least 50 percent of the gross tonnage of all commodities thus financed be carried by American flag vessels. At least 18 states restrict the use of foreign steel and aluminum and order the purchase of domestic products.
Many require state bids to carry a clause restricting the use of foreign materials and calling for American-made products. Many local authorities enact building codes that ban the use of foreign materials.
Countless Federal statutes and regulations prevent or limit imports of agricultural products such as beef, dairy produce, mandarin oranges, and sugar. In recent years the U.S. government sought voluntary restraints of foreign sales, which were as voluntary as a judge’s temporary restraining order. In recent months it finally dispensed with the pretense of voluntarism. Protection from foreign competition now covers all basic industries that are forced to compete in U.S. markets. Its costs to American consumers in the form of higher goods prices amount to many billions of dollars. A recent study estimated the 1980 costs at more than $58 billion, or $255 per American consumer. They probably have more than doubled since then. Its costs to American workers in the form of lower labor productivity and higher rates of unemployment can only be surmised.
The pressures for protection from foreign competition continue to grow in the U.S. and other countries. Well-organized groups, especially organized labor, use the political apparatus to reap economic gains through political force. Unable to compete effectively and suffering from depression and unemployment, for which they deny all responsibility, they seek refuge with government and its coercive powers. They noisily demand protection from foreign competition that is held responsible for their plight. Economists do know, however, that mass unemployment, no matter how painful it may be, cannot be placed on the doorsteps of foreigners. It is a self-inflicted evil of radical interventionism that cannot be alleviated by beggar-thy-neighbor policies. Protectionism only exacerbates it.
1. Cf. theoretical works: Gottfried Haberler, The Theory of International Trade (London: Hodge,  1936); also his Survey of International Trade Theory, Rev. and enl. edition, (Princeton University International Finance Section,  1961); James E. Meade, The Theory of International Economic Policy, Vol. 2; Trade and Welfare (New York: Oxford University Press, 1955); Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (New York: Oxford University Press,  1962); Jacob Viner, Studies in the Theory of International Trade (New York: Harper, 1937); Leland B. Yeager, and David G. Tuerck, Foreign Trade and U.S. Policy: The Case for Free International Trade (New York: Praeger Publishers, 1976). Cf. also the classical historical work of Frank W. Taussig, The Tariff History of the United States (New York: Putnam,  1931).
2. See Melvyn B. Krauss, “Ill Fares the Welfare States,” Policy Review 18 (Fall 1981), pp. 133- 38; also The New Protectionism: The Welfare State and International Trade (New York: New York University Press, 1978).
3. Robert B. Reich, “Beyond Free Trade,” Foreign Affairs 61 (Spring 1983), pp. 773-804; Bob Kuttner, “The Free Trade Fallacy,” New Republic, 28 March 1983, pp. 16-21; G. William Miller, ed., Regrowing the American Economy (Englewood Cliffs, N.J.: Prentice-Hall, 1983); Leonard Silk, ..The Economists, (New York: Avon Books, 1978); see also Allied Industrial Worker, Official Newspaper of the Allied Industrial Workers of America (AFL-CIO) International Union, Milwaukee, Wisc.; September, 1984; CWA News, Communication Workers of America, AFL- CIO, Washington, D.C., September 1984.
8. Beth deHamel, James R. Ferry, William W. Hogan, and Joseph S. Nie, Jr., The Export of Alaskan Crude Oil.’ An Analysis of the Economic and National Security Benefits (Cambridge, Mass.: Putnam, Hayes, and Bartlett, Inc., 1983).
10. Barney Dowdle and Steve H. Hanke, “Public Timber Policy and the Wood-Products Industry,” in Forest Lands, Public and Private, ed. M. Bruce Johnson and Robert Deacon (Cam bridge, Mass.: Ballinger Publishing Co., 1984).
11. See Murray L. Weidenbaum, Business, Government and the Public, 2nd ed. (Englewood Cliffs, N.J.: Prentice-Hail, 1981), pp. 253-55; also “The High Cost of Protectionism,” Cato Journal, Ibid, pp. 777-791.
To abolish the market determination of wages—that is, the commodity character of labor—it would be necessary to destroy private enterprise and resort to socialism. Then the worker really would become a chattel. No longer would his wages depend upon his individual ability to make himself useful, as determined ultimately by the current state of industrial productivity, but upon the will of a political master, from whose decision there would be no appeal. No longer would he be free to choose his occupation, or even his place of residence; he would have to work at his assigned task, whatever and wherever it happened to be, at the bidding of the same political master.
The true “Magna Charta” of labor lies in the very fact that labor is “a commodity or article of commerce,” not a pawn in a totalitarian game.
From The Guaranty Survey, July 1956