The Rising Protectionist Tide
SEPTEMBER 01, 1983 by DENNIS BECHARA
Mr. Bechara is an attorney in Mayaguez, Puerto Rico.
International trade imparts benefits to all countries that participate. The United States, for example, exports twenty per cent of its industrial production as well as forty per cent of its agricultural products. In fact, approximately fifteen per cent of total U.S. output is exported.
Foreign trade has been responsible for a substantial amount of domestic investment, and practically all Western schools of economics agree that free trade is the best course of action for all nations.
Yet, during the past few years, various countries, including the United States, have attempted to. somehow shield themselves from foreign trade. Recently, an agreement was reached between the U.S. and the Japanese governments whereby Japan will comply with so- called voluntary export restrictions in the sale of cars to America. Imported steel has been curtailed, and more restrictions on the importation of foreign textiles and apparel have been implemented. As Time recently pointed out:
Many Europeans now fear that the U.S. will impose trade barriers, such as those that already exist for automobiles and steel, on other products to protect American businesses. Pressure for protectionist measures has been mushrooming. A Florida manufacturer of machine tools has asked the White House to block investment tax credits on Japanese-made machinery. Chemical companies will be actively seeking additional shelter from foreign imports in the next session of Congress. Even uranium producers are invoking national security as an excuse to ban the purchase of uranium overseas.
The range of world-wide restrictions varies, but they inexorably lead to a further reduction in foreign trade. Countries in Central America, for example, have adopted a policy of substituting imports, with the intention of industrializing their economies. Industrialized countries, on the other hand, have other policies which curtail the free flow of goods and services between countries. As an example of the restrictive policies in effect, a commentator recently pointed out:
Airlines in France, Italy and West Germany, for instance, keep U.S. carriers out of their reservation computers, preventing passengers from booking on American carriers, in, say, an Air France office in Paris. Australia forbids the screening of television ads produced abroad, and Canada has issued guidelines that encourage Canadian TV stations to use domestically produced commercials. West Germany requires German models in all advertising produced in the country.
The international situation may perhaps degenerate into the present trade relationship between France and Hong Kong. Alarmed by the massive importation of electronic quartz watches manufactured in Hong Kong, France imposed a quota on their importation. Although the incident cannot vitally affect Hong Kong’s economy, the watch manufacturers, in turn, have promoted a boycott of French cognac.
Fostering Free Trade
The general world-wide trend since World War II has been to foster free foreign trade. The General Agreement on Tariffs and Trade (GATT) is a reflection of this trend, which has been successful in reducing barriers to trade between nations. At the present time, the average world tariffs amount to approximately 5 per cent of imports. Yet, partly as a result of this new trend favoring protectionist measures, world trade has been adversely affected. In fact, GATT figures indicate that “international trade levelled off in the middle of 1979 and has been fiat ever since. Adjusted for inflation, trade volume actually went down in 1980 and 1981 and further falloff is predicted.” In addition, a GATT conference held in the fall of 1982 failed to reach any significant lowering of trade barriers.
Although the trend seems to be in the direction of additional protectionist measures, an opposite movement is simultaneously taking place. A Federal relief program, entitled Trade Adjustment Assistance, which has granted aid to those unemployed as a result of foreign competition, is scheduled to be phased out this fall. This program is illustrative of the failure of interventionist policies that attempt to offset foreign trade.
Although the Trade Adjustment Assistance program has been in effect since 1962, its effects were negligible because of the application of strict guidelines in the granting of benefits. Essentially, a group of workers had to establish that they lost their jobs primarily because of an increase in imports. The increase in imports, on the other hand, had to be related to a so-called trade concession granted by the U.S. government. However, the Trade Act of 1974, which took effect in 1975, amended and substantially liberalized the provisions and interpretations of the program. Perhaps one of the most substantial amendments was that now imports need not be the most important reason causing unemployment. If imports contributed to the loss of jobs, it was not necessary that they be the principal cause. Consequently, the assistance program mushroomed. The number of workers certified as eligible increased from 62,000 in 1976 to 531,000 in 1980.
Aiding the Victims of Foreign Trade
An avowed purpose of the Trade Adjustment Assistance program was to promote foreign trade while cushioning the immediate adverse effects of foreign trade upon domestic producers. The rationale has been that since everyone benefits from free foreign trade, those that do suffer from it ought to receive assistance. The realities of the program, on the other hand, establish that the asserted goals were far from reached.
One of the immediate effects of this program was the creation of an artificial amount of temporary layoffs in different industries. As one commentator put it:
Troubled companies, for example those in the steel industry, would lay people off, allowing them to collect unemployment insurance plus TAA benefits for a while. Then the company would rehire them, at the same time laying off a new bunch.
A General Accounting Office study confirms this view, inasmuch as 85 per cent of the beneficiaries of the TAA program were temporarily laid off.
Yet, perhaps the leading beneficiaries of this assistance program have been labor unions, as the majority of the recipients were unionized employees. This should not be surprising since it is more likely that unionized firms have working conditions that tend to be less competitive than non-unionized firms. Consequently, other things being equal, unionized industries would tend to suffer from foreign competition. In effect, the assistance program has perpetuated inefficient producers. The evidence suggests that although funds were available to promote relocation and job searches, a small fraction of the recipients engaged in active search for alternative jobs. Of the 1,320,733 beneficiaries who were receiving assistance within the April 3, 1975 and September 30, 1981 period, “only 5,133 or .39 per cent engaged in job search, as measured by the number of workers receiving job search allowances.”
Spending in this program has substantially decreased since September 30, 1981. The reason for this is that the Omnibus Budget Reconciliation Act of 1981 amended TAA and the standards required to establish eligibility in the program have been restricted. Spending, which in fiscal year 1981 was $1.4 billion, decreased the following year to $101.6 million. Unless Congress acts otherwise, the program will cease to be in effect as of September 30, 1983.
Essentially, the Trade Adjustment Assistance program was the politicians’ effort to promote free international trade. As ‘foreign competition undoubtedly affected some sectors of the economy, especially the heavily unionized ones, companies were forced to lay off employees. This is normally taken care of in the market order as resources are placed in more efficient areas of production. By withdrawing resources from the more efficient sectors of the economy into the less efficient areas, TAA only acted to increase inefficiency, to promote the production of more costly goods and to shield the labor unions from being publicly held responsible for raising the costs of production. The clamor for protectionist measures, however, remains unabated.
As alluded to before, Central American countries have taken another path which they feel will lead to industrialization. This is the policy known as import substitution, which is another form of protectionism. Essentially, the policy was aimed at promoting the local manufacture of imported goods so as to satisfy domestic demand. However, governments in those countries needed to erect high tariff walls in order to encourage the investment of capital in those industries. The effects of this policy soon began to emerge. Since locally manufactured goods were either more expensive or qualitatively less competitive in the world market, “. . . very little of the new industrial output could be exported. Instead of gaining independence from having to import consumer and intermediate goods, countries merely shifted imports to different kinds of products (inputs, raw materials and capital goods). They became far more dependent on imports due to the fact that in small economies, even simple production requires imported input. The inevitable result was the development of a far more severe balance of payment constraint, and business cycles far deeper than in open, competitive economies.”
As those countries invested substantial amounts of capital in the emerging manufacturing sector, foreign currency had to be obtained in order to pay for the imported capital goods. Yet, the problem became insoluble as the goods that were manufactured internally could not find a ready market outside the domestic market. Foreign exchange was available through the exportation of the traditional basic commodities, but as capital was drained into the less efficient manufacturing entities, the growth of the exporting sector was limited. With less foreign exchange available, there was a smaller amount of capital available to meet the needs of the domestic markets. Thus, the drive to industrialize and seek development through the policy of import substitution has left those countries worse off than before.
The common denominator in all of these protectionist measures is a general misunderstanding of foreign trade. If foreign trade causes unemployment in one sector of the economy, the conventional response is to restrict the introduction of the foreign goods which created the unemployment. Yet, this reaction does not take into account the fact that although some workers may lose their jobs as a result of foreign competition, the domestic consumers will have more resources left at their disposal as a result of purchasing the cheaper foreign goods. Thus, domestic consumers will adjust their behavior, and will spend or save the additional purchasing power brought about by the introduction of less costly foreign goods. Inevitably, jobs will be created in the economy as a result of this.
The Principle of Comparative Advantage Through Trade
The argument against foreign trade may be likened to the opposition to the introduction of machinery brought forth during the Industrial Revolution in England. The opponents set out to ban machinery, and in many instances destroyed the machines outright. This opposition was grounded on the belief that machines created unemployment, for it seemed that fewer employees were needed to produce goods because of automation. The historic evidence, however, has refuted these fears. Machines have increased employment beyond all expectations, because by lowering the cost of goods to the consumer, they helped increase demand for those goods.
Similarly, the principle of comparative advantage should be stressed again and again in order to illustrate the advantages of foreign trade. In order to understand this principle, it is important to grasp the fact that foreign trade is essentially like domestic trade. Specialization occurs within any trading area.
It is common to observe that some areas of a country are identified with a particular industry. In the United States, for example, Detroit is associated with the automobile industry, Pittsburgh with the steel industry, Hollywood with the film industry, Seattle with the aerospace industry, and Dallas with oil. This specialization may be traced to different reasons, but it should be understood that the natural forces of the market have created this situation. On the other hand, there is no immutable law that perpetuates specific economic specialization in a given geographical area. New England, for example, used to be the textile center in America. The market is always in a state of flux, and capital and labor tend to be attracted to the more efficient and hospitable areas.
Foreign trade permits, on an international scale, the specialization that often occurs within the confines of a local economy. Countries more efficient in the production of cars, textiles, wines, food or any other product will tend to export such goods because of their quality and lower cost to the consumer. Those same countries will have the incentive to import goods that may be acquired at a lower cost from outside sources. Clearly an optimum utilization of resources is achieved and employment is maximized.
However, when a country raises tariffs or quotas or implements any protectionist policy, it only succeeds in misallocating resources, lowering world-wide production and raising the prices of goods to the consumers. Protectionist policies may succeed in preserving some jobs in specific industries, but only at the expense of the general welfare of the country. In order to stem the tide of protectionism, it is imperative that the facts about foreign trade be learned. Otherwise, more quotas and tariffs will be erected, to the detriment of all.