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Press Release

    Protectionism: Protecting Whom?

    04/29/2003

    In the swirling debate over globalization and free trade, one tends to lose sight of the actual policies being debated. Amidst competing concerns of “environmental destruction,” “exploitation,” and “Gap is the real terrorist,” one can forget what the word “globalization” describes, and what specifically is meant by “free trade.”

    Globalization refers to the implementation of free trade on a global scale, which is accomplished through international trade liberalization. A country liberalizes its trade with other countries by removing policies that serve as barriers to trade.

    Examples of trade barriers include tariffs, which are high taxes on imported goods that make them less competitive with domestic products, and subsidies, which are monies paid to domestic producers that allow them to sell goods more cheaply than their foreign competitors. Both policies keep foreign producers from selling very much in domestic markets, because when given the choice most people will buy what is cheapest.

    Trade policy is extremely simple: it boils down to what tariffs or subsidies a government chooses to implement to keep its country’s markets closed to other countries (of course there are other policies governments can use, such as quotas on imported goods, expensive licenses for importers, and sometimes outright bans on foreign goods, but tariffs and subsidies are the main ones). A policy agenda that seeks to maximize the number of tariffs and subsidies a government employs is usually called protectionism.

    Arguments for Protectionism

    As a policy agenda, protectionism is defended by three major arguments. The first is that protectionist policies like high tariffs and subsidies save jobs in domestic industries. This argument reasons that if a domestic industry, such as the steel industry in the United States, is forced to compete against a foreign country that produces steel more cheaply, such as Brazil, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the steel industry will be decimated by poverty.

    The second argument, a corollary to this one, is that eventually, left to compete for too long against Brazil, a domestic industry like U.S. steel might collapse completely, leaving the United States dependant on foreign steel. This, the argument goes, could be devastating if the United States suddenly went to war with everyone (a scenario that seems less and less implausible these days), as it would find itself unable to produce a badly needed resource.

    The third argument favors protectionist policies for a slightly different reason. This argument postulates that a country’s protectionist policies should be reciprocal to those of other countries – in other words, that our barriers have got to be as high as the other guy’s. Governments that employ this theory use tariffs and subsidies as bargaining chips at the negotiating table with other countries.

    This so-called “bargaining chip” theory is neither pro- nor anti-trade, but views protectionist politics as a game of give and take. For example, at a meeting of the World Trade Organization, U.S. Trade Representative Robert Zoellick might tell Brazilian trade minister, “We’re willing to lower our steel tariffs. But only if you eliminate your quotas on blond hair dye.” People who take this view usually focus on opening markets abroad while keeping their own markets as protected as possible, in the interest of maximizing exports and minimizing “harmful” imports.

    The Costs of Protectionism

    Each of these arguments may seem compelling. Take the first one, for instance, that protectionist policies are necessary to save jobs. Steel workers are indeed imperiled when their industry is mismanaged to the brink of insolvency; their communities often depend upon the jobs that the steel industry provides; and many have few other skills on which to fall back. To protect these workers, some argue, it is necessary to impose high tariffs on imported steel.

    But what about those who work in factories that produce things made of steel? Take a factory that produces hubcaps. Say this factory has been buying Brazilian steel very cheaply in order to make its rims available at a low price. But then lobbyists for the U.S. steel industry complain that they can’t compete with Brazilian steel and that they will soon be forced to lay off a significant number of workers. Realizing that the steel lobby is good at turning out voters on Election Day, the U.S. government slaps a 30 percent tariff on imported steel, making Brazilian steel 10 percent more expensive than U.S. steel.

    Suddenly the American hubcap factory must start paying 20 percent more for the steel it uses to make its wheels. But the U.S. government hasn’t put a tariff on dubs. So now Japanese hubcap factories, which can still buy steel at world prices, can make dubs more cheaply than the American factory.

    The result? Americans start buying their dubs from Japan. Facing declining revenue, the American hubcap factory must lay off a significant number of workers, go out of business, or sign some sort of contract with the Cash Money Millionaires. In all seriousness, this is precisely what happened to many manufacturers when President Bush imposed new steel tariffs in March of 2002.

    So the question, when times are tough for a particular industry, is not, “Should we save these jobs?” It is, “Should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?”

    Even when the case is not cut and dry like with steel and hubcaps, domestic protectionism always has a domestic cost. Most of the time, however, the costs of protectionism go unnoticed, because protected jobs in one industry are concentrated and easy to see, while the costs throughout the economy are widely dispersed, over a hundreds of industries and millions of consumers.

    In the case of the steel tariffs President Bush introduced in March of 2002, the cost was $732,000 in higher prices for each steel job saved, according to Dan Griswold of the Cato Institute.

    Relying on Foreign Industry

    The second argument for protectionism can also seem compelling. “Okay,” one might say, “steel tariffs save steel jobs but cost others their jobs throughout the economy. But if we left the U.S. steel industry unprotected, it might collapse entirely, leaving us over-reliant on foreign steel. Isn’t that bad?” This would indeed be bad if this were the way free trade actually worked. But this is not how trade works for the developed world or for developing countries.

    In the developed world, competition from abroad normally has the effect of spurring needed reforms in domestic industries, making them stronger rather than weaker. But one could take a worst-case scenario and still show that it is unlikely that developed nations would lose the capacity to produce for themselves what they currently import.

    Suppose that the U.S. steel industry really did collapse, unable to compete with cheap imports from, for consistency’s sake, Brazil. Then suppose U.S. foreign policy alienated everyone on the planet, leading to a worldwide steel embargo on the United States.

    The demand for steel in the United States would be so great, and Americans willing to pay such a high price for steel, that one of two things would occur: entrepreneurial Americans would finance the resumption steel production and make a fortune, or some foreign nations would cheat on the embargo. Supply will always find its way to demand, even though the chances of this scenario occurring are virtually nonexistent.

    Industries in the Developing World Need to be Protected?

    As for developing countries, many actually bought this argument wholesale a generation ago and only today are recovering from its folly. As they gradually won their independence from colonial powers such as Great Britain, many leaders in the developing world viewed imports as another form of dependence on their former masters.

    They proposed what is called “import substitution” instead. Under this system, a command-and-control local government would dictate how the nation used its resources as it struggled to produce everything it formerly imported.

    Needless to say, this strategy cannot lead to prosperity, and it did not. As detailed in Brink Lindsey’s Against the Dead Hand: The Uncertain Struggle for Global Capitalism, the Third World fell into a deep debt crisis as it borrowed and borrowed in attempts to produce enough of everything it needed. Today the example of East Asia has demonstrated that the way out of poverty for many developing nations is to export things they can make easily and cheaply, in exchange for imports they cannot produce as easily.

    Globalization is occurring because most of the world is realizing that economic growth occurs when a country focuses on producing what it’s relatively very good at and exporting as much of that product as possible, in exchange for imported goods it cannot produce as well.

    In this way, countries use their comparative advantages over other countries to create value – that is, if I have something you like but I hate, like mustard, and you have something I like but you hate, like a bleu cheese dressing and bologna sandwich, then we can trade and, although nothing new has been “created,” we are both richer. Unless you hate mustard too. (For an explanation of this phenomenon that does not involve condiment metaphors, see Adam Smith’s The Wealth of Nations.)

    The principle of comparative advantage means that every nation, no matter how undeveloped or poor, has a comparative advantage in producing some good. To understand how comparative advantage works, take this example. Bill Gates is a good software designer. He also happens to be a good typist. It makes sense for Bill Gates to spend most of his time working on software and not typing his memos. He employs an assistant to type his memos even if he is a better typist than his assistant. The same goes for countries.

    Protectionism is a "Bargaining Chip"

    Many people who understand this principle still advocate the third argument for protectionism: that it is a necessary evil because everyone else is doing it, and countries can only lower their trade barriers via a slow give and take. Otherwise, they argue, domestic industries would have to compete against protected industries in other countries.

    U.S. proponents of this argument might say, “Why should our steel industry have to compete with Brazil’s, when Brazil’s steel mills receive millions of dollars in subsidies each year? Of course their steel is cheaper, because subsidies allow them to sell their steel for less than it costs them to produce it!” They would argue for a “level playing field,” because to accept otherwise would subject domestic industries to “unfair” competition.

    To counter this line of thinking it is necessary to return to the idea of comparative advantages. Comparative advantage can’t work as a one-way street. In other words, keeping domestic industries protected while pushing other countries to open their borders is not only hypocritical, it is harmful to those in the domestic economy who are exporting what they are good at producing but are prohibited from importing what they need.

    To expand on a previous example, I keep selling you mustard for cash, but my country places prohibitively high tariffs on bleu cheese dressing, leaving me with only enough money to buy bologna and bread. Sure, I can sell you as much mustard as you’re willing to buy, but come on, how much mustard can one person eat? So I’ll never have enough money to buy the bleu cheese dressing I need to make my sandwich.

    This approach to trade policy protects a few special interests – steel producers and mustard salesmen, for instance – to the detriment of the country’s economy as a whole. A country’s economy grows in overall wealth when it is free to sell what it is best at producing and buy the cheapest and best goods – even if those goods are subsidized by other countries’ governments – from all over the world.

    If some countries sell subsidized goods on the world market, then countries with open borders get the benefit of buying those goods more cheaply than they could before. The taxpayers who are subsidizing the local industry are actually subsidizing consumers in open-market countries.

    At the same time, the low costs these open-market countries pay for imports allow them to shift their resources to their most productive industries, increasing their economic power.

    In this way, open-market countries lead by example. The powerful trend of trade liberalization started when countries began to realize that the most successful economies in the world were open-market economies.

    “Protectionism” when used to describe a policy agenda of high tariffs and subsidies is a term that is apt and misleading at the same time. It gives the impression that the country’s overall economy is being “protected” from harmful foreign competition. This is simply not the case.

    Who Really Benefits from Protectionism?

    When protectionist policies are enacted, certain domestic industries are protected at the expense of others. So in the end, it comes down to which industries can exert the most influence over domestic politics.

    In the United States, the powerful steel, textile and agribusiness lobbies have kept those industries protected from foreign competition in ways that hundreds of other industries have not; and while unprotected industries have faced stiff foreign competition, they have also faced higher prices on steel, textiles and agriculture. One might look at the situation and decide that steel jobs are more important than other jobs, but to deny the connection between the two is to ignore evident economic principles.

    Each argument for protectionism has merits: protectionism does save jobs in protected industries, can sometimes save those industries from financial catastrophe, and can be useful sometimes when it comes to negotiating trade agreements with other countries.

    But in each argument, the government is placed in the role of making arbitrary decisions between which industries deserve protection, and which must inadvertently bear the costs of protection. The alternative is a government that does not pick winners but instead stands by principles and treats each industry the same, regardless of its political clout or well-connectedness.

    The important thing to remember is that economic costs are unavoidable. The question is not whether an economy can avoid a cost, but who will bear it. Some believe the government is capable of deciding this question, and some believe that free individuals should decide it by their actions in the marketplace.

    But economic costs must fall somewhere. Even if a wide array of protectionist policies could somehow protect every industry in the United States from the costs of foreign competition, then those costs would accrue to foreign countries, many in various states of destitution and, as previously mentioned, needing export markets as doorways out of poverty.

    The conflict over protectionism, when all the rhetoric is boiled away, pits parochial interests against international ones. Picture the conflict as a factory laborer in a steel town in West Virginia arguing for tariffs to save his job and his community, versus thousands of workers all over the world who all have a small but important stake in being able to sell and buy steel at the lowest possible price: the consumer who will have to pay higher prices for anything made of steel; the autoworker in Michigan whose plant will lay him off due to higher steel prices; and finally, the Brazilian steel worker who will lose his job if the steel he makes is shut out of the United States.

    In this case, it is important not to forget the pain of the steel worker who, because his industry has been mismanaged from the top, is facing the prospect of unemployment. But it is still important to ask, what about the average American? What about the autoworker? What about the Brazilian whose only alternative might be a sort of poverty that has been largely unknown for decades in the United States? None of them really deserve to bear the cost. But protectionism almost always places the burden on those who deserve it the least.