Why Protectionism Is Such a Lousy Idea: Part 1
Thanks in part to the October 19 crash, which temporarily scared Congress into not monkeying with fragile world markets, we escaped 1987 without a big trade bill. But the protectionism clamor won't die, as long as industry after industry keeps taking a beating from imports, and the falling dollar fails to dent the negative trade balance overall.
Well, why not protect? The reasons are numerous.
1. HIGHER CONSUMER COSTS. In cars, protectionist quotas added $13 billion to 1984 sticker prices alone ($2,500 per imported Japanese car and $1,000 per U.S. auto, after our automakers jacked up their prices). The British estimate that the Multi-Fiber Agreement (MFA) that governs most textile trade tacks an extra 30 percent to 50 percent to low-cost garments; their children's wear prices have doubled since the agreement was signed. A Canadian study demonstrated that the MFA has four times the negative effect on lower income families than it has on those who are better off. All tolled, the bill for protectionism in the U.S. is now estimated in excess of $65 billion.
2. UNINTENDED SIDE EFFECTS. For example, we negotiated the MFA to save textile workers' jobs in New England. Instead, from 1968 through 1977, 75,000 jobs were lost in New England, while 50,000 jobs were created in the South. Or take the 1977 Orderly Market Agreement (to stop the flow of Japanese television imports into the U.S.): It did curb Japan's share of the TV market, as intended, from 90 percent to 50 percent. But the slack was not picked up in Peoria; instead, Newly Industrialized Countries (NICs) in Asia, such as Taiwan, took up the slack and improved their share of the U.S. market from 15 percent to 50 percent.
Protectionism also causes the nation whose exports are restricted to move to upscale market segments, which threaten the remaining profitable bits of the protectionist nation's markets. The brilliant Honda Acura is a case in point. It is a direct product of auto quotas the U.S. imposed on Japan. Honda would surely rather use one of its precious quota slots (especially since it is an underdog in Japan and received relatively few slots) to sell a $20,000 Acura Legend than an $8,000 Civic. Moreover, the excess profit that exporters garner from high prices set by protectionism permits them to invest more and more in innovation and product development for upscale markets.
The spillover effect from one protected industry to other industries is also substantial and capricious. For instance, Oregon's timber must be transported down to Southern California in expensive U.S. bottoms, since we will not let inexpensive
foreign shippers engage in interstate water commerce. One result is that the price of housing in Los Angeles goes up, because it uses the Oregon timber, the price of which is inflated by excessively high shipping charges.
3. NEITHER PANACEA NOR PLACEBO. Generally inefficient protected firms seldom get much better, and sunset industries end up attracting new capital that might have been better spent elsewhere. Quotas put in place to provide a "breathing spell" become just that—a "time out" which rarely speeds up efforts to reform. More often, protected firms use much of the cash generated by unrealistically high prices (thanks to quotas) to go elsewhere. Notable examples include steelmaker Armco's disastrous diversification program, which has led to billions in losses; and similarly unrelated forays by USX, Ford, GM and Chrysler into areas such as oil, aerospace, and finance.
Also, protection allows sheltered firms to continue to make "commodity" products, removing the pressure to move upscale and dramatically improve the quality of their goods.
Finally, the contrived high prices attract new capital away from better long-term bets. For instance, one of the questionable side effects of the MFA is that one third of the U.S. textile/clothing firms at the end of 1982 were started after 1976, in response to the protectionist price umbrella.
4. HURTING THE HEALTHY. Protectionism singles out our efficient industries for maximum damage. As previously noted, capital is diverted from the most efficient and promising industries. Also higher value goods from these efficient firms often become the target of exporter nations that are subject to quotas. Further, sub-components made by protected industries become unrealistically expensive, scarce, or both. For example, restrictions on semiconductors from Asia hurt the generally efficient and innovative computer and telecommunications industries.
5. RETALIATION. With rare exceptions, such as Japan, which is opening markets at an extraordinary pace (admittedly starting from a highly protectionist base), fast-growing protectionism in the U.S. is leading to new non-tariff restrictions elsewhere. Moreover, nations' retaliation is almost always aimed at our best exporters. For example, after a trade brouhaha with Canada, which led us to restrict the entry of some of their forest products, they retaliated—not against our forest products, but against computer parts and other high value-added goods.
The case against protectionism is wildly unbalanced on the negative side (next week I will examine several more factors). Moreover, both conservatives and liberals agree in theory that protection is very bad news indeed. Yet the seductive logic of "just this one time, just this one industry, and just for a while" is increasingly difficult to defend against. Let's start 1988 right, and scream from every pulpit and forum that protectionism is the one sure way to destroy long-term competitiveness, not regain it.
(c)1988 TPG Communications.
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