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2002 Annual Report—Federal Reserve Bank of DallasThe Fruits of Free TradeProtection's PriceAlthough specialization and trade make us wealthier, most societies spend a lot of time, money and energy trying to thwart the exchange of goods and services. At home, companies pursuing their self-interest often breed monopolies that restrict supply and hike prices. The same impulse to stifle competition leads to a variety of trade measures aimed at imports. As the United States reduced tariffs over the past six decades, producers turned to import quotas, antidumping penalties, domestic-content laws, "voluntary" export restraints and other nontariff barriers. Export subsidies, exchange-rate controls, trade licenses, and onerous labeling, packaging and technical requirements further tilt the market against foreign goods. In whatever guise, protectionism is pure poison for an economy. Time and again, economic studies show that import restraints aren't worth it. They saddle consumers with huge costs. Dozens of researchers have reached this conclusion for a host of products, from steel, automobiles and semiconductors to textiles, apparel and farm products. Even when they temporarily stave off job losses, trade barriers are costly. For example, trade protection saved 216 U.S. jobs in the production of benzenoid chemicals, used in suntan lotion and other products—but at a cost of nearly $1.4 million per worker. Because the chemical workers earn a fraction of the protectionist toll, it would cost far less to simply pay them not to work! In case after case, the costs of protection outweigh the benefits. The tab for each job preserved in the luggage industry is nearly $1.3 million; in softwood lumber, more than $1 million; in sugar, more than $826,000. Moreover, some of the jobs saved are dirty, dangerous and low paying. (See Exhibit 11.) And trade barriers don't deliver on their promise to save beleaguered industries. Even when shielded from foreign competition, most protected sectors have continued to shrink. Steel and textiles—beneficiaries of years of protection—are still not strong enough to compete on their own. The U.S. automobile industry provides a good illustration of the economic forces unleashed by trade protection. Under pressure from automakers and unions, Washington coaxed Japan into accepting "voluntary" limits in the 1980s on the number of cars it would sell in the United States. Protectionism didn't spark the renaissance the U.S. auto industry wanted. Asian and European automakers kept coming, lured by American consumers' craving for cars. The companies adapted their strategies for penetrating the U.S. market; they moved production to plants in the United States and shifted their focus to high-quality, luxury vehicles. As a result, foreign producers captured a larger share of the high-priced, high-profit segment of the car market. In the 1990s, the average prices of imported and domestic models were relatively close. In 2001, the imports sold for nearly 40 percent more, on average, than U.S.-made cars. Even with protection, Detroit couldn't hang onto this lucrative slice of the market. Domestic automakers' market share and employment continued to slide in the 1990s, although new jobs were created in the foreign-owned factories. (See Exhibit 12.)
Protectionism fails domestic industries because it delays and weakens their response to market forces. Particularly when in trouble, companies need to confront reality and avoid wasting precious time and resources. Sometimes, that reality demands that jobs be cut, companies shut down and even whole industries wither. When industries pursue political favors instead of efficiency or innovation, they only delay the inevitable. Responding to market signals, vibrant economies shift resources from declining sectors to emerging ones. Trade barriers short-circuit the process by muting the market's message. Labor and capital that could be more productive elsewhere end up stuck in industries where cheaper or better import alternatives are readily available. When steel companies or sugar producers want to fend off imports, they complain to Washington. A second but far less visible free trade contest takes place in state capitals, where the makers of some goods and services seek to restrict out-of-state rivals.
The U.S. Constitution's commerce clause creates a hurdle for state and local interference with the flow of goods and services. Although it's more difficult to impose trade barriers within U.S. borders than without, producers still try. To skirt the commerce clause, they often cloak homegrown trade protection in the guise of promoting consumer protection or public safety. An 87-year-old Oklahoma law, for example, decrees that only licensed funeral directors can sell caskets—a policy that discourages consumers from shopping around and keeps prices high. Vermont restricts its milk market to in-state dairies. Internet commerce creates a new avenue for state meddling; for example, Texas prohibits the online sale of used cars, and Georgia restricts commerce in replacement contact lenses. Domestic trade barriers hurt consumers just as much as those aimed at foreigners. The Fraser Institute finds that government intervention costs residents of West Virginia—the least open state—$5,294 annually, weighted against a national average of $26,765 in per capita personal income. In contrast, Delaware's citizens gain an average of $3,882 a year by living in the state with the lowest barriers. A per capita gap of $9,176, or 34 percent of per capita disposable income, shows just how much even interstate trade issues matter. The Great Depression provides an example of how trade restrictions lead to economic ruin. America's highly restrictive Smoot–Hawley tariff, passed in 1930, prompted other countries to retaliate by imposing their own trade barriers. Under the weight of the restrictions, world trade contracted sharply over the next few years, compounding excess capacity problems. At the Depression's depths, about a quarter of U.S. workers were unemployed. (See Exhibit 13.)
Whether aimed at foreigners or fellow Americans, trade restraints aren't just a matter of lost dollars and cents. All protectionist schemes violate basic economic freedoms. They involve third parties using the power of government to thwart the right of others seeking an exchange that will make them better off. Each time it happens, Americans are less free—and poorer. |
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The stock market hates protectionism. That lesson—perhaps the clearest history has ever taught—comes from the Smoot–Hawley Tariff Act of 1930. In the late 1920s farmers, whose economic fortunes had not kept pace with industrialists', lobbied Congress for tariffs on agricultural products. The proposed act had few political sponsors at first (two of the three major political parties opposed it), and the stock market ignored it.
