FAQ: What are the costs of protectionism?

Talking Points:

Although in some instances protectionism may help fledgling industries for limited periods of time, current and decades-old studies indicate that protectionism actually has severe negative consequences. Reducing the number of imports through the use of trade barriers only raises the costs of goods and services to consumers and results in net job losses.

According to the 2002 U.S. International Trade Commission report, The Economic Effects of Significant U.S. Import Restraints, if all U.S. trade barriers had been simultaneously eliminated in 1999, 175,000 full-time workers would have been displaced, with the textile and apparel sector incurring nearly 90 percent of that loss. This would have represented only one one-hundredth of 1 percent of the 1999 labor force of 122.1 million. However, the report indicates, 192,400 full-time jobs would have been created, resulting in a net gain of nearly 17,400 jobs. In addition, total output would have increased by $58.8 billion.

The WTO determined in 1988 that $3 billion was added annually to grocery bills of U.S. consumers to support sugar import restrictions. In the late 1980s, U.S. trade barriers on textile and clothing imports raised the cost of these goods to consumers by 58 percent. And when the U.S. limited Japanese car imports in the early 1980s, car prices rose by 41 percent between 1981 and 1984. The objective was to save American jobs. However, in the end, more jobs were lost due to a reduction in the sale of U.S.-made automobiles, according to the WTO.

Additionally, the report Trade, Jobs and Manufacturing contends that if import barriers on sugar products were eliminated, imports would surge by almost 50 percent and domestic production would fall by 7.2 percent. The resulting job losses in sugar-related industries would total 2,290 out of 16,400 full-time industry jobs—a small number compared to an average of 235,000 net new jobs the U.S. economy created each month leading up to 1999, the year the report was released.

In December 2003, President George W. Bush announced his decision to remove the steel tariffs he had imposed 21 months earlier. Nevertheless, the damage was done. U.S. steel users incurred massive price increases as well as major supply disruptions, according to William Gaskin, president of the Precision Metaforming Association, as reported in a June 2004 CATO report. The higher prices caused many steel-consuming industries to shrink. In the end, more jobs were likely lost than gained.

Commenting on the costs of protectionism to consumers, Peter Sutherland, former Director General of General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), said, “It is high time that governments made clear to consumers just how much they pay—in the shops and as taxpayers—for decisions to protect domestic industries from import competition. Virtually all protection means higher prices. And someone has to pay, either the consumer or, in the case of intermediate goods, another producer. The result is a drop in real income and an inability to buy other products and services.”

FAQ: Does protectionism effectively save jobs in failing industries over the long term?

Talking Points:

No, it does not. Scholars and leaders of industry alike agree that even if a greater level of protectionism were implemented, low-technology jobs would still be replaced by technology or shifted to lower-wage locations over time. Robert Reich, former U.S. Secretary of Labor, stated that “Even if millions of workers in developing nations were not eager to do these [low-technology] jobs at a fraction of the wages of U.S. workers, such jobs would still be vanishing. Domestic competition would drive companies to cut costs by installing robots, computer integrated manufacturing systems or other means of replacing the work of unskilled Americans with machinery that can be programmed to do much the same thing.”

There are many examples of technology raising worker productivity and business efficiency, where output increased or remained the same while utilizing fewer, higher-paid workers. According to Trade, Jobs and Manufacturing, a 1999 CATO study by Daniel Griswold, “In the last two decades, tens of thousands of telephone operators and bank tellers have been displaced from their jobs, not by imports, but by computerized switching and automated teller machines.”

On this point, Sutherland says, “Maybe consumers would feel better about paying higher prices if they could be assured it was an effective way of maintaining employment. Unfortunately, the reality is that the cost of saving a job, in terms of higher prices and taxes, is frequently far higher than the wage paid to the workers concerned. In the end, in any case, the job often disappears as the protected companies either introduce new labor-saving technology or become less competitive. A far better approach would be to use the money to pay adjustment costs, like retraining programs and the provision of infrastructure.”

In the early 19th century, the English Luddites attempted to destroy textile machines because they replaced weavers. Modern-day “Luddites” want to do essentially the same thing—but they have mistakenly attacked trade instead of technology. Explaining the impact of technology and its relationship with protectionism, Michael Licata, a senior economic development executive, tells the following story:

Each day, 10 fishermen ventured to the ocean to catch their family’s food requirements. The task lasted all day. However, on one particular day, a fisherman brought a net he created by twining vines together. And in just six hours, he caught enough fish to supply all 10 families. Amazed, the other fishermen marveled over the new invention. One asked, “What are you going to do with all that fish? Your family can’t eat all of them.” “I guess you’re right,” said the net man. “I’ll tell you what,” said another, “I’ll keep your roof from leaking if you give me enough fish to feed my family.” Another said, “My wife has a garden, so I’ll trade you vegetables for fish.” And a third said, “I hate fishing. If you catch my fish from now on, I’ll hunt game and gather your firewood in the forest.” When the net man returned each day with his large catch of fish, he saw his wood chopped, vegetables near his door, and a brace of rabbits hanging on his fence. He even was able to sleep better since his roof no longer leaked during rainy nights. Others, too, benefited from various trades and ventured into other businesses. For example, one man learned to play an instrument he made out of wood and entertained villagers at night in exchange for goods and services. Another experimented with herbs and began curing certain illnesses. However, as specialization occurred and life improved for all 10 families, the fishing pole maker was not happy. His business worsened since fewer men now fished. Enraged, one night he sneaked over to the net man’s hut and destroyed the invention. In the morning, the disaster was discovered and the day’s allotment of fish went unmet. The next day all 10 original fishermen returned to their boats to fish. Leaky roofs went unfixed, firewood uncut, game uncaught, illnesses uncured and evening entertainment ceased. But, the fishing pole maker was happy at the expense of many.

FAQ: What is the protectionist worst case scenario?

Talking Points:

In the 1930s U.S. industrial production began to fall and U.S. farmers felt the effects of foreign agricultural competition. European agricultural recovery after World War I resulted in overproduction. As a result, international agricultural prices fell. The solution: on June 17, 1930, President Hoover signed the Smoot-Hawley Act that raised tariffs nearly 60 percent over their existing high rate of 44 percent. Although the act seemed like a good idea at the time, it effectively killed international trade. Within two years following the act’s implementation, U.S. exports decreased by nearly two-thirds.

In anticipation of Smoot-Hawley’s passage, France, Italy, India and Australia passed their own protectionist legislation. Others, such as Spain, Switzerland and Canada, followed suit. The result: export markets dried up and domestic industries slowed down. For the next eight years international trade declined. The unemployment rate in the United States rose to 25 percent in 1933. What began as a sincere attempt to aid U.S. industry made an international crisis of the highest order more severe.

Today, the potential negative impact of protectionism is no less severe. Larry Davidson, professor of Business Economics and Public Policy at the Indiana University Kelley School of Business finds that manufactured exports have been extremely important to economic vitality, manufacturing output and employment in 10 Northeast states analyzed in his recent report, Exports of the Northeast Region 1996 to 2004, prepared for the Council of State Governments Eastern Region. The report, co-authored by Benjamin Warolin and Lan Zhang, cites considerable strength in export growth from 1996 to 2004 of chemicals and pharmaceuticals to Germany and the Netherlands, and ever stronger gains of machinery sales to China and Mexico. When it comes to identifying hot spots of export growth in 2004, the report identifies reliable partners like Japan, the United Kingdom, Germany and the Netherlands, as well as newcomers like China and South Korea. “Clearly, if the U.S. and its key industrial regions are to continue to benefit from export growth to Europe and Asia, they cannot hope to do this while at the same time protecting their industries from imports from these countries,” said Davidson. As stated earlier, international trade has become an integral part of everyday life, accounting for 25 percent of U.S. economic growth in 2004. If the United States takes protectionist actions, our trading partners are sure to do the same.

FAQ: How do tariffs and non-tariff barriers operate?

Talking Points:

Tariff barriers—taxes or duties levied on imports of foreign products—originally were established to provide revenue for the federal government, predating income or property taxes. Today, however, they are viewed differently. In effect, tariffs increase the product price which discourages its demand and thereby insulates, to a degree, domestic producers from foreign competition. Each country places higher tariffs on goods determined to be import sensitive.

The most common form of duty or tariff is the ad valorem: a tax assessed on merchandise value. In addition, other types exist. Specific duties are those charged by weight, volume, length or any other unit (e.g., charging 10 cents per square yard on fabric). Compound duties call for both an ad valorem and a specific duty on the same product. Alternative duties are those in which the custom official calculates the ad valorem duty and the specific duty and applies whichever is higher. In addition to the above fees, an import processing fee, harbor tax, and other taxes, if further assessed, increase the exporter’s costs.

Non-tariff barriers, on the other hand, are often hidden, and are not necessarily quantifiable or measurable. They typically include quotas, boycotts, licenses, health standards, local content requirements, restrictions on foreign investment, domestic government purchasing policies, exchange controls and subsidies, as well as formal and non-formal bureaucratic red tape. Like tariff barriers, non-tariff barriers often are used to inhibit the importation of products. In many sectors, environmental, labor and investment issues increasingly are being used in an abusive manner to discourage trade.

At times when it appears that foreign government subsidies for industry are decreasing, assistance by other means may be increasing. Many analysts believe the Europeans, Japanese, and even the emerging markets are investing more and more of their resources to do battle with U.S. companies. In a sampling of about 200 overseas competitive projects tracked during an eight year period, it was estimated that U.S. firms lost approximately one-half of these due in part to government pressure—a hidden and non-quantifiable barrier to trade.

FAQ: How do global trade disputes, which often arise out of an attempt to protect an industry, affect U.S. companies and workers?

Talking Points:

The United States always has been a leading proponent of free trade. However, many now believe this leadership position is at stake—especially since U.S. willingness to accept WTO rulings is questioned. For example, both WTO and NAFTA committees have ruled that Canadian lumber subsidization evidence is insufficient. Nevertheless, the U.S. continues to impose tariffs on Canadian softwood lumber exports to the U.S. This dispute has been unresolved since 1982.

The U.S. is not alone in terms of non-compliance with international trade rulings. And, if the number of global trade disputes is any indication of unfair play, the U.S., EU and several other countries share company. Since 1995, the year the WTO was established, the international body has accepted about 30 trade dispute cases annually. As of April 6, 2005, the U.S. alone has been charged with 86 trade disputes; the EU or member states have been charged with 54, according to the Progressive Policy Institute.

In today’s competitive world, national tax laws and subsidies have become extremely complex, resulting in numerous unintended consequences—including multiple trade disputes. For example, for decades, EU industries, such as aerospace and telecommunications, have been subsidized. This has boosted their international strength or shielded them from global competition. In addition, the EU has exempted its exporters from paying a value added tax, which, in effect, has reduced their tax burden.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its exports, its indirect tax system is technically WTO-compliant. To counter this, the U.S. crafted the Foreign Sales Corporation (FSC) tax code in 1984. This was designed to help U.S. exporters compete more fairly with EU companies, as well as others around the world. Many U.S. companies claimed it was a success. In fact, a National Foreign Trade Council report stated that 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. However, the EU challenged the FSC rule through the WTO, and won in 2000. To appease the EU and global trade body, the U.S. repealed the law. In its place, the U.S. Congress created the Extraterritorial Income Exclusion (ETI) Act of 2000. But this law still didn’t satisfy the EU. Consequently, the EU challenged it through the WTO and won.

To remedy the situation, on October 22, 2004, President George W. Bush signed legislation repealing ETI. The bill also reduced corporate tax rates for domestic manufacturers and simplified tax rules on overseas profits. Without this, it was argued prior to repealing ETI that approximately 6,000 U.S. exporters, who relied on ETI to compete, would have been hurt. Several years ago Boeing estimated that repealing ETI without a suitable replacement would result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Why? In 2002, Boeing’s heavily subsidized European rival, Airbus, was estimated to have received more than $30 billion in EU financial support. Boeing claimed this gave the EU conglomerate an unfair advantage. Furthermore, analysts believed this affected the entire U.S. aerospace industry that employed nearly 800,000 highly skilled workers in 2002. Nevertheless, for over a decade the Boeing-Airbus fight has continued to rage without a solution in sight. In fact, the heat was elevated in May 2005 when Airbus requested $1.7 billion subsidy in launch aid for its new A350 mid-range jetliner.

Should the number of trade disputes continue to climb resulting in retaliation, American exporters stand to suffer losses. Retaliatory actions, which typically come in the form of increased tariffs, raise the cost of American products in foreign markets. Often leading to decreased sales for U.S. companies, this can translate to fewer jobs for American workers. As a result, it is in the interest of the U.S., the EU and others to swiftly remedy disputes and focus on more profitable long-term trade relations.

This section appeared in Part III: Frequently Asked Questions and Talking Points of the book, Grasping Globalization: Its Impact and Your Corporate Response, 2005.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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