In depicting the true costs to consumers of protectionism, Mr. Peter Sutherland, Director General of the General Agreement on Tariffs and Trade, stated, "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."

Mr. Sutherland continues, "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 addition to higher prices, protectionism also results in a reduction of available products limiting choices.

Protectionism has severe negative implications for domestic producers as well as foreign industries. By effectively preventing foreign competitors access to a domestic market, sheltered domestic producers tend to become complacent; producing costly, poor quality products inefficiently. This principle was exemplified by the industries of Eastern European nations during the reign of Communism.

This costs of protectionism can be seen in the historic performance of the U.S. auto and steel industries, too. The United States has attempted to protect its automobile and steel industries from foreign competition through the use of voluntary restraints agreements (VRAs), a type of quota. The policies are designed to temporarily shield the U.S. industries from foreign competition thereby allowing U.S. industries to gear up or recover, and become more productive and globally competitive. The U.S. auto VRA imposed on Japan did not achieved this. Instead, the VRA effectively increased, on average, the price of Japanese autos by more than $2,000 in the U.S. market in 1984. Rather than increase market share, which was a major goal of the program, U.S. producers increased their prices by an average of $750 - $1,000. It is estimated that in 1984 this policy saved only 1,100 jobs in the auto industry at a cost to the U.S. economy $6 billion.

In 1983, it was estimated that the U.S. steel VRA program cost U.S. consumers more than $1 billion, whereby U.S. steel producers gained only $500 million. The annual costs to consumers for each job saved was estimated at $113,622. Furthermore, the price of imported steel rose 4.5%, while domestically produced steel rose almost 1%. In addition, U.S. steel exports declined.

But perhaps the most dramatic demonstrations of the costs of protectionism are those of the global agriculture, textile and apparel industries. According to the GATT report released in August 1993, the total transfers, in terms of higher prices and taxes, from consumers to producers during 1992 to pay for government support for agriculture are as follows (all totals in U.S.$):

  • Canada: $9.1b, $330
  • Japan: $74.0b, $600
  • United States: $91.1b, $360
  • EC: $155.9b, $450

Japan maintained a ban on rice imports since 1967, until its domestic shortage finally opened the door for emergency supplies in 1993. Consequently, the cost of rice, per hundred weight, can be $175 to $250 in Tokyo, compared with $45 to $50 in the United States. Partly as a consequence, Japan's per capita consumption of rice has fallen from 260 pounds a year in 1962 to 154 pounds a year in 1990.

In the Fall of 1993, Japan agreed to open its market to U.S. apples for the 1994 growing season. This is the first tangible action over the decade-long apple dispute. According to U.S. Trade Representative Mickey Kantor, the Japanese stated in a letter to the U.S. Department of Commerce that it would move expeditiously to take the necessary action to allow entry of U.S. Golden Delicious and Red Delicious apples from Washington and Oregon.

The U.S. Department of Commerce estimated in 1988 that sugar subsidies added an average of $3 billion a year to American consumers' grocery bills. In 1990, the average U.S. wholesale price for sugar was 23 cents per pound compared with the average world price of under 12 cents.

Canada, like the EC, Norway, Mexico and Finland, operates a system of supply management with respect to eggs, poultry and dairy products. In 1990, one study demonstrated that consumers in Toronto, Canada, paid substantially more for these goods than consumers in Buffalo, New York. In fact, Toronto consumers paid 42% more for a dozen eggs, 128% more for roughly the same volume of milk (.5 gallons/2 litres), 97% more for one kilogram of chicken, and 22% more for 500 grams of cheese.

The textile and apparel industry is another highly protected and supported industry regulated on a global basis by the multi-Fiber Arrangement (MFA). The MFA establishes quotas on behalf of industrialized countries directed against textile and apparel exports from developing countries. The program was originally introduced to provide for an orderly adjustment to the change of international textile and apparel comparative advantage in favor of developing countries.

The U.S. has MFA quota agreements with 40 countries. The Institute for International Economics estimated that in 1986 the MFA raised textile and apparel costs by an average of 28% and 53% respectively, with annual consumer losses of $2.8 billion and $17.6 billion. The net welfare cost to the nation, after subtracting the benefits to producers and workers, exceeded $8 billion. The consumer costs to maintain each U.S. textile and apparel manufacturing job was $135,000 and $82,000, respectively. The result: the lowest 20% of U.S. households, ranked according to income, experienced a decline of 3.6% in their standard of living.

It was estimated that terminating the Multi-Fiber Agreement would increase U.S. national welfare in 1984 by $13 billion.

According to GATT report released in 1993, studies conducted during the 1980s indicate protection costs to the consumer on clothing have been estimated at between $8.5 billion to $18 billion in the United States, £500 million a year in the United Kingdom and C$780 million a year in Canada. Expressing these estimates in current 1993 dollars, the 4-person household spent an additional $200-$420 per year in the United States, $130 per year in the U.K. and $220 per year in Canada.

This article appeared in a publication of the International Society of Certified Public Accountants, November 1994
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, competitive strategies and the latest economic trends. He also is founder of the ManzellaReport.com and Chief Strategy Officer of Ignition Life Solutions. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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