August 1, 2003
We Restrict Trade At Our Own Peril
In a sense, there is probably very little significance in the fact that U.S. Senator Evan Bayh recently went on record as strongly supportive of continued trade protection for the domestic steel industry. It is no more surprising to see a Senator from Indiana look out for steel than it is, say, for a Louisiana representative go to bat for the oil industry, or a Washington state politician carry the water for aircraft manufacturers.
In fact, the real headline would be if anIndiana politician did not take such a stance. The conventional wisdom would say that such a person would soon be looking for a new job.
But maybe such a stance is correct nonetheless. Even if protectionist policy "works" -- letting Indiana steelmakers boost their prices without provoking retaliatory actions by our trading partners -- it might not make Hoosiers better off. After all, those extra dollars being collected by Indianasteelmakers are being paid by automakers, appliance manufacturers, and countless other industries who buy the product. That makes these companies, many of whom are located in our state, less competitive when they go head-to-head with competitors abroad who don't have to pay more than the going rate for their raw materials.
With the razor-thin margins many smallIndiana manufacturers are operating at these days, this is not a trivial matter. The cost of trying to save steel jobs by slapping a surcharge on imports may be more than just the extra dollars paid by consumers of steel products. It could also be the lost jobs in the downstream manufacturers who lose market share as a result.
And that's if the policy works. There is a mountain of evidence, some of it reported in a recent Dallas Federal Reserve Bank monograph, suggesting that it does not even accomplish its most limited goals.
The steel industry itself is perhaps the best example. One has to wonder if steelmakers had put the same resources over the years into their plant and equipment as they have in the political process -- over 50 percent of all anti-dumping complaints filed at the International Trade Commission are from the steel industry -- if they would be in better shape today. As it is, decades of protectionist policy have only proven one thing, namely, that steel companies say that more protection is needed.
But overt protection, of the kind put into place last year by the Bush administration for steel, is only one form of trade restraints that cost us money and jobs. And not all of them involve trade across international borders. We have a variety of ways, from pressuring nations to obey "voluntary" quotas, to regulatory or labeling restrictions that effectively close the door to outside competition, to erect barriers to the movement of goods and services.
Indeed, the notion that "Buying American," or otherwise keeping the dollars we spend close to home has been thought to be good for so long that few have even bothered to examine its logic. If we did, we'd have to utter the phrase "pay more" in the same breath.
Few of us enjoy paying taxes, yet we burden our governments to follow onerous work rules and purchasing procedures in public construction projects that limit competition from out-of-state companies, raising their costs. Some of us loathe our dependence on foreign oil suppliers, but if we were to try to get by without imports the price of gasoline would probably be more than $7 a gallon. Trade helps support the specialization and prosperity in our economy, and we restrict it at our own peril.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives