Opinion Editorial

Monday, June 7, 1999  

Cost Of Protectionism

One of the ironies of the current economic expansion is that political pressure for trade protection has grown as the unemployment rate has declined. One would think that pressure for protection would be at its peak when unemployment is high, and would decline as the unemployment rates falls. But in fact, it has usually been the opposite. The infamous Smoot-Hawley Tariff, for example, was enacted at a time of unprecedented prosperity. So it is really no surprise that political support for protection against steel and other imports is at a high level today.

It is not clear why this is the case. It may be that when times are good people feel that they can afford a little protection. Most people today would probably be willing to pay a few dollars more for an auto if they thought it was saving a steel worker's job. But if we were in a recession or if inflation were a problem, then they might not be so willing to do so. Another factor may be that economists have not done a very good job of explaining either the benefits of free trade or the costs of protection.

  • A new study from the Federal Reserve Bank of St. Louis estimates the cost of protectionism to the U.S. Economist Howard Wall calculates that U.S. exports would have been 26.2 percent higher in 1996 if other countries practiced free trade.

  • U.S. protectionism also hurt, costing consumers more than $100 billion.

  • In a recent speech in Dallas, Federal Reserve Chairman Alan Greenspan said that the ultimate cost of protection can be even higher if it blocks the flow of technology and new ideas that are the life's blood of economic progress.

Similarly, the benefits of free trade may not be as apparent as their perceived costs in terms of job displacement. However, the benefits are large.

  • According to a new study by the Department of Foreign Affairs and Trade in Australia, a 50 percent reduction in world tariffs would increase the world economy by more than $400 billion per year (see figure).

  • Complete elimination of tariffs would add $750 billion to the world economy annually.

A final source of protectionist sentiment may be the understatement of U.S. exports, which exacerbates the recorded trade deficit. According to the U.S. Census Bureau, exports may be understated by as much as 10 percent, due to the undercounting of small exports and other factors. This may make people think that restricting imports is necessary to restore balance. More accurate counting of exports, therefore, may help reduce protectionist pressure.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 7, 1999.

For Census Bureau study http://www.census.gov/foreign-trade/aip/expunder2.html

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