NCPA - National Center for Policy Analysis

Cost Of Protectionism

June 7, 1999

Ironically, political pressure for trade protection has grown during the current economic expansion. Similarly, the infamous Smoot-Hawley Tariff was enacted at a time of unprecedented prosperity. It 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 United States.

  • St. Louis Fed economist Howard Wall calculates that U.S. exports would have been 26.2 percent higher in 1996 if other countries practiced free trade.
  • Wall found that U.S. protectionism also hurt, costing consumers more than $100 billion.
  • In a recent speech in Dallas, Federal Reserve Chairman Alan Greenspan said 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.
  • 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.

 

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