The Structure and Stupidity of Protectionist Trade Policy

Any day now, the Trump administration is poised to make a major decision on US trade policy: whether to impose punitive measures to protect the US steel industry from foreign competition. Such measures–sought by domestic steel producers to protect them from foreign competition–could include tariffs, import quotas, or a combination of both. As the Washington Post notes: “The move could provide relief for a domestic steel industry that says it badly needs it, but it could also raise steel costs at every step of the supply chain — increasing expenses on consumers and on many of the manufacturing industries Trump promised to protect. Additionally, the move has the potential to upset some of the country’s closest international allies, and it could spark a set of retaliatory trade moves against U.S. companies trying to sell their products abroad.”

If anything, the Post is understating the likely effect. First, the direct impact of protectionist policies are always–ALWAYS–a net negative. Even if some jobs are saved, the cost of doing so massively outweighs the benefits of the job saved (unless it’s your job saved…more on this later). Take US sugar import quotas, for example:

U.S. import quotas limit the amount of sugar the United States imports. As a result, U.S. sugar prices are 350 percent higher than world market prices. Although this policy has preserved a few thousand sugar-producing jobs, it has also cost an estimated 7,500 and 10,000 jobs, as candy makers relocated production to countries with lower sugar prices.

Or, the impact of Reagan-era “voluntary export restraints” on Japanese cars: “Overall, American consumers suffered a loss of some $13 billion, measured in 1983 dollars. After accounting for the higher profits of American automakers, the U.S. economy as a whole thus suffered welfare losses totaling some $3 billion due to the restraints on Japanese car exports.”

The second deleterious impact of any protectionist trade policy is the damage it does to US credibility, reputation, and the broader structure of the international system. The imposition of trade restriction policies by one country are nearly always met by the imposition of retaliatory trade restriction policies by those affected by the initial move. Such tit-for-tat policies were, to some degree, responsible for the collapse of the global economic system between WWI and WWII and were, in no small measure, what the GATT and the WTO were designed to prevent. But even if the targets of any US steel measures respond through the framework of the WTO, the unilateral nature of hte US’s actions will “mak[e] [the US] vulnerable to successful WTO actions from other countries. This weakens a 70-year-old U.S. commitment to promote the international rule of law and encourages others to engage in tit-for-tat retaliation. China did this repeatedly between 2009 and 2011, harming U.S. exports and workers in sectors as diverse as poultry, autos and steel.”

Such actions would be bad enough on their own. But when taken by a president who has turned his back on Asia by withdrawing from the Trans-Pacific Partnership, has questioned the viability and usefulness of NATO while only doing the bare minimum to attest to his willingness to uphold Article 5, and who is already held in very low regard around the world, any protectionist measures could take on a much greater meaning. There are rumblings that Trump is planning on punishing China for what he believes is China’s unwillingness to rein in North Korea’s nuclear program. A US president espousing a doctrine of “America First,” who rejects the basic principles of collective self-defense and free trade that have undergirded the international system since 1945, and who seems to have no understanding of the complexity of the world will not inspire confidence. Much of the broad safety and stability that the world has enjoyed over the past 75 years has been a result of a system based not only on on the overwhelming force of American power but also on widely-accepted norms and leadership. Under Trump the latter two of those pillars are in danger of toppling.

If protectionist trade policies are a net economic loser and threaten the international system, why have American presidents attempted to use them every twenty years or so? The answer lies largely in the logic of collective action problems. Global free trade is unquestionably a net benefit to everyone, but it also unquestionably produces winners and losers. While most people benefit from the improved quality and variety of goods along with lower prices that result from free trade, some people working in uncompetitive jobs lose their livelihoods. To return to sugar policy as an example, a 2006 Department of Commerce study found that “for each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost” while another study from the US International Trade Commission noted that “removal of restrictions on imports of sugar would result in a welfare gain to U.S. consumers of $1,660 million over 2012–17, or an average of $277 million per year.”

$277 million per year sounds like a lot of money…but those loses (or potential gains if the quotas were lifted) are distributed across every American consumer across the entire year. Given a US population of approximately 325,000,000, each American spends less than $1 per year more than they would have in the absence of the sugar quotas, and that dollar is lost in thousands of transactions each and every time a good containing sugar is purchased. While the aggregate costs are large, the specific and direct costs are miniscule.

The benefits of protectionist sugar policy are, on the other hand, concentrated and direct. A 1994 study found that “that the U.S. sugar program helps to maintain approximately 2,260 sugar industry jobs, many of which are growing and harvesting jobs, at an annual cost per job saved of $826,000 (these estimates are based on data from the early 1990s when the differential between U.S. and world sugar prices was between 60 and 105 percent. The price differential is much larger today. Thus, these studies likely underestimate the cost per job saved of the sugar program today.)” Herein lies the collective action problem. The promise of saving less than $1 per year motivates exactly no one to lobby Congress to lift sugar quotas. But the 2,260 people whose jobs are at stake are highly motivated to save their livelihoods as is the industry that would lose millions of dollars a year in a free market. And the nearly 7,000 jobs that aren’t created in other industries as a result of the money lost to higher sugar prices don’t exist so they can’t lobby and politicians will always care more about saving jobs that do exist that creating ones that don’t. So, while protectionist trade policies are always a net economic loser, they are also nearly always a net political winner. And that is why they persist.

At the end of the day, the root of the problem leading Trump to consider protecting the US steel industry–and to some degree at the economic distress that led to the election of Trump–is not a result of globalization and free trade but rather at the failure to properly distribute the economic gains of free trade and compensate the losers. The collective action problem inherent in free trade is a political poison pill, threatening to undo the whole thing to benefit a few. The political dynamics of free trade require that we figure out how to protect the losers from being left behind in order to keep everyone moving forward.

 

 

 

 

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