Trade protectionism doesn't work

Bruce Bartlett
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Posted: Nov 20, 2003 12:00 AM

On Nov. 18, the Bush administration announced a decision to impose new trade restrictions on imports of some Chinese textiles. Although rationalized as a means of saving American manufacturing jobs, no trade expert thinks it will have more than a trivial effect in this regard. Its principal impact will be to further enrich a few wealthy Republican businessmen, by protecting them from competition, while further impoverishing the poorest members of our society, by making them pay more for clothing. This action is utterly unjustified and disgraceful.

A petition from four textile industry groups, led by South Carolina Republican textile magnate Roger Milliken, alleging that Chinese imports "threatened to impede the orderly development of trade and caused market disruption in the U.S.," initiated the new trade restrictions. No proof was offered to support this allegation. The mere fact that imports of Chinese textiles have risen in recent years, which is all the petition demonstrated, is legally insufficient to prove market disruption. The claim was simply asserted and should have been dismissed out of hand.

To show just how absurd this is, one of the new trade restrictions applies to brassieres. Yet there is no domestic manufacturer of this product. Some components are produced here, but all are exported to low-wage countries in Latin America for manufacture. This is done solely because of a law requiring a degree of domestic content in order to avoid trade barriers when the final product is imported. In other words, it is entirely an artificial arrangement. The reality is that 100 percent of brassieres are imported, so there really is no domestic industry to protect.

Furthermore, there is no evidence that China has a protected market, which might justify some sort of action. Although China likely will run a trade surplus with us of more than $100 billion this year, the International Monetary Fund estimates that its overall surplus will be just $25 billion. In other words, China runs a deficit with the rest of the world. Moreover, the IMF rejects the idea that China is artificially holding its currency down to stimulate exports and hinder imports. "There is no clear evidence that the renminbi is substantially undervalued at this juncture," it concluded in a Nov. 18 report.

Viewed in isolation, these new restrictions won't have much of an impact, since they apply to just $10 billion of imports -- not much in a $10 trillion economy. But it is important to understand that they come on top of existing trade protection that already costs Americans billions of dollars per year.

A new report from Consumers for World Trade quantifies the impact of trade barriers on American families. It concludes that the cost of protection is quantitatively large and impacts most heavily on those with low incomes. In the aggregate, both tariffs and quotas add about 6 percent to all the goods we buy. But because low-income families buy more of the things that import restrictions affect, they pay more. Minorities are estimated to pay 6.9 percent more on average, and single parent households pay 7.5 percent more. Every family would get the equivalent of a $238 per year tax cut if all import restrictions were abolished, according to the report.

A recent study by the Progressive Policy Institute emphasizes the disproportionate impact of trade protection on low-income families. It notes that "tariffs are highest on the goods important to the poor." For example, a tariff of 48 percent is applied to sneakers costing $3 or less. This means that poor people, the ones most likely to buy such shoes, pay $4.79 instead of $3.23, which is what they would sell for without the tariff.

Another problem with trade protection is that it invites retaliation. The day after the U.S. textiles decision, China canceled a trade mission to the United States that probably would have led to billions of dollars of orders for American goods. In recent weeks, China has signaled a desire to increase its imports of our goods, including planes from Boeing, jet engines from General Electric and a variety of agricultural products, as well as chemical and telecommunications equipment. Such purchases would have come to many times the value of the goods that are now restricted, creating vastly more jobs -- and better paying ones -- than might otherwise be lost in the textiles industry. Now these orders are in doubt and may go to European or Canadian companies, instead.

The Bush administration has shown incredibly poor judgment in trade policy ever since taking office. Its steel tariffs backfired by costing more jobs in steel-using industries than were saved among producers, and its budget-busting agricultural subsidies doomed a multilateral trade agreement. From the point of view of trade, it is the worst administration since Herbert Hoover helped bring on the Great Depression by signing the Smoot-Hawley tariff in 1930.