In his State of the Union Address last month, President George W. Bush sounded like Adam Smith when he said, "Good jobs depend on expanding trade." Yet sooner or later, the president is expected to announce what can only be called a "mercantilist" idea to enact higher tariffs (perhaps as high as 40 percent) and more quota restrictions on imported steel. From Adam Smith to industrial mercantilism in less than 60 days. Wow!
As the administration ponders what it's going to do, it would be well advised to remember Smith's observation that "Consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer."
Smith understood that when government imposes import quotas and selective tariffs to protect favored producers, the interest of consumers is doubly sacrificed. Consumers must pay both a higher price for imports due to the tariff and a higher price for domestic products.
The administration got itself into this fix last June, when Bush directed the U.S. trade representative to request the International Trade Commission to initiate an investigation into the "injury" done to the U.S. steel industry by foreign producers' allegedly "dumping" steel on American markets at "below-market" prices. The president justified his order on the grounds that the declining fortunes of big, old-fashioned, integrated steel producers raise considerations of "national security." Here, too, it is helpful to recall Smith on producers who make the claim that every tariff they seek is a "patriotic duty."
Protectionism is always tempting to political leaders left and right, especially when the special-interest lobby in question comprises both large corporations and labor unions. Little is more frightening to a politician than to be accused of "doing nothing" while cheap foreign imports undermine America's industry, causing American companies to go bankrupt and throwing hard-working Americans out of jobs. Nothing gets the juices flowing faster, especially during a time of war, than to have Big Steel wrap itself in the flag and appeal for import quotas and a tax increase on imports as an act of patriotism.
But as every new generation of politicians learns the hard way, if they succumb to the siren song of protectionism, it is a counterproductive political stratagem because it is economically harmful. Protectionism shrinks national output more than it increases business in the protected industry; it costs more American jobs in related industries than it saves in the protected industry. Therefore, protectionism ultimately loses more votes than it garners because it adversely affects so many more people than it benefits.
According to a study published by the Institute for International Economics, the highest of the tariffs and quotas under consideration by the administration would cost domestic steel users and foreign steel companies $34 billion over four years, which translates into a cost of $500,000 for every steelworker's job that might be saved. But that's not the extent of the economic damage that steel quotas and protectionist tax increases would cause.
The higher price of steel would reduce demand for products made of steel, such as automobiles, machinery and appliances, and lead to layoffs. By one estimate, as many as 13 jobs would be lost in companies manufacturing and selling steel products for every steelworker's job saved by import quotas and higher taxes on steel.
Yes, many American steel companies cannot currently compete in global markets, and steelworkers' jobs are at risk. However, the real problem is not competition with Europe and Japan but wrongheaded policy. The real enemy of steelworkers in the United States is not foreign companies but stupid tax and regulatory policies in Washington.
If we would reform the tax code to expense investment in
plants, machinery and technology, cut tax rates on labor and capital to increase workers' disposable after-tax income, and ease up on radical environmental regulations, all American businesses would have a better chance to compete with foreign rivals who enjoy a friendlier tax and regulatory environment and face lower labor costs. Tax and regulatory reform would allow workers to live better lives with more income after taxes.
Beyond the immediate economic harm produced by increasing steel quotas and raising steel-import taxes, Bush must also consider the retaliation it would invite from our trading partners and how abandoning his free-trade position would seriously undermine his credibility when it comes to convincing Congress to grant him trade promotion authority (formerly known as "fast-track" authority). When the president announces his decision, I hope he rejects the special pleading of the steel lobby and stands up for free trade and by doing so stands up for all Americans.