I buy more from my grocer than he buys from me. I buy more from my auto dealer than he buys from me. The trade imbalance doesn't stop there. My grocer and auto dealer both buy more from their wholesaler than the wholesaler buys from them.
These are examples of trade deficits. What should President Bush and Congress do to eliminate these trade deficits to ensure a level playing field?
You say: "Williams, have you lost your marbles? There'll always be trade deficits like you describe. What's wrong with it?" You're absolutely right.
But, what would you say if one seller, say Costco, had cheaper prices than another seller, say Food Giant? What action would you have Bush and Congress take against Costco? How about taxing Costco's products so as to level the playing field between Costco and Food Giant?
You say: "Williams, that's a trick! The only thing that taxing Costco will do is to enable Food Giant to charge customers higher prices, earn higher profits and pay employees higher wages. Consumers will be worse off." You're right again. Now let's apply your reasoning to a real-world example.
Two weeks ago, some teachers, students, retirees and steelworkers gathered on Capitol Hill to press Congress and the Bush administration to use U.S. trade laws to address a problem described by Leo Gerard, president of United Steelworkers of America. He said, "Illegal foreign dumping of steel in the United States is devastating American families and communities."
Gerard claims that as a result of illegal dumping, more than 23,000 American steelworkers have lost their jobs since 1998 and 18 companies have been forced into bankruptcy. The Bush administration announced that actions will be initiated under Section 201 of U.S. trade laws.
Let's analyze this by substituting Timken Stahl, a German steel
producer, for Costco; U.S. Steel, an American company, for Food Giant; and John Deere & Company, a manufacturer of heavy farm and construction equipment, for you and me as customers.
Suppose American steel companies and their unions are successful in getting Bush and Congress to enact retaliatory measures against foreign steel producers for "illegal dumping." By the way, the real definition of dumping is when your competitor charges a price you think is too low.
To see the effect of trade restrictions, we need only to go back to the Reagan administration's "voluntary restraints" on steel imports. Professor Arthur T. Denzau of the Center for the Study of American Business found that the import restrictions saved nearly 17,000 jobs in the steel industry by enabling them to charge higher prices. Politicians love this; the beneficiaries are visible and seen. However, higher steel prices made American steel-using industries, such as John Deere, less competitive in domestic and international markets, leading to a loss of 52,400 jobs -- a net job loss of 35,400 jobs. These are the invisible and unseen victims of steel import restrictions. Politicians love invisible and unseen victims of their policies.
Maybe there's a case for helping those 23,000 American steelworkers who lost their jobs. But let's recognize that costs of restrictions are always higher than the benefits going to the beneficiaries. Saving a $45,000-a-year steelworker's job, in terms of higher prices in the rest of the economy, might cost as much as $125,000. It would be better if Congress enacted an Aid to Dependent Steelworkers bill, where each unemployed steelworker is simply handed a $45,000 check each year.
As a nation we'd surely come out ahead, but Congress would never do that. Why? The handout would be visible, and it wouldn't politically fly.