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Fast Track to Protection

Mises Daily: Wednesday, May 08, 2002 by

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How is it possible for America to have a president who pledges allegiance to free trade, and argues for fast-track negotiating authority to expand free-trade agreements, yet at the same time, signs off on protectionist policies for the steel, softwood lumber, and agriculture industries that will cost American consumers billions and billions of dollars?

These positions are mutually inconsistent, if we are discussing logic rather than political advantage. Yet such protectionism, dressed up as patriotic support of America, follows a well-worn script. 

First, imports are found to harm a domestic industry; then that harm is used as an excuse for "I'm for free trade, but we must defend America" protectionist policies. Of course, imports always harm the domestic industry that competes with them, by reducing the demand for domestic production, which means that this can be reused for political cover whenever any domestic industry gets the government's ear.

Those following this protectionism script frame the argument as one of U.S. producers versus foreign producers, with the obvious implication that patriotism should lead Americans to favor U.S. producers. If it was producer versus producer, with no other effects, protectionists would have a decent argument. If we care more about "our" producers than "their" producers, we would give them preference, other things equal. However, such a presentation of the issues substantially misrepresents reality. 

A more accurate way of framing the issues is as one of U.S. producers colluding with the U.S. government to rip off U.S. consumers, incidentally harming foreign producers in the process.

The depiction of this as a one-on-one fight between domestic and foreign producers ignores the most important issue: Why do American consumers buy from foreign producers when given the choice, despite popular preferences for "buying American"? Once you ask this question, the answer is obvious. Americans buy from foreign producers when they offer a better "deal," increasing consumers' wealth by charging lower prices and/or offering higher quality in consumers' eyes. 

Equally obvious, then, is the fact that when trade restrictions-tariffs, quotas, nontariff barriers, "voluntary" restrictions backed up by government threats, environmental or other restrictions designed to mainly hinder imports, etc., take away those superior options, they make consumers poorer. And patriotism does not imply we should favor U.S. producers over U.S. consumers.

Making protectionism even worse is that the policy-induced transfer of wealth from American consumers to American producers is not a zero-sum game, where producer gains equal consumer losses. It is a negative-sum game, with losses exceeding gains.

Consider a simple numerical example. Suppose that the domestic cost, and therefore price, of a product is $20 and the import price is $15, but then a tariff or quota raises the import price to $20. American consumers lose $5 per unit from the higher price, but American producers do not gain $5 per unit. For each added American unit purchased, the $20 ($5 higher) price is "used up" by the $20 cost of domestic production, leaving no net gain to U.S. producers. 

The overall effect is to throw away $5 of resources for each unit bought domestically rather than from foreign suppliers, because what could have been gotten for $15 of resources now requires a $20 sacrifice of resources. And from the U.S. point of view, it makes no difference if the lower foreign price is the result of superior efficiency, foreign subsidies, or "dumping."

Each of us supports fewer restrictions on our ability to advance our own welfare. This means we want free trade when it comes to selling our output and deciding how to produce that output, and for those who would sell to us (and every protected U.S. industry has made every one of those "free-trade" arguments), because such changes benefit us through higher sales prices and lower costs. 

However, it also leads to support for restrictions on competitors, because that also benefits us. The difference is that both parties involved gain from free trade, but the beneficiaries of trade restrictions gain at an even greater cost to others, who are forced to make do with inferior alternatives as a result.

Free trade creates wealth.  But when free trade threatens the wallets of interest groups, support for government restrictions to protect them in order to assure "fair" trade suddenly blossoms--only because that sounds better than "gimme money." However it is dressed up, though, it is just a form of welfare, which can only impoverish Americans by restricting our access to lower-cost sources of supply.


Gary M. Galles is a professor of economics at Pepperdine University. Send him MAIL, and see his Mises.org Articles Archive. See also Mises's two essays: Autarky and its Consequences (1943) and  Economic Nationalism and Peaceful Economic Cooperation (1943)