In the name of "fair" trade, America's three-decade commitment to free trade is about to be dumped. The most recent sign was the December 15 House vote for a "local content" bill to "protect" the jobs of auto workers from foreign competition. That same lame-duck session enacted a gasoline tax bill that included a provision requiring 80 percent local content on all federally funded mass transit systems. And the watered-down Caribbean Basin Initiative—which was supposed to provide duty-free access to US markets for products of our impoverished island neighbors—ended up exempting apparel, handbags, footwear, luggage, mushrooms, canned tuna, and petroleum products and limiting imports of duty-free sugar.
Support for protectionism is popping up all over. Business Week last fall featured guest columns headlined "The U.S. Can No Longer Afford Free Trade" and "A Plea to Prop Up Basic Industries." Richard Viguerie and four other New Right leaders issued a statement in December calling for protection against foreign imports and terming free trade "economic unilateral disarmament."
Nor are the liberals any better. The traditional liberal Democratic support for free trade seems to have evaporated. Sens. Ted Kennedy and John Glenn both support the local content bill, and presidential hopeful Walter Mondale keeps attacking the Japanese.
In response to this nonsense, economically literate people can only shake their heads. Ever since Adam Smith, economists have understood the principle of comparative advantage. If each country concentrates on the goods and services it can produce most efficiently and obtains the others by trade, everyone will be better off. Since 1947 when the General Agreement on Tariffs and Trade (GATT) began slashing tariffs by 75 percent, world trade has expanded by 7 percent a year. In the previous 35 years, the annual growth rate had been a mere half of one percent.
With protectionism, governments shield—by definition—their most inefficient industries by restricting imports. But the net effect, worldwide, is to reduce everyone's ability to export (since somebody must be able to buy the exports). Thus, at least as many jobs are lost in efficient, export-oriented industries as are saved in the inefficient, protected industries.
Comparative advantage is so powerful that it works even if allowed to function unilaterally. Hong Kong and Singapore are two of the most prosperous places in Asia; both practice unilateral free trade. Chile's amazing economic recovery (see "Chile's Economic Revolution," REASON, Apr. 1982) was fueled by massive, unilateral cuts in tariffs. Old, inefficient industries went belly up, to be replaced by dynamic new ones.
Underlying the practical arguments for free trade are profound moral arguments. Those who advocate limiting or prohibiting certain imports are seeking to use force to prevent you from exercising your free choice to purchase Brazilian shoes, a Korean shirt, a French food processor, a Dansk place setting, or a Japanese car. If UAW president Douglas Fraser walked into a Datsun dealership with a gun and threatened to keep you from buying a 200SX, you'd be outraged. You should be equally outraged when he does the moral equivalent but seeks to gloss it over with a lot of fancy words and paperwork.
Moreover, it is morally nauseating to see the same liberals who shed crocodile tears over the poverty of the Third World's people imposing "countervailing duties" on Peruvian textiles or advocating duties on Mexican beer (which makes up a whopping 6.2 percent of all beer imports) or keeping out peanuts from the Sudan or sugar from the Dominican Republic so that gentlemen farmers like Jimmy Carter and Bunker Hunt can continue to prosper. What Third World peoples need is not foreign-aid handouts. They need the freedom to produce their way out of poverty. And for that they need open access to markets in countries like ours.
A return to protectionism risks worldwide catastrophe like that of the 1930s. The infamous Smoot-Hawley Tariff "protected" the US economy by so sharply restricting imports that it set off a worldwide trade war. Economist Jude Wanniski has pointed out that the 1929 stock market crash occurred just after it had become obvious that Smoot-Hawley would pass. Sophisticated investors realized how disastrous such protectionism would be for American industry—and they were right, as the next 10 years amply demonstrated.
The signs of such a new debacle are all around. In France, the Mitterrand government is turning sharply protectionist. The entire Common Market "protects" member countries' high-cost farming, and recently US officials threatened to launch an export subsidy war in retaliation. Particularly ominous, at a time when many developing countries are in danger of defaulting on massive loans, is the threat to their exports. Hudson Institute economist Jimmy W. Wheeler warns of a "disaster scenario" in which protectionism chokes off the Third World's ability to earn hard currency, leading to a collapse of the international financial system.
But protectionism would also hurt us more directly. By seeking to protect aging and inefficient auto, steel, and textile industries against efficient foreign producers, the government would impoverish us all. As John Naisbitt points out in Megatrends, the United States is fast shifting from being an industrial society to an information society, operating in a world economy. Seeking to reverse these historic and economically sensible shifts is like holding back the tide. Ultimately, it can't be done—but the attempt could be very costly. The Economist points out that the countries hurt worst in the current recession have been those, like Britain, that devoted the most effort to protecting outmoded industries.
Protectionism is wrong—morally and practically. Free trade, even if unilateral, is the moral and practical policy. But if the protectionists want to channel their frustrations into a more constructive vein, we have a suggestion. Go after Japan and Europe not by restricting their autos or steel but by ending our subsidy of their defense. That would help put all our economies on a comparable footing. And it would help prevent real wars as well as trade wars.