Negative-Sum Nonsense

Suppose you really had it in for the Big Banks and the Capitalist System. Your objective: to trigger a collapse of the international financial system due to widespread debt defaults by Third World nations. How best to pull it off?

Try this on for size: slash Brazil's exports of alcohol, shoes, and steel; South Korea's exports of textiles, shoes, and steel; and Mexico's exports of beer, farm produce, and steel. Without their earnings from exports—from production and trade—Third World countries have no hope of paying off their debts. Yet choking off those exports is precisely what many of our elected representatives have been urging.

Sad to say, government interference with trade has a long history in this country, even during the postwar period of worldwide tariff-cutting. President Kennedy gave in to pressures to protect the textile industry from competition. LBJ's weakness was meat imports, while Richard Nixon intervened to shield the ailing steel and (again) textile industries. Jimmy Carter extended those protections, adding new ones for domestic sugar and footwear producers. And even the administration of Ronald Reagan, filled with officials flaunting their Adam Smith ties, has intervened massively to shield domestic auto companies, steel companies, sugar producers, motorcycle makers, and textile firms from competition. Today, approximately one-third of the US manufacturing industry is insulated from international competition by government intervention.

To be sure, President Reagan did reject the recent plea of US copper miners for import quotas. But two weeks later he turned around and granted a similar plea from the much larger steel industry—a decision that will hurt far more people, at much greater cost. Yet every argument cited by Trade Representative William Brock against copper quotas applies equally well to quotas on steel: they would harm debt-ridden Third World producers, cost more jobs in steel-using industries here at home than would be saved in steel-making firms, impose higher costs on consumers, and encourage further protectionism by other countries.

The administration tried to soften the impact of its decision by calling the quotas "voluntary," but they will be about as voluntary as paying your income tax. According to the New York Times, the White House "said it would block access to the American market for countries that refused to limit their steel shipments to the United States." In other words, there he goes again—just like the four years of "voluntary" Japanese-car quotas, which have cost consumers billions.

And cost billions this one will, too. The Congressional Budget Office estimates that the quota limit requested by the steel industry—15 percent of the market—would end up costing consumers $7.8 billion a year, while saving only 34,000 steelworker jobs. Using somewhat different assumptions, the Federal Trade Commission (FTC) came up with a lower estimate, but all such studies yield a net cost of between $100,000 and $200,000 per year for each job saved—far more than the pay of a steelworker.

There's a good reason why thus "protecting" steel turns out to be a negative-sum game. By establishing import quotas, government forces millions of people to act against what they can see is in their best interest—to buy from the most efficient supplier. If it were more efficient for Caterpillar Tractor to buy all its steel from US steelmakers, it would not take the force of law to get the company to do it. So the costs of protectionism will always be greater than the benefits. By definition, a less-efficient outcome is being imposed on people.

No one should be surprised, then, by study after study that documents the harm. The FTC found that the cost of protection was 3.5 times the benefits in the sugar industry, seven times the benefits in clothing, and 25 times the benefits in shoes. Robert Crandall of the Brookings Institution puts the cost to consumers of the Japanese auto quotas in 1983 at $4.3 billion—about $100,000 a year per job saved.

Perhaps the most insidious danger is that the new protectionism may lead to imposition of an "industrial policy" by the back door. Several members of Congress have urged giving the International Trade Commission (the agency that recommended imposing quotas on copper and steel imports) the power to "help domestic industries reshape themselves" as a condition of protection. Termed "conditionality," this idea is being promoted by people such as former Carter aide Stuart Eizenstat and Walter Mondale. Just prior to Reagan's steel decision, Mondale urged quotas that would halve steel imports. The "condition" would be creation of a business-labor-government committee tasked with restructuring the steel industry.

Fortunately, there are some rays of hope in all of this. More and more opinion leaders have learned to see through protectionist rhetoric and to recognize it for the special-interest, negative-sum nonsense that it is. And broad-based political opposition is beginning to coalesce. Twenty major retail chains (including Sears and J.C. Penney) have formed a Retail Industry Trade Action Coalition to fight for free trade. For the first time in 70 years, the Constitution Industry Manufacturers Association has opposed a specific protectionist measure—the steel quotas. Farm groups, including the American Farm Bureau Federation, the National Grange, and the corn and soybean associations, have also become more activist. "Decisions on steel, copper, and textiles have a direct impact on large grain sales," notes the Washington rep of the National Corn Growers Association.

So the makings of a powerful coalition for free trade—the kind that brought about airline and trucking deregulation—are nearly in place. What's missing so far are the consumer activists: Consumers Union, Consumer Federation of America, and Ralph Nader's Congress Watch. If these groups could break free of their reflexive alliance with labor unions—as they did on transportation deregulation—the advocates of higher prices and reduced choice might start getting the horselaughs they deserve. And all of us, including the Third World, would be much better off.