Protect Us from the Protectionists

As all but Rip Van Winkle know, the United States is running a huge deficit in its balance-of-trade account—supposedly justifying this fall's mad rush to protectionism. But when it comes to a balance-of-blame account, we are running a huge surplus. The national mood of scapegoatism grows uglier by day, with more and more fingers pointing at foreigners, particularly the Japanese.

According to the protectionists—primarily big business, big labor, and their allies in big government—"unfair trade practices" on the part of foreign nations (such as restricting US imports and subsidizing their export industries) are harming the national interest of the United States. The ballyhooed trade deficit is Exhibit A in the case against foreign products and their makers. Exhibit B is the "loss" of American jobs.

Both pieces of evidence, however, are artifices. They suit very well the special interests mounting protectionist campaigns that are pro-worker and pro-America in rhetoric but anticonsumer in fact. But they are chock full of holes.

Exhibit A, the trade deficit, is perhaps the most misunderstood of publicly consumed statistics, though it actually tells us nothing important. The official "trade deficit" for 1984 was $123.7 billion. But what does this figure mean? In 1984, Americans spent $123.7 billion more on merchandise from foreign sellers than foreign buyers spent on American goods. But the figure includes only "merchandise," a statistical category that excludes "services"—things like transportation, construction, banking, and insurance, which are an increasingly important element in modern economies. In this category, US concerns consistently sell more abroad than are bought from abroad ($20 billion more in 1984).

Moreover, the trade deficit by itself doesn't give any clue to which specific goods Americans are buying from foreign producers. If that were shown, we'd see that oil purchases accounted for nearly half of the 1984 deficit. (In 1983, oil imports made up $59 billion of that year's $60-billion "trade deficit.")

Closer scrutiny of the trade deficit also reveals that it turns a blind eye to revenues that US firms earn from production and sales operations inside foreign nations. In Japan, for example, US-based firms earned $44 billion in sales last year. Though these revenues are certainly a boon to the firms' US stockholders and employees, they're not counted as export income when it comes to totting up the trade balance. Why? Simply because the data keepers don't define exports that way. When these revenues are counted, it turns out that Americans and Japanese, for example, bought about equal amounts of goods from each other last year ($69 billion worth).

Rather than getting all hot and bothered about a statistically inadequate figure like the trade deficit, the public and the politicians should be checking out other information that in fact more accurately portrays the health of the US economy in world markets. In manufactured exports, for example, the US share of the foreign market has increased from 17 to 20 percent over the last six years, surpassing West Germany for first rank on this measure. And the US share of the highly competitive Asian-Pacific market has held steady at 15 percent since 1967, while that total market has grown from $5 billion to $80 billion.

But perhaps the biggest problem with focusing on the trade deficit is that it creates a false impression about the fate of all those US dollars sent abroad for all those goodies. So what if foreigners are selling us more goods than we are selling to them? The "excess" dollars have to come back to the US economy in the end.

This isn't just economic theory. The Japanese, for example, are in fact now investing enormous sums in the United States—largely profits from their US sales of VCRs, cars, stereos, etc. The whole cycle is quite understandable: as the US economy grows at its present fast clip, Americans are purchasing more and more (hence the "trade deficit"); at the same time, rapid US economic growth offers foreigners good investment opportunities and thus attracts huge amounts of foreign capital. How can we lose?

The forces of protectionism think they have the answer: Exhibit B, lost jobs. Sen. Lloyd Bentsen (D–Tex.), for example—one of the many sponsors of protectionist legislation in Congress—names "the loss of U.S. jobs" as foremost among "the trade deficit's damaging effects." And according to Democratic representative of Indiana Lee Hamilton, for his constituents the trade issue "translates into jobs." Not least because that's what the anti-free-traders keep telling all those constituents out there.

To be blunt, however, the alleged loss of US jobs is pure fiction. On the contrary, the US economy is producing new jobs at a truly phenomenal rate, 8 million since 1980, while every other major Western industrialized nation is actually losing jobs. In some US industries, it's true, jobs are diminishing—particularly factory jobs in the older, smokestack industries. But this decline is greatly offset by the explosion of jobs in newer industries. Unfortunately, the hiring of workers in thousands of personnel offices dispersed throughout the nation doesn't have the visibility—nor the six-o'clock-news appeal—of laid-off steelworkers languishing in the unemployment line.

The trade deficit and job loss, then, are useless as tools for cogent policy analysis. For purposes of masking problems that are in fact entirely domestic, however, they are great.

For big-business and big-labor protectionists, equating the meaningless trade deficit with some supposed national ill enables them to divert attention from their inability or unwillingness to adapt to new economic conditions—conditions that include, for example, growing competition in basic manufacturing from newly industrialized and industrializing nations abroad and Japan's remarkable achievement in quality control.

For protectionists in government, the trade deficit is a red herring useful in diverting attention from a host of policies that work against US exporters. In this area, public problem number one is the $200-billion-plus federal deficits: to finance its enormous overspending, the federal government borrows—and borrows—pushing up interest rates and, consequently, the foreign demand for dollars. As this rising demand pushes up the value of the dollar against other currencies, US products become more costly to foreign buyers.

And what is the government's solution to this problem? Cutting federal spending? Hah. No way. No—much more to the liking of government meddlers is international fiddling in the currency market to bring the dollar down. The Reagan administration supposedly embarked on this course in September to stave off the rising tide of protectionism in the Congress. But dollar-bashing is widely acknowledged to have no lasting effect in such matters.

Meanwhile, the forces of protectionism, which are also the sources of big political contributions, continue to have the ear of Congress. What do the protectionists want? In a word, subsidies. Call them tariffs, call them import quotas, call them what you will—all come down to consumers being bled via higher prices so that some few among us won't have to lose any sleep worrying about foreign competition.

Already we're paying mightily for their untroubled dreams. Last year, American car buyers, for instance, shelled out some $5 billion more than they would have paid if the Japanese hadn't been pressured into "voluntarily" limiting their car exports. And that's just one for instance. Steel is used throughout the economy. Shoes. Clothing. Finished food products. The list of major and minor items now subject to unfree-trade restrictions or up for the protectionist axe is long indeed.

Such intervention not only raises consumers' costs, chipping away at Americans' living standard (not to mention what it means for the foreign victims of our protectionism). It also is counterproductive: consumers who must pay more for, say, cars must now forgo buying, say, new lawnmowers—and so the US garden-equipment maker lays off workers, who can buy neither new cars nor much of anything else. Multiply these effects throughout the economy, and the true, deleterious effects of protectionism become obvious.

When the rhetoric and obfuscation are finally brushed away, protectionism reveals itself at bottom as a violation of individual rights. Free trade is simply part of freedom generally, the right to free association: individuals have the right to trade peacefully with whomever, and on whatever conditions, they choose. However disguised and in whatever form, trade restrictions abridge that right. Hence the price we pay for protectionism is denominated not only in dollars but in something far more dear—individual liberty.