This year, beginning with his State of the Union address, President Reagan has once again declared himself committed to free trade. But don't hold your breath. We've heard it before.
"Protectionism is not a problem solver," Reagan said in a typical 1983 speech; "it is a problem creator. Protectionism invites retaliation. It means you will buy less from your trading partners, they will buy less from you, the world economic pie will shrink, and the danger of political turmoil will increase."
Unfortunately, Reagan's commitment to free trade involves little more than rhetoric. His protectionist actions began almost as soon as he took office, with the import quota for Japanese autos announced in May 1981—a deviation excused as a "voluntary" agreement among Japanese auto makers but in fact rigidly enforced by the Japanese government.
And the effect, of course, was to raise the prices of all cars, as consumers paid "additional dealer markup" on a limited selection of Japanese cars and U.S. auto makers, facing less competition, sharply increased their prices. The U.S. International Trade Commission estimates that consumers paid nearly $1 billion in higher prices in 1981. By 1984 the cost of the quota had risen to $8.5 billion.
Reagan did change his mind (on this one) in 1985, but the Japanese government continued to limit auto exports to the United States. So consumers are still paying the price for Reagan's auto protectionism.
The second year of his administration, Reagan granted the steel industry relief from European and Japanese imports—again masked under the guise of "voluntary" restraints. And when this led to a surge of imports from other countries, notably Brazil and Korea, new restraints were slapped on in 1984 to hold all steel imports to 18.5 percent of the U.S. market.
The Institute for International Economics figures that these quotas jacked up the price of imported steel by 30 percent and of domestic steel by 12 percent. The estimated cost to consumers? $2.3 billion a year.
Of course, Reagan hasn't granted import relief to big industries alone. In 1983 he imposed tariffs on imported motorcycles, despite the fact that there was only one American-owned manufacturer, Harley Davidson. In short, Reagan's action benefited a single firm—for which each buyer of a motorcycle paid an additional $400–$600.
More-recent protectionist actions by Reagan include quotas on machine tools, tariffs on imported pasta, and import restrictions on Japanese computer chips . He has also renewed restrictions imposed by earlier presidents that sharply raise the price of clothing, sugar, dairy products, and many other consumer goods.
A 1983 estimate by Murray Weidenbaum, former chairman of the Council of Economic Advisers, put the cost to consumers of all U.S. tariffs and import quotas at $58.5 billion per year in 1980 dollars. Since consumer prices have risen about a third since 1980, the comparable figure for 1987 would be about $78 billion.
Restrictions on imports of clothing, sugar, steel, and autos alone cost $14–20 billion a year according to a 1985 study published by the Federal Reserve Bank of New York. Using conservative assumptions, noted the study, this is equivalent to a federal income tax surcharge of 23 percent for people earning less than $10,000 a year. (By contrast, the "surtax" for those earning over $60,000 is between 3 and 5 percent.)
And Reagan's violation of free-trade principles goes beyond import tariffs and quotas. The zealousness with which the administration has enforced national-security export controls has imposed heavy costs on U.S. businesses involved in international trade, with long delays and paperwork requirements for the export of many goods with no conceivable military value. The National Academy of Sciences found that fully 40 percent of U.S. manufactured exports, not counting military goods, are covered by export controls, costing U.S. firms $9 billion a year in lost sales and 188,000 jobs.
Reagan recently announced plans to liberalize such controls because of the trade deficit, but he shows no inclination to renounce foreign-policy trade sanctions against such countries as Cuba, Nicaragua, Libya, and South Africa, even though Secretary of State George Shultz has called them "a bad idea" that basically hasn't worked. The President's Commission on Industrial Competitiveness figures they cost U.S. firms $4.7 billion a year in lost sales.
In addition, taxpayers are paying about half a billion dollars a year, through the Ex-Im Bank, to offer low-interest loans to U.S. exporters, with the benefits largely accruing to just a few companies like Boeing and General Electric. Although the Ex-Im Bank has been around since the 1930s, the Reagan administration recently expanded it to make domestic loans as well, in retaliation against foreign export subsidies.
Finally, we can't ignore the direct and indirect cost to U.S. producers and consumers when our trading partners play tit for tat—as when Canada imposed a 76 percent tariff on U.S. corn to get even for U.S. tariffs on Canadian lumber. And, by blocking imports from developing countries, protectionism exacerbates the Third World debt problem.
So Reagan's latest push for competitiveness and opposition to protectionism must be taken with a grain of salt. Free-trade rhetoric is not enough. It doesn't make up for the billions of dollars we are paying for protectionism. Actions would speak louder than words.
Contributing Editor Bruce Bartlett is the E.L. Wiegand Fellow in Economic Policy Studies at the Heritage Foundation.