Protectionism May Bite Hand That Creates It

One of the most sensitive issues facing the Senate as it heads into campaign season is whether to provide more protection for American industry against foreign assault. The House has already passed a bill that would provide a lot more and now the Senators must decide whether that’s really what the voters want.

On the surface, it’s easy to conclude that the House has taken a politically popular step. Industries from textiles to steel have been seeking help to preserve what’s left of shrunken markets. Job losses have been monumental. The House vote on the measure was overwhelming, 295 to 115, with 59 Republicans joining the Democrats to provide a margin that would override a presidential veto.

Protection, however, is a complex issue. It involves more than the obvious pain of those hurt directly by less expensive imported goods. And it involves more than the predictable voter attitude that protecting American jobs is a good thing to do.

The House bill would be one of the toughest pieces of protectionist legislation in decades. It would impose punitive tariffs on imports from countries that have “excessive trade surpluses” and don’t trim exports to the United States by at least 10% a year. Other provisions would hit Third World countries, which have low wages and poor labor standards, and provide for mandatory retaliation when the International Trade Commission finds U.S. workers have been injured by import competition.

The White House has expressed dismay at the measure, predicting that it will lead to a trade war with our major trading partners. The Senate is working on a milder bill, but it too would force the President to retaliate against some foreign competitors. Fortunately, time is getting short and there’s considerable doubt that the Senate can get a final bill together in time. Even if it does, conflicts with the House measure may make it impossible to reconcile differences before the session ends.

On the other hand, in a year in which the Senate has passed a radical tax-reform measure with little debate and almost no last-minute changes, anything is possible. And if the massive tax changes now facing a House-Senate conference committee aren’t scary enough in terms of potential economic impact, the move toward massive protectionism is a reason for some real terror.

What is usually forgotten amid the campaigning by those whose jobs or profits are being eroded away by imports is the true cost of protection. It is forgotten because it is not easily measured. Yet there is no question that restricting imports forces U.S. consumers to pay more for goods they buy, in many cases substantially more.

A study by the Federal Reserve Bank of New York published last summer translated these higher prices in protected industries into an effective income tax surcharge--and a dramatically regressive one at that--ranging from 66% for those in the lowest income categories to 5% for the wealthy.

It is also clear that lifting the pressures of foreign competition has an impact on how effectively U.S. industries operate. American steel and automobile prices both have risen under the umbrella of voluntary quotas, bolstering profits temporarily but not necessarily strengthening resolve to make more operations more competitive. In the long run, protected industries tend to slip even farther out of the race.

What of the voters? Do they want protection anyway?

The experts say that’s by no means clear. Greg Schneiders, an adviser to President Jimmy Carter and now a political pollster, has recently completed a national survey on the issue. He found that when you ask people whether they would favor a candidate who wants to limit imports to protect jobs, 69% say yes. Ask the same people in the same interview whether they would favor a candidate who backs free trade to make available the best and lowest cost products to American consumers and 61% say yes to that, too.

Other polls have shown that many Americans blame U.S. industry for its own ills.

Schneiders’ conclusion is that candidates seeking to capitalize on the trade issue run a good chance of shooting themselves in the foot. It is a good warning for the Senate to heed.