Exports Vs. Imports: Congress Also Flunks
I recently asked my undergraduate students which is better for the U.S. economy: exports or imports? Exports, 80% answered. Always? They said yes.
I flunked them.
My students are not alone. Import bashing is in vogue. Witness the passage on April 29 in the House of Representatives of a blatantly protectionist trade-legislation amendment sponsored by Rep. Richard A. Gephardt (D-Mo.). Never mind that inexpensive foreign goods benefit all consumers. Never mind that protectionism drives up the price of components like semiconductors, making U.S. products that use them more expensive for foreigners. And never mind that our trading partners will almost certainly retaliate and buy fewer of our exports.
Congress is fighting the wrong battle--imports--with the wrong policy--trade restrictions. But before considering better policies, let’s distinguish major battles from minor skirmishes.
Congress would have us believe that imports strip American workers of their jobs. Congress is wrong. Imports do not destroy jobs. They shift jobs from one industry to another. Some workers are hurt; but others are helped.
What do the Japanese do with the dollars they earn selling automobiles to us? They spend them--maybe directly in the United States for food. Or maybe they buy oil from Saudi Arabia. But then the Saudis are likely to spend these dollars in the United States for AWACS airplanes. In either case, U.S. employment will shift from automobiles to the food and aerospace industries. Jobs will not be lost.
The Japanese have another option: invest their dollar earnings in the United States. They might, for example, build an automobile factory here. If so, U.S. employment and output will rise. The fact that the Japanese will repatriate a portion of the extra output as profit harms no one.
There is a storm cloud, however. Foreigners, such as the Japanese and West Germans, have chosen to invest by lending tremendous sums to the U.S. government. If the federal government is not using this money in ways that expand productivity, then paying back foreign lenders--with interest--will be painful. But this is an argument for controlling the federal deficit, not for blocking imports.
Of course, some of the dollars we spend abroad never return. They circulate around the globe to facilitate international trade. This circumstance is ideal--for us. We’ve managed to swap pieces of paper for real stuff--German cameras, French wine and Japanese cars.
No matter which of these options is chosen, the result is the same. If the United States buys less from Japan--or anywhere else--foreigners will buy less from us. We will preserve jobs in steel, textiles and automobiles. But we will lose a comparable number of jobs throughout the rest of the economy. In addition, protectionism is prohibitively expensive. Every job preserved in a protected industry, like automobiles and steel, costs consumers $100,000 or more.
Politicians propose import restrictions in the name of equity and compassion. True, the restrictions ease the frightful pain of unemployed auto workers. But, as we have seen, the very same restrictions can victimize farm workers, whose average pay is typically only a fraction as high. Our tariffs have raised prices of sugar, clothing and automobiles paid by families with modest incomes who rely on these inexpensive foreign products. So where’s the equity?
If fighting imports is the wrong battle, what is the right one? Simple. Auto workers, steelworkers, textile workers and others have been displaced by foreign imports. Even when they find new jobs, their new wage is likely to be a puny fraction of their old wage. They need help.
Now that the important problem is clear, what is the solution? Trade reform is now before Congress. The House and Senate are considering government-sponsored retraining programs. But in the past, these programs have been disappointing. Mandatory training--training that is required in order to receive cash assistance--rarely works. But on-the-job training does systematically work. So if trade reform is to be effective, it must quicken the process of matching displaced workers with permanent jobs.
We need imaginative policies. Let’s borrow two ingenious proposals by Robert Litan and Robert Lawrence of the Brookings Institution. Pay a worker displaced by foreign imports a cash grant. But pay the grant only after he or she accepts a new job. The grant ought to be sufficient to close much of the gap between the worker’s old and new wage.
By paying the grant only after the worker finds new work, the policy will accelerate, not retard, matching displaced workers with new jobs. But by closing much of the gap between the worker’s old and new wage, the workers are insured against catastrophic loss of income. Current policy pays displaced workers extended unemployment insurance. Litan and Lawrence convincingly argue that the existing policy diminishes a displaced worker’s incentive to find, and accept, a new job. The agony of unemployment is thereby prolonged.
Of course, subsidizing displaced workers has a cost. Taxpayers foot the bill. But spreading the cost of assistance across all taxpayers is surely more fair than blocking imports and thereby imposing the costs on low-income consumers or workers in a particular export industry.
Litan and Lawrence have an even bolder idea. Foreign imports can devastate entire geographic regions. Let’s extend unemployment compensation to cities and counties. For a modest annual fee, the federal government could insure municipalities against a serious erosion of their tax base due to trade-related factory closings.
Protectionism is a false promise. Yet we need not become knee-jerk free-traders. Under exceptional circumstances, carefully crafted, precisely targeted tariffs can be useful. Swapping one type of job for another can be fair and desirable. And retaliation against foreigners who abuse international rules of fair trade can be appropriate. But retaliation can easily backfire. Unfair trade practices account for only a modest fraction of our trade deficit. And the United States itself is guilty of numerous infractions. We limit imports of sugar, beef and other agricultural goods. In fact, we impose tariffs on more than two-thirds of our imports.
Under any circumstance, tariffs should be used only for temporary relief. Under exceptional circumstances, firms need a limited amount of time to establish, or recover, a competitive edge. And workers need time to prepare for new jobs. Tariffs can provide the necessary time. But no tariff should shield an industry for long. Otherwise the inevitable adjustment is postponed and made all the more painful.
Job loss--due to trade or any other reason--is a horror. If Congress is a bit imaginative and avoids false nostrums, we can soften the blow of foreign imports without creating whole new classes of victims.
