The Persistent and Costly Myths About Trade Policy
U.S. Trade Representative Carla A. Hills talks about using a crowbar to open Japanese markets. Representatives and senators posture before the cameras, denouncing restrictive trade practices abroad while urging similar practices at home. Last year, the U.S. government cited Brazil, India and Japan for unfair trading practices and opened negotiations with Japan to remove barriers.
After a year of discussion, part of the logjam broke. The Japanese government agreed to stop some of its restrictive practices. The reaction surprised many. Japanese citizens cheered, while many representatives and senators snarled.
Are the Japanese people insane or perverse? Not at all. Many understand that the principal costs of their government’s restrictive trade practices fall on them. Despite their legendary hard work and self-discipline, they enjoy a standard of living far below the level they expect, given their work effort. They pay high housing prices, in part because of their tax system, but also because their sawmills are inefficient and often antiquated. If they carry out their recent commitment to remove restrictions on lumber imports,housing prices will fall.
The story of housing is repeated for many Japanese consumer goods, including rice, long a staple of the diet. Even an occasional visitor to Japan cannot fail to notice that the price of many consumer goods in Tokyo supermarkets has hardly changed since 1985, despite a 40% to 50% appreciation in the value of the yen. The appreciation increased Japanese purchasing power in world markets, but prices for gasoline, oranges, meat, fish, rice and other products that can be imported from the rest of the world showed little response to the appreciation. No wonder Japanese consumers cheer when some of the restrictions on imports are reduced. They know that they will be the principal beneficiaries of increased competition and freer trade.
One of the myths in current trade disputes is that restrictive Japanese trade practices exploit us. In fact, they are the principal losers. It is their standard of living that is reduced.
Why, then, are U.S. politicians so eager to see the practices changed? The politicians claim to be concerned about the trade deficit with Japan. They allege that bringing pressure on the Japanese to import more will help lower the deficit and give our producers a larger share of the Japanese market.
This, too, is a myth, and a highly misleading one at that. Our trade deficit depends on the amounts in the aggregate that our citizens save and invest. Similarly, Japan’s trade surplus reflects their investment and saving decisions. Japanese in the aggregate save more than they invest in their own country. Much of the excess comes here. We invest more than we save, so we borrow from the Japanese and others.
The amount we, as a nation, borrow is equal to the difference between our total imports and our total exports (plus net interest payments). This is not an accident; it is a consequence of the way the accounts are kept. Trade restrictions or dialogues about opening markets have little effect on total investment and total saving, so they also have little effect on the trade deficit.
Congressmen are usually interested in trade restrictions and opening markets for a different reason. They want to help their constituents and the people who contribute to their campaigns. They press for measures to help these groups, even if they harm others. Opening Japanese markets for one or another commodity benefits the sellers of that commodity--such as timber producers or employees of sawmills in the Northwest, which prefer to sell lumber instead of logs. The overall trade balance is unaffected. Because total trade is unaffected, someone somewhere loses when lumber producers gain.
The best that can be said about so-called market-opening measures is that they are better than restrictions on imports from abroad. Japanese consumers benefit from increased competition and lower prices. And people here avoid the high costs of import restrictions that are introduced as retaliation against foreign restrictions.
Unfortunately, the United States has not limited its actions to opening markets. There are now restrictions on many imports into the United States--in response to demands by special interests. Consumers pay two or three times the world price for sugar. Textile imports have been limited since 1962, raising the cost of clothing to consumers. The steel industry has sought and received protection, off and on, for more than a century, and it has been increasing in recent years. Automobile imports from Japan have been subject to quotas--so-called voluntary restraints--since 1981. Semiconductors are sold under an agreement negotiated in 1986.
All of these agreements are costly to American consumers for exactly the same reasons that Japanese import restrictions hurt Japanese consumers. And none of the restrictions can be called successful in reducing the share of imports. In textiles, steel, autos and semiconductors, the share of imports versus domestic production has increased despite the restrictions. For example, in 1980 imports of steel were 14% of domestic production. By 1985, the ratio had doubled to 28%.
That isn’t the end of the story. Instead of concentrating on high-volume, lower-priced sheet steel, foreign exporters concentrated their limited sales on higher-priced, more profitable items. Their share of the alloy steel market rose from 2% or 3% before 1980 to about 10% after quotas were placed on total steel imports.
Limiting imports of less expensive foreign steel raised the price to users of steel in the United States. They had to buy higher-priced domestic steel, so their costs of production rose, putting them at a competitive disadvantage.
Automobile producers are big users of steel, so their competitive disadvantage against foreign producers worsened. Instead of importing sheet steel to be made into autos, the steel came in as part of a foreign auto body. And domestic producers made more parts abroad, where costs were lower. Other countries entered the market. South Korea followed Japan in steel, then autos and now computer chips, after Japanese exports of these products to the United States were restricted by quotas.
Estimates put the cost to U.S. consumers of the 1981 import restrictions on Japanese cars as high as $1,000 per car by 1983 or 1984. The increased cost reflects many changes induced by import restrictions. The Japanese sold us higher-priced cars with higher markups. They added costly extras, such as air conditioning, automatic transmissions and power steering. The table shows the shift in auto imports from Japan. Low-cost, stripped-down cars became harder to find. Consumers were hurt.
Next time your congressman tells you about protecting American industry by restricting imports, tell him no thanks. Like other protection rackets, it’s costly and harmful to your pocketbook.
IMPORT EXTRAS Share in percent of Japanese imports with the following equipment for years indicated:
‘77-80 1981 1987 Automatic Transmission 28% 30% 64% Power Steering 20 32 85 Air Conditioning 27 29 57
Source: Ward’s Automotive Reports
