America’s Biggest Trade Secret : Closed Markets--Here--Are Killing U.S. Jobs; The Case for Free Trade
CHRYSLER CHAIRMAN LEE A. IACOCCA, AMERICA’S PREMIER TRADE philosopher, recently declared the United States to be the world’s “last bastion of free trade.” That might come as a shock to the U.S. computer industry.
In August, the Commerce Department determined that advanced Japanese flat-panel computer screens were being dumped in this country. “Dumping,” in the arcane world of trade regulation, means that the department thinks crafty foreigners are taking advantage of us by charging too little. The agency figured it would even the score by imposing a dumping duty that adds as much as $1,100 to the cost of making laptop computers in the United States.
As a result, U.S. laptop makers using the Japanese-made screens were hobbled in the competition against overseas producers. So Apple Computer is making its hot new laptops in Ireland instead of Colorado. Compaq is making a powerful new portable in Scotland instead of Houston. Toshiba moved part of its U.S computer-assembly operations from Irvine to Japan. Dolch Computer Co. moved production of its color-screen portable computers from Milpitas, Calif., to Germany.
An IBM spokesman described the dumping penalty as “an eviction notice from the U.S. government to the fastest-growing part of the U.S. computer industry.” He might have added that the decision has eliminated perhaps thousands of American jobs. And that it was unnecessary: There simply was no viable U.S. flat-panel display industry to protect.
Much has been made recently of America’s huge trade deficit with Japan, and that country’s difficult-to-penetrate markets. But Iacocca and Japan notwithstanding, U.S. trade policy is far more protectionist than most Americans realize.
In fact, the U.S. government maintains literally thousands of trade barriers that serve to limit imports of everything from clothespins to machine tools. These barriers are not cheap. Altogether, they cost American consumers $80 billion a year, according to a 1988 study by the Institute for International Economics, a Washington think tank devoted to trade issues.
Because of U.S. trade policy, you pay more for housing, food, clothing, cars and almost everything else. Imported trucks carry a 25% tariff. Import restrictions on cotton hats, bow ties and ski suits are the equivalent of a 63% tariff. Manhole covers from China carry a dumping penalty of 97%, imposed, like all dumping levies, because the government claims the product is being sold for unfairly little. On Swedish ball bearings, it’s 180%.
“The surest thing that the science of economics knows, and the one thing that almost every economist agrees about, is that trade barriers cost the country that puts them up more than it benefits them,” says Julian Simon, a University of Maryland economist. “It is like falling on your own sword--glorious but self-destructive.”
The United States last year traded $1 trillion in goods and services with other countries, but because we import more than we export--a chronic condition in recent years--our trade deficit last year was $66 billion.
Normally the province of technocrats and lobbyists, trade is now a campaign hot button. George Bush praises free trade while his appointees have assailed the Japanese and Canadians. Patrick J. Buchanan describes himself as a “trade hawk” and insists that the goal of trade should be “to win.” He supports a $1,000 tax credit to buyers of U.S.-made cars.
Bill Clinton generally supports free trade, but spoke more favorably about it several months ago. Edmund G. (Jerry) Brown Jr. was a staunch free-trader until he became a presidential candidate; now he denounces fast-track approval of the proposed free-trade agreement with Mexico and Canada. Protectionism is always a substitute for tackling serious problems at home.
Although these men appear to be engaged in a debate about jobs, or economics, or politics, or even ideology, none of those things has much to do with the way trade policy actually comes about. Trade restrictions, which almost invariably make Americans poorer, are adopted by Congress on behalf of groups that give members of Congress money. Taken together, the rhetoric of job-preservation, the bashing of foreign protectionism and the job-destroying import barriers that U.S. leaders are often ready to deploy add up to a deep hypocrisy on trade. “Fair trade"--protectionism--has thus become the latest refuge of scoundrels.
THE UNITED STATES IS HARDLY unique in sustaining a sprawling array of import restrictions. In general, the European Community is slightly more protectionist than the United States, though the difference is not great, and Japan has more non-tariff barriers and general resistance to imports.
On the other hand, Japan has a lower average import tariff than we do. As Harvard economist Robert B. Reich has observed, the Japanese in 1990 bought about $1,900 worth of imports each, not much less than the $2,050 worth of imports purchased by Americans.
And the United States, which imposes import quotas on more than 3,600 categories of goods, is far from the last bastion of free trade. Hong Kong, Singapore and the United Arab Emirates have markets far more open than ours. Even the Russian republic recently announced that, as a matter of principle, it would avoid imposing import quotas.
At first glance, U.S. trade policy seems designed only to encourage profligacy. When you buy an imported plastic book satchel, for instance, the price includes a 20% duty. But pick one of reptile leather, and the duty is just 4.7%.
Lobster is duty free; with the savings, struggling parents may afford infant food preparations, which carry a 17.2% tariff. Orange juice carries a 40% tariff. Perrier is less than 1%. And mink furs are imported with no tariffs at all. That’s one of the first lessons about protectionism: The people it hurts most are the poor.
Few commodities offer as thorough a primer in U.S. trade policy as sugar. Other countries have a better climate for sugar-growing, as well as cheaper labor and land. Caribbean growers produce sugar for far less than U.S. growers. But the U.S. government has protected or subsidized sugar-growing here since 1816. Thus, for almost our entire history, sugar prices in America have been two to four times world levels. A 1988 Commerce Department study figured the U.S. sugar program was costing us $3 billion a year.
(The American Sugar Beet Growers Alliance says the sugar program actually makes money for the government--from duties on imported sugar, for example. But these duties are ultimately paid by consumers.)
If sugar barriers haven’t done American consumers much good, they have been effective at destroying jobs. High sugar prices have wiped out nearly 9,000 U.S. food-industry jobs since 1981, the Commerce Department estimated in 1988. In the Red River Valley of Minnesota, meanwhile, protected and subsidized sugar growers have bid farmland rents so high that soybean growers have trouble finding room to plant.
“Soybeans are our most competitive export crop, and American sugar producers have never been competitive since the birth of the American republic,” says Dennis Avery, former senior agricultural analyst at the State Department. “It is insane policy for the government to crucify the soybean farmers in order to pad the profits of the sugar growers.”
There are only 11,000 U.S. sugar farmers, but they manage to make their voices heard in Washington. Congressmen receive $500,000 a year from the sugar lobby.
Ironically, the U.S. trade balance is probably more favorable than the statistics indicate, because the government does a much better job accounting for imports than for exports. The National Academy of Sciences estimates that the United States undercounts manufactured exports, for example, by $10 billion to $20 billion a year. But even accepting government statistics at face value, our annual trade deficits have shrunk more than 50% since 1987.
Protectionism is nothing new in America. The Declaration of Independence denounced King George III for “cutting off our trade with all parts of the world,” but in 1789 the new Congress passed its first tariff--mainly to raise revenue, but also to temporarily protect “infant industries.” More than 200 years later, the U.S. Tariff Code fills two hefty volumes with 8,753 different rates, and an army of specialists and advisers has sprung up to help importers get around the rules.
In the 19th Century, generous bribes to congressmen could win high tariffs, some of which live on today, long after the congressmen have turned to dust. The notoriously protectionist Smoot-Hawley Act of 1930, which imposed stratospheric tariffs, prompted other countries to retaliate with trade restrictions of their own and helped cause the Depression.
Limits on imports do have a nasty way of becoming limits on exports. In 1983, the United States imposed textile quotas on China that blocked $35 million worth of Chinese goods; China retaliated by cutting its purchases of U.S. agricultural products by $1.8 billion.
U.S. trade officials rarely lack high-sounding rhetoric to justify reducing imports. Usually, the rationale is that jobs are at stake. That’s true, but the evidence is overwhelming that trade barriers cost more jobs than they save. Just last year, the U.S. International Trade Commission, a federal agency, concluded that ending import quotas would actually raise U.S. employment.
Steel import quotas, which expired March 31, are a good example. The Institute for International Economics estimated that each steel job “saved” by quotas cost the equivalent of $750,000 a year; a 1987 study by Washington University’s Center for the Study of American Business estimated that quotas eradicated three other jobs for every steel job preserved.
Consider Davis Walker Corp. The 65-year-old Los Angeles concern was the nation’s largest independent wire maker when the Reagan Administration imposed “voluntary restraints” on steel imports. Davis Walker had relied on imported steel, but subsequently found itself forced to buy 60% of its steel from more expensive U.S. producers.
Suddenly, Davis Walker couldn’t compete with Canadian wire makers, who were under no such constraints. Mounting financial woes forced it to close plants in Dallas, Houston, Memphis and New Orleans. In 1989, Davis-Walker filed for Chapter 11 bankruptcy protection.
When the company emerged from Chapter 11 two years later, its new owners included its largest unsecured creditor, which also got three seats on its board. That creditor was Mitsui & Co. USA, a steel supplier. So an attempt to protect U.S. industry from foreign competition succeeded in delivering partial ownership of a venerable American company to a firm whose corporate parent is Japanese.
Japanese markets are far from wide open, of course, to that nation’s detriment. The office of the U.S. Trade Representative estimates that if Japan opened its rice market, for example, American farmers could sell $656 million worth of rice annually to the Japanese, who would then enjoy lower prices.
But agricultural trade policy is inextricably linked to domestic farm policy. Thus, last year Washington gave $867 million in direct subsidies to U.S. rice growers, not counting water subsidies and low-cost loans to foreign governments (to induce them to buy U.S. rice). Americans would benefit far more from ending U.S. rice subsidies than from opening Japanese markets.
Such subsidies go to the heart of U.S. hypocrisy on trade. America takes a dim view of foreign governments subsidizing foreign companies, but we don’t practice what we preach. The United States condemns the EC for its farm export subsidies, even as Washington will spend more than $1 billion this year on similar subsidies. Last year, the United States paid a 94% subsidy on wheat exported to Norway, making wheat cheaper in Oslo than in Chicago.
IF U.S. TRADE BARRIERS are so bad, what’s the secret of their stubborn persistence? First, most people can’t tell in the supermarket or the mall why things cost what they do. The second reason is Congress.
Members of Congress collect $2 million a year in contributions and “honorariums” from the dairy lobby, which gains protection from Australian and New Zealand dairymen. Congressmen receive more than $1 million a year from auto-industry political action committees and the United Auto Workers, all of whom have enjoyed government shelter from the rain of foreign vehicles.
Opponents of free trade cite Japan as a case study in the power of protectionism. But for 20 years after World War II, Japan had trade deficits. Its economic miracle is built not on protectionism, but on good education, low taxes, a high savings rate and an obsessive work ethic. Between 1970 and 1985, its manufacturing productivity increased almost three times faster than ours did. Like most Americans, the Japanese make money the old-fashioned way: They earn it.
Just as naive as blaming Japan is viewing foreign trade only in terms of jobs. Reliable Japanese automobiles, for example, have relieved many Americans of the costly burden of frequent car repairs, and now even U.S. cars are better. Japanese machine tools have helped many U.S. industries build better products and compete on world markets.
The rising fear of imports misses the point. Trade allows people everywhere to benefit from increases in productivity anywhere, yielding a higher standard of living for all. Trade binds humanity together for mutual benefit. Trade and peace go hand in hand. Trade wars, on the other hand, can become shooting wars.
Fortunately, there is hope. Many nations are moving toward freer trade. Economic barriers between European countries are falling, and the same seems likely in North America, although there is the danger that trading blocks will become exclusionary on a larger scale.
The global expansion of trade since World War II has already produced the greatest era of prosperity in world history, making Ralph Waldo Emerson even a better philosopher of trade than Lee Iacocca. “If a talent is anywhere born into the world,” Emerson observed, “the community of nations is enriched.”
Never before have those words been truer.