Professional Documents
Culture Documents
SSRN Id91369
SSRN Id91369
Policy Analysis
No. 10 July, 1996
The Dumont Institute for Public Policy Research, 236 Johnson Avenue, Dumont, NJ
07628 Telephone: (201) 501-8574 e-mail: info@dumontinst.com
http://www.dumontinst.com
Introduction
This article is divided into four sections. The first section is on the philosophy
of protectionism and reviews several of the most commonly given reasons that have
been used to justify protectionism over the past few hundred years. The author points
out that these arguments generally support the producer's position, often to the
detriment of consumers and the general public. Each argument is analyzed empirically
and logically. The general conclusion is that the case against protectionism and in favor
of free trade is strong from both an economic and liberal democratic perspective.
Part two takes a look at the cost of protectionism, with emphasis on the case in
the USA. The auto, steel, textile and agricultural industries are given special attention.
Some nonmonetary costs often overlooked or ignored by many commentators are also
discussed. These costs include the net deadweight employment loss, social harmony
costs, reduced choice and the violation of rights that is inherent whenever consenting
Part three examines antidumping policy in the USA from both a theoretical and
practical viewpoint. After a review of the economic and legal background of the
2
antidumping laws and a look at how they are administered, the author proceeds to
examine the many problems inherent in the present policies, such as the many
computational problems, the harmful effects of antidumping policy and the weakness of
the predatory pricing argument. The section concludes with a discussion of the
philosophy of antidumping policy and examines issues such as the ethics of using the
approach to antidumping1 and the relationship between antidumping laws and the
international trade in Europe. The author examines the options for trade policy in
Europe, with emphasis on emerging market economies, from both the rights and
utilitarian perspectives. The author concludes that, while total and immediate free trade
is the best policy, policymakers may find it necessary, for practical reasons, to adopt a
gradualist approach that involves temporary protection. Of the two options examined --
mankind.2
thought that allowing foreign traders into the polis would corrupt the soul. Aristotle4
thought that exchanging products for money had a corrupting influence, and thought
that the best state was one that was self-sufficient. And while the reasons for
advocating protectionism have changed over the centuries, the protectionist philosophy
has not gone away. It has merely evolved and become more sophisticated.
Perhaps the main reason why protectionism has failed to die, even though
protectionist arguments have been refuted for centuries,5 is because special interests --
auto manufacturers, steel companies, the textile industry, and so forth --have much to
gain by enlisting the aid of government to protect them from foreign competition,
have little to lose by any particular protectionist legislation, and may not even know that
the measure is costing them money in the form of higher prices. As Vilfredo Pareto
said as far back as 1927, "A protectionist measure provides large benefits to a small
number of people, and causes a very great number of consumers a slight loss. This
who has to spend an extra $5 for a shirt because of some protectionist legislation will
not go to the capitol to protest. But the textile industry, which stands to gain millions
of dollars by the measure, will hire full-time lobbyists to push its agenda through the
legislature. Public Choice economists call this behavior rent-seeking, the attempt to
seek special privileges or protection from government, or to get others to pay for your
benefits.7
4
While it is obvious that protectionism results in higher prices and benefits the
few (producers) at the expense of the many (consumers), perhaps the strongest
of others. 8
Through the centuries, some individuals have discovered how to satisfy their
wants without earning their way or stealing. They ask the government to do the
stealing for them.9 They band together to ask government to take from some
(consumers) and give to others (producers) in a manner that would be a crime if they
did it themselves.10
But while the moral argument is the strongest, the economic literature
One of the more curious aspects involved in trying to restrict imports is trying to
determine exactly where the product in question is coming from. The Volvo 780 that is
sold in the USA, for example, includes parts that are made in France, Japan, Germany
Singapore, the USA, Canada, Taiwan, South Korea, Ireland and Italy as well as
definitions to determine whether a particular product is an import and what quota or rate
of tariff applies.12
example, some protectionists argue that they need government protection because some
5
foreign government is subsidizing some product. But if this were true (and it
sometimes is true), then it would be cause for celebration, because it means that some
foreign government is paying part of the cost for a product that American consumers
are purchasing. Rather than paying $20 for a bottle of fine French wine, they may pay
only $12 because the French government is subsidizing the French winemaking
industry, for example. While the subsidy might make it more difficult for the
California and New York wine industries to compete, the vast majority of consumers
benefit by the practice. Allowing the U.S. government to force consumers to pay a
tariff or forcing French wine makers to raise their prices only hurts consumers.
A variation of the subsidy argument is the dumping argument, the belief that
foreign manufacturers are selling their products in the domestic market for less than
cost, or for an "unfairly low" price, whatever that means. Yet, oddly enough,
consumers never complain that prices are too low. It is the domestic manufacturers
who complain, and ask for government assistance in preventing or reducing the
competition that they face.13 The empirical evidence suggests that dumping either
never exists or rarely exists, and only then for brief periods of time.14 But the mere
fact that a domestic producer can bring an antidumping action has a chilling effect on
price competition and results in higher prices than would be the case in the absence of
profits. That is why companies resort to it only rarely, usually in cases where selling
Another argument that has been put forth in favor of protectionism is that the
failure to protect domestic industry from foreign competition will result in the loss of
jobs. But while this is sometimes true, the evidence suggests that more jobs are lost by
protectionism than are saved by it.16 According to one study, the "voluntary" restraint
6
agreement placed on steel in 1984 saved 16,900 jobs in the steel industry but destroyed
52,400 jobs in industries that use steel.17 And, perhaps more importantly, if inefficient
industries are protected from more efficient competitors, then government is being used
to subsidize inefficiency, which has a retarding effect on economic growth and the
standard of living. It does not make sense to force consumers to spend an extra
$160,000 a year in the form of higher prices to protect a job in the auto industry that
Another interesting argument that makes no sense logically is the trade deficit
argument. Today's policy makers still subscribe to the mercantilist view that a surplus
of exports over imports is good, and a deficit is bad.19 Yet while the U.S. current
account deficit quadrupled between 1982 and 1987, more than 13 million jobs were
created -- more than were created in Europe and Japan combined in the last ten years.20
And since both the buyer and seller gain from an exchange (otherwise there would be
no exchange), how can it be said that purchasing the product of one's choice is harmful
to the economy as a whole if it is good for each individual? The trade deficit argument
(as well as many of the other protectionist arguments) begins from the implied
assumption that domestic producers are somehow entitled to the business of the
country's populace, and that foreign producers who do business with the local
manufacturing jobs are being replaced with lower-paying service industry jobs. Yet the
evidence shows that the number of jobs in manufacturing in the USA has remained
about the same for the past few decades, and production has increased because of the
argument is the "hamburger flipper" argument, the view that, unless American
7
computers.23 But studies have shown that the vast majority of jobs lost are due to
recession and not structural change, and that most unemployed workers find new jobs
quickly.24 And while it is true that workers who lose their steel or auto jobs often have
to be content with lower wages in their next job,25 the trend shows that low-paying
jobs are the ones being destroyed and higher-paying jobs are being created, for the
most part.26
takes the position that industrialized countries need protection because they cannot
compete with third-world countries that have much lower wage rates. But what these
proponents ignore is the fact that industrialized countries can afford to pay higher
wages because their labor force is more productive, partly because of higher capital
investment. And even if foreigners can undersell a domestic company in some labor-
intensive industries, consumers benefit because they can buy what they want for less
money, which means they will have more to spend on other goods and services.
One of the most popular arguments in favor of protectionism is that trade should
be "fair" rather than free. Proponents of this argument take the view that it is unfair for
other countries to protect their domestic producers or dump their products on American
markets at low prices.27 What these advocates fail to see is that fairness is a process,
not an outcome. This erroneous view leads to any number of other fallacious
arguments. A transaction is fair if consenting adults are free to enter into it without
coercion, and it is unfair if some special interest group is able to get the government to
use force to increase the prices that consumers must pay for the goods and services of
their choice. We cannot determine fairness by looking at the way things are. We must
8
look at how things got that way.28 If the current situation is the result of consumer
argument, which starts with the premise that no country should have an "unfair"
competitive advantage over another. They take the view that it is somehow unfair for
some foreign government to subsidize one of its industries to make it more competitive
in American markets. Those who argue for a level playing field are actually arguing
against the best interests of the vast majority of the population, at least in cases where
they want foreign governments to stop subsidizing the products that domestic
consumers buy.
One of the earliest arguments for protectionism, one that was especially strong
during the eighteenth century, is the infant industry argument.29 According to this
argument, the government should protect a new industry from foreign competition so
that it can eventually grow strong enough to hold its own against foreign competition.
This argument is especially strong today in the emerging democracies of Eastern and
Central Europe, Asia and Africa. The problem with this view is that, historically, once
nearly impossible to remove the protection because of the special interests that stand to
lose if left free to sink or swim in the marketplace. And even if an industry can be
weakening them.
This argument was used in the USA to give "temporary" protection to the auto, steel
and textile industries. According to this line of reasoning, the government provides
9
temporary protection so that an ailing industry can retool, become more productive, and
strengthen its international competitive position. The problem with this argument is that
it has not worked in practice. The American auto industry has been receiving protection
since the early 1980s, yet it still does not make cars that American consumers want.31
make a competitive product. Industries that know they can get protection use their
resources to lobby government to continue the protection rather than plowing their
One of the most compelling arguments in favor of free trade, from a utilitarian
specialize in the things you do best and trade for everything else than to attempt to
provide everything all by yourself. Wealth and the standard of living are enhanced by
economic growth and restricting trade inhibits growth, which leads to a lower standard
of living.
Another utilitarian argument for free trade is that the masses benefit by it.34 It
is only the special interests that stand to lose by free trade, and even the special interest
groups may gain more than they lose by free trade, at least in the long run. For
example, an automobile company may benefit in the short run by convincing the
legislature to limit foreign imports because it will be able to sell its automobiles for a
higher price than would be possible in a free market. But if the steel industry also
convinces government that it needs protection, then auto companies will have to pay
more for their steel, so they are harmed. If the tire companies also get government
10
protection from foreign competition, the automobile companies will have to pay more
for tires. And on and on. Policies that restrict trade are essentially welfare programs
classic example of special interest groups using the force of government to obtain
benefits at the expense of the majority. Protection is really just exploitation of the
consumer.35
But perhaps the strongest utilitarian argument against protectionism is its cost,
in both monetary and nonmonetary terms, which we will discuss below. Protectionism
raises prices, increases inefficiency and destroys more jobs than it saves. The price
produce and what to charge, becomes distorted under a protectionist regime, because
the true market price is obscured by tariffs, quotas or other barriers. As a result,
There are several other utilitarian reasons for free trade. For one, it enhances
international cooperation. Countries that trade with each other are less likely to go to
war than are countries that erect trade barriers to prevent foreign goods from crossing
their borders.37 "Buy domestic" campaigns are costly to consumers (and taxpayers, if
the government buys more expensive domestic products instead of cheaper foreign
foreign countries cannot receive American dollars for their products, they will not be
able to use American dollars to purchase American goods and services. Dollars that
flow out of the country must eventually flow back into the country.39 And trade
While most economists look at free trade issues from a utilitarian perspective,
free trade can also be looked at from a rights perspective. The rights view of free trade
begins with the premise that individuals own their own bodies. From that premise, it
follows that individuals own the fruits of their labor. As owners, they have the right to
trade the fruits of their labor for the fruits of the labor of others. Any restrictions on
this activity violates their rights. This view is in keeping with the classical liberal view
of government, which restricts government activity to the defense of life, liberty and
property.41 If government goes beyond these parameters, it must necessarily take from
some and give to others, which is parasitical. In the case of trade, adopting a policy
that favors producers over consumers is parasitical because it benefits producers at the
expense of consumers. Consumers must pay higher prices because producers receive
something they are not entitled to -- the patronage of consumers who would otherwise
choose to buy the products of foreigners. Trade policies that prevent consumers from
buying the products of their choice violate their rights to property and contract. If
consenting adults want to enter into a contract, no one else has a right to interfere. The
role of government is to protect the sanctity of contract, not to dictate whether particular
A. Introduction
There is no doubt that protectionism costs. But what is not so clear is how
much it costs and who must pay. And while protectionism results in a deadweight loss
-- there are more losers than winners -- some individuals and groups gain from
protectionism. And those who stand to gain have the ear of the legislature, for the most
part.
12
protectionism in particular cases. One study estimates that trade restrictions raise the
cost of imported goods in the USA by 20%, on average, and raise the price of
comparable domestically produced goods by 10% to 14% because of the reduced price
industries between 1972 and 1982 concluded that protection is not an effective way to
stimulate domestic output because the reactions of users tend to offset the actions of
producers. 43
Another factor that is often overlooked is the disparate impact that protectionism
American consumers $14 billion in 1984, which amounted to a 23% income tax
surcharge for families that had less than $10,000 in income, but amounted to only 3%
for families with incomes of over $60,000.44 Protection in the textile industry alone
has been estimated to cost poor families almost 9% of their disposable income.45
Another study found that textile quotas cost the poorest fifth of the U.S. population
"Costs" of protectionism include not only direct costs, such as higher prices,
but many indirect costs as well. Protectionism destroys more jobs than it creates, so
there is the employment cost. Quality may also decline, if higher quality products
become less available or totally unavailable as a result of protectionism. And there are
losses of individual rights, since consumers and producers -- buyers and sellers -- are
less free to enter into contracts. And there is a cost involved in administering the
various protectionist schemes, which must be paid for by taxpayers and consumers.
And since protectionism raises prices, reduces quality and incurs administrative costs, it
B. Monetary Costs
automobiles cost consumers about $14 billion in the mid-1980s.48 Quota rents -- the
amount by which foreign sellers can raise prices because of the auto quota -- have been
estimated to be between $2.2 billion and $7.9 billion a year.49 The foreign deadweight
reasonable to expect that some foreign deadweight loss will occur, since the quantity
they can sell will be reduced by quotas, even though they may be able to charge a
higher unit price for the units they are able to sell.
On a cost per auto basis, one study estimated that import quotas added $2,400
to the price of a Japanese car, on average.51 A different study determined that the
annual cost of quotas was $241,235 per auto job saved.52 Another study put the
estimate at between $181,000 and $188,000, depending on the year.53 But even if the
annual cost of saving one job in the auto industry is only $100,000, it would still pay,
in terms of overall welfare, to remove the blockages to free trade and pay each
displaced auto worker $40,000 or $50,000 a year for awhile,54 until they can find
another job.
estimated that the induced increase in the price of imported steel was 30%.55 This
study also estimated that the induced increase in the price of domestic steel resulting
from this agreement was 12%.56 Various studies57 have estimated the cost of restraints
to U.S. consumers to be $1.1 billion,58 $2.0 billion,59 or from $4.3 billion to $5.9
billion.60
14
Another cost, although more difficult to trace, is the cost that protection in one
industry has on other industries. For example, if the steel industry receives protection,
steel-using industries have to pay more for their steel. A government study of the effect
1985, $5 billion in 1986, $4.8 billion in 1987 and $0.6 billion in 1988.61 And the
foreign companies that are willing to sell steel for lower prices are forced to raise their
prices as a condition of doing business in the USA. U.S. trade policies sometimes
actually increase the profits of foreign companies because the reduced quantity they can
sell is more than offset by the higher price they can charge. Korean steel companies
would actually make less profit if the USA removed its trade restrictions, which puts
the U.S. Congress in the curious position of helping foreign companies that are
One study conducted a few years ago estimated the induced increase in the price
of textiles to be 21%63 A more recent study estimated the price increase to be 28%.64
For apparel, various studies have estimated the cost increase attributable to
protectionism to be 39%,65 50%,66 46% to 76%, 67 and 53%. 68 The induced increase
in the price of domestic goods has been estimated to be between 3%69 and 17%70 for
the findings are consistent in their conclusions that protectionism results in higher
prices. Protectionism costs between $50,00074 and $134,68675 a year for each textile
job saved and between $39,00076 and $81,973 77 for each apparel job.
15
The various farm commodity programs had an annual deadweight loss of about
$6 billion in 1987, according to one estimate.78 But there were gainers and losers.
Producers gained $16.6 billion while consumers lost $4.8 billion and taxpayers lost
$17.7 billion. About $4.1 billion of the $4.8 billion consumer loss represents income
One study of the dairy industry estimated the annual U.S. deadweight loss
caused by protectionism to be $1.4 billion.79 Another study estimated that the quota
rents in the dairy industry cost $250 million a year.80 A study from the mid-1980s
found that there is a small amount of foreign deadweight loss from U.S. dairy industry
protectionism.81
C. N ONMONETARY COSTS
Protectionist policies can save jobs. In fact, one of the main reasons why
advocates of protectionism support protection is because jobs will be lost in the absence
of protection. That is what is seen. But what is not seen is the jobs that will be
destroyed or the jobs that will never be created as the result of some protectionist
policy. If auto imports are restricted, the people who depend on auto imports for their
livelihood, such as importers, foreign car dealers and their employees, and so forth,
may be thrown into the unemployment lines. But the effects on these groups are often
policy. One study82 found that a particular protectionist policy would save 36,000
apparel manufacturing jobs but cause 58,000 apparel retailing jobs to be lost, for a
loss/gain ratio of more than 1.6 to 1. And that figure is conservative, since it does not
measure the job losses that would occur in other industries as a result of the
protectionist policy. Other studies found that imposing "voluntary" export restraints in
the steel industry actually destroyed more jobs than it saved. One study found that
16
16,900 jobs in the steel industry were saved as a result of the 1984 voluntary restraints
on steel imports, but 52,400 jobs were destroyed in the industries that use steel, for a
loss/gain ratio of 3.1 to 1.83 Another study84 estimated that 27,072 jobs would be
saved and 40,927 jobs would be lost, for a ratio of slightly more than 1.5 to 1.
Another study85 estimated that a 15% import quota in the steel industry would save
26,000 jobs in the steel industry but destroy 93,000 jobs in steel-importing industries,
for a loss/gain ration of 3.6 to 1. A recent study that estimated the effects that voluntary
The Cline study87 estimated that the various protectionist policies88 in the
U.S.A. preserve 214,200 direct jobs in the apparel industry and 20,700 jobs in the
textile industry, at an annual cost of $17.6 billion for apparel and $2.8 billion for
textiles.89 That means that it costs about $82,000 to save one job in the apparel
industry for one year and $135,000 to save a textile job. That amounts to $238 per
Each job saved in the carbon steel industry costs $750,000, and the average
hourly wage is $22.21,91 or $44,420 for a 2,000 hour work year. In the rubber
footwear industry, it costs $30,000 a year to save a job that pays only $11,460 a year,
based on a 2,000 hour work year.92 Likewise, for the lead and zinc industry, it cost
$30,000 a year per job saved, at a time when the average wage was $3.28 an hour, or
rather than pitting the proletariat against the bourgeoisie, it is a conflict of producers
versus consumers. And the producers seem to be winning, in the sense that they are
17
able to get their protectionist policies adopted by the legislature, which is elected by the
consumers.
consumers have to settle for their second or third choice, they lose utility. The measure
of this loss is the difference between what they would have chosen had they been able
to make their first choice, and the product or service they must settle for because their
economic freedom that results when some government makes a policy that results in
reducing the number of contracts that consenting adults are able to enter into, or raising
the cost of entering into such contracts. For example, if the price of a certain foreign
auto is $2,000 more than it would be in a free market, then government is forcing
import quota prevents consumers from even obtaining the automobile of their choice, a
property right is also violated, since property rights include the right to trade the fruits
of one's labor. The ethics of this form of redistribution (as with any form of forced
redistribution) are also questionable.94 Tariffs and quotas are hidden forms of
redistribution.
Antidumping laws have been on the books in the United States, in one form or
another, for decades.95 But antidumping was not pursued as a policy in the U.S.A.
until Zenith and National Union Electric Corporation filed charges against Japanese
articles in the United States for substantially less than the actual market value with the
There are a number of problems with the antidumping laws in the United States,
both in the way they are structured and the way they are administered. The Commerce
Department and the U.S. International Trade Commission can demand unlimited
quantities of documents with short turnaround time and can impose crushing penalties
abandoned more than $50 million in export sales, because the Commerce Department
demanded on a Friday that it translate 3,000 pages of Japanese financial documents into
imposed a 115.82% dumping duty on uranium imports from six republics of the former
Soviet Union.99 But the prices the Commerce Department examined were from the
period before the republics came into existence, so, in effect, they were being punished
for Soviet pricing behavior. The 115% assessment was based on unsubstantiated
figures that were offered by the parties that filed the petition, who stood much to gain
from punishing their foreign competitors.100 And even if it were possible for the new
republics to obtain the information (it was not), it would have been illegal under Soviet
law to release the information. So American consumers have to pay higher prices for
spaced. And before foreign companies can reply, they first must translate it from
English into their own language, then distribute it to numerous company employees,
since no one, single employee knows the answers to all of the questions.101 In one
case, the Commerce Department demanded that the management of a small Taiwan
company supply it with more than 200,000 pieces of information and reply to a 100-
page questionnaire that was written in English. But the management of the company
consisted of a husband and wife, and they were unable to respond.102 Because of the
dumping duty which, when combined with a 34% tariff, makes it very difficult to make
a profit in the U.S. market. Within a year from the time this investigation started, more
than two-thirds of the companies that produce acrylic sweaters in Taiwan went out of
Another problem with the U.S. antidumping laws is the way in which
violate generally accepted accounting principles, the principles that private companies
must use when they publish their financial statements. But the government does not
have to comply with these rules, which are made in the private sector. Some of the
though the foreign supplier had no intent to dump goods in the domestic market. The
problem is that there is no way to predict exchange rates in advance, so a shift in the
20
wrong direction can lead to penalties.104 But even if exchange rates could be predicted
whether dumping was taking place. And while this test was not used much at first, it is
considered to be selling at a loss, and therefore subject to a dumping duty. Yet many
their sales.107
compares products that are not similar. For example, an Italian company was found
guilty of selling woodwind musical instrument pads for 1% less than fair value.108 But
smaller pads sold in the U.S.A. with the larger pads that were sold in Italy. And it can
disregard quality differences when computing dumping margins. For example, it has
been known to compare grade B Canadian raspberries sold in the U.S.A. for juice to
grade A raspberries sold in Canada to make jam. The grade B sample was harvested by
machine, whereas the grade A sample was harvested by hand, which made the
because of a 0.002% price differential, which is less than one cent per 500 pounds of
raspberries.109
21
Another criticism is that a company can be penalized for selling its products in
some foreign market for more than the price it charges in the U.S.A.110 In effect, the
U.S.A. for higher prices than they charge anywhere else. If they don't, they are
risking being hit with a dumping penalty. It is a blatant case of having the government
protect domestic producers from foreign competition at the expense of consumers, who
other grounds as well. It has been known to compare U.S. wholesale prices to foreign
retail prices, 111 disregarding volume discounts, 112 inconsistently classify costs as
direct and indirect,113 and use average rather than specific prices.114
The antidumping laws actually impede competition rather than promote it.
Antidumping laws raise entry barriers to the American market and increase the cost of
doing business. The laws also encourage foreign suppliers to charge higher prices in
order to avoid being charged with an antidumping violation. They have a chilling effect
on competition and allow domestic producers to charge higher prices because of the
American companies must pay higher prices for materials and other foreign-made
products that they use in their business. Auto companies have to pay more for steel.
Retail clothing stores have to pay more for textile products. And their profit margins
must shrink as a result. Marginal companies might be forced out of business and many
companies will redouble their efforts to cut costs, which might include laying off some
workers.
antidumping policy sometimes argue that such a policy is needed in order to insure
"fair" trade. They fail to understand that there is no objective way to determine what is
fair and what is not, and that consumers are better judges of what they want than
bureaucrats, who may be hundreds or even thousands of miles away from the
marketplace. They believe that it is somehow wrong or harmful to charge low prices.
Other proponents of antidumping laws have more sinister motives. They want
to use the laws as a club to batter the competition and feather their own nests at the
expense of the general public, which must pay higher prices than would be the case in a
less-regulated market. The cost of using the laws is low. All a company has to do to
take advantage of the law is to petition the Commerce Department, which will then
supply the attorneys needed to thwart the competitors' attempt to sell their products at
low prices. The accuser does not have to spend much money at all. But the accused
must often spend millions of dollars defending accusations that, in the end, prove
groundless.
The antidumping laws raise some ethical questions. For example, is it ethical
for a domestic company's executives to enlist the aid of the Commerce Department to
beat up foreign competitors when all they are doing is selling products to people who
want to buy them? Are such actions really just violations of the property rights of the
foreign competitors? Is it ever ethical to prevent consenting adults from entering into
There are two major implications of USA protectionism that could have an
effect on trade in Europe and elsewhere. The first is the effect that U.S. trade policies
23
will have on the way individual countries, and Europe as a whole, deal with the United
States, which is clearly in a protectionist mode, and has been for some time.
Subsidies actually benefit consumers. So does dumping (if it actually existed, which is
protect an industry results in more job losses than if government stayed out of the
picture and let consumers buy the products of their choice. The low wage argument,
full employment argument, level playing field argument, and so forth, have little
relation to reality.
economic growth, less choice, a deadweight employment loss, reduced social harmony
The reasons given in favor of protecting this or that industry do not hold up
under analysis. Yet the policymakers in Washington do not see that. As a result, U.S.
trade policy is being driven by fallacious economic theory. Public Choice economists
would see this as no surprise. The special interests have the resources and incentives to
push their policies through the legislature, to the detriment of U.S. consumers and our
Our European trading partners have two basic choices. They can retaliate by
adopting similar policies of their own, which would be counterproductive. Or they can
adopt free trade policies and try to convince the U.S. policymakers of the errors of their
ways.
24
The second major implication of USA protectionism that could have an effect on
trade in Europe is the possibility that our trading partners, especially those in emerging
democracies, could decide to adopt U.S. trade policies as their own, not in order to
retaliate, but because they think that U.S. policies are somehow better than those of
attempting to convert from a centrally planned system to a market system, to look to the
policies of western democracies for guidance. For example, the government of Poland
invited representatives of the U.S. Internal Revenue Service to Poland to teach Polish
tax collectors how to collect taxes.116 Many Americans who learned of this invitation
were horrified at such a prospect. The IRS is one of the least freedom loving of all
government bureaucracies. It has been known to confiscate and destroy or sell assets
with little or no due process.117 IRS comes as close to a fascist dictatorship, at times,
as a government agency in a democratic regime can get. Yet Poland and other countries
This copycat approach is not all bad, however. Whether adopting another
country's policies is good or bad depends on the policy and how it fits into the social
and political framework of the country adopting it. What is of the most concern is that
European policymakers will adopt this policy or that without carefully examining all the
implications first. In the area of antidumping, for example, several countries in the last
few years have adopted policies similar to those of the United States. Yet U.S.
antidumping policy is among the most irrational policies that a country could adopt.
have been refuted for decades. Yet European policymakers often spout the same
25
arguments, as though they had some validity. They often look to the United States to
support their opinions, but even if they do not, the danger is still there that they will
resources resulting from central planning and the absence of a price system, most of
their industries are not competitive with those in the west. The best solution to their
problem, in theory at least, is immediate free and unrestricted trade. The speed with
which their industries can be upgraded to compete with the west will be accelerated if
they permit unrestricted foreign investment, which will provide the capital and
technology needed to make a rapid conversion. The way to maximize efficiency and
the standard of living is to dismantle trade restrictions, do what you do best and trade
for everything else. Foreign investment will accelerate the conversion process. And if
resources are allowed to flow, they will flow to their most productive uses.
The complete and immediate adoption of free and unrestricted trade is the only
approach that is consistent with the "rights" approach to trade.118 If individual rights
are being violated by not allowing individuals to buy the products of their choice at the
market price, their rights are being violated, and the only moral solution is to stop these
rights violations immediately. Allowing special interests to dictate terms of trade results
in allowing the minority (special interests) to benefit at the expense of the majority
(consumers).
The same argument was used before and during the American Civil War in the
case of slavery. If slavery is immoral, the only solution is to end the practice
immediately. The fact that slaveowners will be driven out of business is irrelevant, as
26
is the fact that hundreds of thousands of slaves will become unemployed. An increase
in the bankruptcy and unemployment rates are not relevant, either in the case of
Thus, the rights approach to trade would hold that a conversion to total and
immediate free trade is the best solution. But most economists do not use the rights
approach. They use a utilitarian approach. I am not saying that economists are correct
to use the utilitarian approach, but only that they tend to favor it over the rights
approach.
system, there are at least two versions of the utilitarian approach that can be used, the
long-run approach and the short-run approach. We previously concluded that free trade
utilitarian approach is taken. Both approaches lead to the same conclusion. But a
complete and immediate switch from protectionism to free trade can lead to traumatic
results, especially when an entire economy has to convert from central planning to a
market system. If all state-owned or recently privatized industries are left to sink or
swim in the international marketplace, many of them will sink, leading to massive
bankruptcy, unemployment and social unrest. To minimize the pain and trauma
approach. Rights theorists, of course, would be quick to point out that the only policy
that is consistent with individual rights is a complete and immediate change from a
policy that violates rights to one that does not. In the case of the American Civil War,
the conversion from a slave society to a free society was made in a short period of time,
but at a cost of more than 500,000 dead and the destruction of the plantation system. If
Probably the most plausible gradualist approach would be based on the infant
industry argument. This approach advocates temporary protection, just long enough to
prevent the massive unemployment and social disruption that would otherwise occur.
In the case of centrally planned economies that are attempting to convert to a market
But there are dangers to the infant industry approach. Historically, there have
been problems with this approach. The main problem is that protection that starts out
being temporary often becomes permanent. An example is the sugar industry in the
USA, which has been protected since 1816,119 and many other industries have been
receiving protection, in one form or another, at least since the 1930s. The auto industry
in the United States has been receiving government protection at least since 1981, when
a voluntary import restraint agreement took effect. At that time, Japanese automakers
had a 20.5% share of the market. As of 1991, ten years later, they had a 30.3% share,
the same year that the Big-3 automakers in Detroit lost a record $7.5 billion.120 One
reason for the decline in the U.S. auto industry is attributable to the fact that the U.S.
automakers used the breathing room the protection gave them to invest in other
industries rather than plowing capital into modernization of their auto plants. And now
that Japanese automakers have built auto plants in the USA, it will be even more
difficult for the Big-3 to compete because the import restrictions do not apply to cars
Even if protection does help one industry, it does so at the expense of others,
since resources must be diverted in order to protect it. Thus, other industries are
weakened and resources are allocated inefficiently. And there is evidence to suggest
28
that the infant industry approach does not work even when it is applied to just one
industry. 121 And if it is applied to too many industries it will not work either because
Competition provides incentives to improve quality and reduce costs. Taking away this
producers a monopoly. When there is monopoly, there is far less incentive to innovate,
cut costs and improve quality because consumers have fewer choices in the
marketplace. If industry executives know that the legislature will give them protection,
they will spend their time and resources getting protection from the legislature rather
lose their jobs as a result of free trade. While this approach is not fair to the taxpayers,
who must pay people not to work, it would be less expensive to pay people not to work
than to continue a protectionist policy. For example, because of tariff and quota
policies, U.S. consumers pay perhaps $40 billion a year --nearly $500 per household --
to subsidize the textile and apparel industries.123 That amounts to $134,686 a year for
every textile job saved and $81,973 for each apparel job saved.124 But textile and
apparel workers earn an average of only $12,000 a year, which means that
protectionism costs $11.20 for each $1 of wages paid in the textile industry and $6.80
for each $1 of wages paid in the apparel industry. So it would be much cheaper just to
pay the workers that are displaced than to continue protecting them.
29
How much should they be paid and for how long? Given these statistics, it
would be cost effective to pay them 100% of previous wages each year over their
remaining working lives. Making these payments would allow trade barriers to be
dismantled and the gains would far exceed the losses. But this liberal a policy is not
necessary, and would not be fair to those who have to pay. Such a policy would also
stifle economic growth, since it would take away all incentive for the displaced workers
to find other productive work, and the money that taxpayers must pay these workers
A U.S. Department of Labor study found that apparel industry workers who
lose their jobs are displaced an average of 24.8 weeks. Textile workers are displaced
an average of 13.3 weeks. 125 When they do find new employment, they tend to earn
about as much as they did in their old jobs.126 Rather than pay these displaced workers
100% of previous wages over their remaining working lives, why not pay them their
regular wages, or perhaps a percentage of their previous wages, for just 3 to 6 months?
By that time, they will find new jobs, so the taxpayers will not have to suffer the long-
term burden of paying these people not to work. And the displaced workers will retain
their incentive to find new productive employment because they know that their
The economic return on this type of approach is enormous. Rather than paying
between $81,973 and $134,686 (in the form of higher prices) each year to save one
$12,000 job, it would be much cheaper to make a one-time payment to each displaced
worker of $3,000 to $6,000 -- three to six months pay. Such an approach would solve
the transition problem at minimal cost, and would remove the danger of the infant
permanent protection. Of course, even the direct payment approach is not fair to those
30
who must pay for the idleness of others, but at least it will reduce the total amount they
that are converting to a market system. But these economies would have problems
implementing the approach as outlined above. For example, the average displaced
worker might earn $3,600 a year rather than the $12,000 in the above example, so the
months pay. And the time needed to find a new job in an emerging market economy
might not be 13.3 or 24.8 weeks. It might be either longer or shorter. And the
governments in these countries might find it difficult to pay even these amounts, since
they are already running fiscal deficits. The goal should be to provide a short-term
cushion that provides sufficient income for a short period of time without taking away
But there is a danger in using this approach. As is the case with infant
protection, the same could very easily be true of this suggested payment system. In the
USA, for example, the temporary welfare measures that were passed during the 1930s
depression are mostly still in force. In some cases, families receiving government
payments are now into the third generation. The children and grandchildren of people
who received welfare payments in the 1930s are also receiving welfare payments.
Rather than working and leading productive lives, these people are a drain on society.
They are being paid not to work and the incentive to work has been taken away from
them.128 If they get a job, their welfare benefits will be taken away from them (as they
The conclusion, then, is that there is no easy solution. The best solution, from
a rights perspective, is total and immediate free trade, regardless of the consequences.
This solution is the only one that does not violate the right to contract and property. It
is also the only policy that is in keeping with the "servant" theory of government, the
view that government should be the servant of the people -- the protector of life, liberty
and property -- and not a redistributor of wealth.129 Total and immediate free trade
would also cause resources to be reallocated to more productive uses faster, whereas a
gradualist approach would retard this shifting of resources. Thus, the standard of
living would rise faster under the total and immediate free trade approach.
But if policymakers deem that a policy of total and immediate free trade cannot
be implemented, for whatever reason, what would be the second-best solution? For
political reasons, they might decide that it might be more feasible to adopt a gradualist
approach, which will lead to eventual free trade. Of the two gradualist approaches
unemployment payment approach is the less costly and less dangerous of the two.
But there are problems with the unemployment payment approach because the
unemployment payments approach, they will have to make sure that the system of
temporary payments does not evolve into a welfare bureaucracy that allows individuals
to live at the expense of others for more than a few months. Some safeguards must be
built into the system that would prevent a temporary system of unemployment
insurance from turning into a permanent way of life, as has been done in the USA.
32
------------------------------------------------------------------------------------------------------
Nothing written here is to be construed as necessarily reflecting the views of the
Dumont Institute or as an attempt to aid or hinder the passage of any bill before
Congress. An earlier version of this Policy Analysis appeared in The George
Washington Journal of International Law and Economics, Vol. 26, No. 3 (1993), 539-
573.
Robert W. McGee is president of the Dumont Institute for Public Policy Research
and is a professor at the W. Paul Stillman School of Business, Seton Hall University in
South Orange, New Jersey. He is a certified public accountant, attorney and economist
and holds doctorates from several American and European universities. Dr. McGee has
authored or edited more than 30 books and monographs and has written more than 300
articles and reviews for a variety of professional and scholarly journals in economics,
law, accounting, taxation and philosophy.
1
For a discussion of some ethical aspects of antidumping laws, see Robert W. McGee
and Walter Block, Ethical Aspects of Initiating Antidumping Actions, I NTERNATIONAL
JOURNAL OF SOCIAL ECONOMICS, forthcoming.
2
ADAM SMITH, A N INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF
NATIONS 461 (1776/1937).
3
PLATO, L AWS, IV, 705a.
4
ARISTOTLE, T HE POLITICS, I, VII, chapter 4.
5
For some of the more noteworthy refutations of protectionism, see ADAM SMITH,
supra; FREDERIC BASTIAT, ECONOMIC SOPHISMS (1964); FREDERIC BASTIAT,
SELECTED ESSAYS ON POLITICAL ECONOMY (1964); FREDERIC BASTIAT,
ECONOMIC HARMONIES (1964); These and other Bastiat works previously appeared
in French as OEUVRES COMPLETES DE FRÉDÉRIC BASTIAT, fourth edition
(Guillaumin et Cie 1878). Also see Ralph Raico, John Prince Smith and the German
Free-Trade Movement, in M AN, E CONOMY AND LIBERTY: ESSAYS IN HONOR OF
MURRAY N. R OTHBARD 341-51 (Walter Block and Llewellyn Rockwell, Jr. eds.
1988); NORMAN LONGMATE, T HE BREADSTEALERS: THE FIGHT AGAINST THE CORN
LAWS, 1838-1846 (1984); FREE TRADE AND OTHER FUNDAMENTAL DOCTRINES OF
THE MANCHESTER S CHOOL (Francis W. Hirst, ed. 1903/1968).
6
VILFREDO PARETO, MANUAL OF POLITICAL ECONOMY 379 (1927).
7
For more on the Public Choice School concept of rent-seeking, see TOWARDS A
THEORY OF A RENT-SEEKING SOCIETY (James M. Buchanan, Robert Tollison and
Gordon Tullock, eds. 1980); THE POLITICAL ECONOMY OF RENT-SEEKING (Charles
K. Rowley, Robert D. Tollison and Gordon Tullock, eds. 1988); GORDON TULLOCK,
THE ECONOMICS OF SPECIAL PRIVILEGE AND RENT SEEKING (1989).
8
R OBERT NOZICK, ANARCHY, STATE, AND UTOPIA 272 (1974). Nozick (and
others) believe that the state is going beyond its legitimate function when it redistributes
-- takes from some and gives to others. For the ethical aspects of redistributionism, see
BERTRAND DE JOUVENEL, T HE ETHICS OF REDISTRIBUTION (1952/1990).
33
9
W. M. C URTISS , T HE TARIFF IDEA 19 (1953), puts it as follows: "Through the
years, some men have discovered how to satisfy their wants at the expense of others
without being accused of theft: they ask their government to do the stealing for them."
10
Frederic Bastiat elaborates on this theme in THE LAW 21 (1968). Bastiat's test to
determine whether the law is being perverted is as follows: "See if the law takes from
some persons what belongs to them, and gives to other persons to whom it does not
belong. See if the law benefits one citizen at the expense of another by doing what the
citizen himself cannot do without committing a crime."
11
Bjorn Ahlstrom, Protecting Whom from What? 39 FREEMAN, at 153 (1989).
12
For more on this point, see Michael F. Bryan, The Mythology of Domestic Content,
ECONOMIC COMMENTARY, Federal Reserve Bank of Cleveland, June 20, 1983, at 1-
6; Gregory A. Patterson, Customs Steps Up Pressure on Honda With Tariff Boost,
WALL ST. J., February 13, 1992, at A2, col. 1; ROBERT E. BALDWIN, TRADE
POLICY IN A CHANGING WORLD ECONOMY 82-3, 129, 167, 240 (1988); R ICHARD
POMFRET , I NTERNATIONAL TRADE: A N INTRODUCTION TO THEORY AND POLICY
117-18, 142-43 (1991); I. M. DESTLER, AMERICAN TRADE POLITICS, second edition,
78-79, 210, 434-35 (1992).
13
Frederic Bastiat's 1845 refutation of this silly antidumping argument is one of the
best ever written. See FRÉDÉRIC BASTIAT, OEUVRES COMPLETES, supra, at 57. The
English translation is in Bastiat's ECONOMIC SOPHISMS 55 (1964).
14
If companies made a practice of dumping, they would soon go out of business.
15
Domestic producers sometimes resort to allegations of predatory pricing to support
their case. But the literature suggests that predatory pricing either does not exist or
exists only in isolated cases, and only then for a short period of time. The reason for
the lack of evidence to support a charge of predatory pricing is that such behavior is
irrational and would reduce profits (and even drive a predator out of business). For
more on this point, see R. Koller, Jr., The Myth of Predatory Pricing: An Empirical
Study, 4 A NTITRUST L. & E CON. R EV. 105 (1971). The classic treatment on this
subject is by John McGee, Predatory Price Cutting: The Standard Oil (N.J.) Case, 1 J.
L. & ECON. 137 (1958).
16
Various studies have estimated that for every job saved because of some
protectionist measure, more than one job is lost because of economic inefficiencies..
17
ARTHUR DENZAU, HOW IMPORT RESTRAINTS REDUCE EMPLOYMENT,
Publication No. 80, Center for the Study of American Business, Washington
University, 1987.
18
Robert Crandall, Import Quotas and the Automobile Industry: The Costs of
Protectionism, 2 B ROOKINGS REV., at 16 (1984).
19
Frederic Bastiat provided one of the best refutations of this argument during the
1840s. See Bastiat's ECONOMIC SOPHISMS 51-55 (1964). The original French may
be found in OEUVRES COMPLETES, supra, at 52-57 (1878).
34
20
A. Shapiro, Why the Trade Deficit Does Not Matter, 2 J. A PPLIED CORP . F IN. 87,
at 95 (1989). For more on the irrationality of the balance of trade argument, see Robert
W. McGee, Trade Deficits and Economic Policy: A Law and Economics Analysis, 11
J. L. & C OM. 159-74 (1992). The U.S.A. had trade deficits practically every year
throughout the nineteenth century, a period of rapid economic growth. It had a surplus
during the Great Depression of the 1930s. Part of the problem is one of measurement
because improper accounting techniques are used to compute the deficit.
21
Barry Bluestone and Bennett Harrison are proponents of this view. See their THE
DEINDUSTRIALIZATION OF AMERICA (1982). An earlier proponent of this view was
NICHOLAS KALDOR, THE CAUSES OF THE SLOW ECONOMIC GROWTH OF THE
UNITED KINGDOM (1966), But this argument goes back to the early days of
mercantilism. See THE PHILOSOPHY OF MANUFACTURES: E ARLY DEBATES OVER
INDUSTRIALIZATION IN THE UNITED STATES (M. Folsom and S. Lubar, eds. 1980).
22
For more on this point, see RICHARD B. MCKENZIE, C OMPETING VISIONS: T HE
POLITICAL CONFLICT OVER AMERICA' S ECONOMIC FUTURE 38 (1985); Charles L.
Schultze, Industrial Policy: A Dissent, in PLANT CLOSINGS: PUBLIC OR PRIVATE
CHOICES? 155 (Richard B. McKenzie, ed. 1984); William H. Branson, The Myth of
Deindustrialization, in P LANT CLOSINGS: PUBLIC OR PRIVATE CHOICES? 177 (1984).
23
Presidential candidate Walter Mondale is one advocate of this view. See M.
Schram, "Big Fritz": Tough Talk and a Flag, Washington Post, October 7, 1982, at 1.
Also see JAGDISH BHAGWATI, P ROTECTIONISM 64 (1988).
24
The Congressional Budget Office estimated that only about 20% of those who were
unemployed in January, 1983 lost jobs in declining industries, and that only 240,000
of the 1.6 million who were unemployed had been unemployed for 26 weeks or more.
See RICHARD B. MCKENZIE, N ATIONAL INDUSTRIAL POLICY 67 (1984).
25
Workers in the steel and auto industries received about 189% and 165% of the
manufacturing wage average in 1982, partly because these industries were protected
from foreign competition and partly because capital intensive industries tend to pay
higher wages than labor-intensive industries. M. Kreinin, Wage Competitiveness in
the U.S. Auto and Steel Industries, 4 C ONTEMPORARY POL' Y ISSUES 39 (January,
1984); Edward Tower, Some Empirical Results on Trade and National Prosperity, 3
CATO J. 639 at 640 (Winter 1983/84).
26
N. Rosenthal, The Shrinking Middle Class: Myth or Reality? MONTHLY LABOR
REV. at 4 (March, 1985); RICHARD B. M CKENZIE, T HE AMERICAN JOB MACHINE
102, 108-12 (1988).
27
It is curious to note that some of the same people who hold this view also think there
is nothing wrong with subsidizing the sugar industry, the wheat industry or some other
American industry, so that these industries can compete on world markets and perhaps
dump their products on other countries' markets.
28
WALTER WILLIAMS, ALL IT TAKES IS GUTS 81 (1987).
35
29
Alexander Hamilton made this argument in his 1791 Report on Manufactures, which
is reproduced in A. H. COLE (ed.), INDUSTRIAL AND COMMERCIAL
CORRESPONDENCE OF ALEXANDER HAMILTON (1968).
30
Rothbard calls this the senile industry argument. See Murray N. Rothbard,
Protectionism and the Destruction of Prosperity, in THE FREE MARKET READER
(Llewellyn H. Rockwell, Jr. ed, 1988), at 159.
31
WAYNE GABLE, MYTHS ABOUT INTERNATIONAL TRADE 14 (no date).
32
DAVID RICARDO, P RINCIPLES OF POLITICAL ECONOMY AND TAXATION (1817).
33
ADAM SMITH, supra.
34
MELVYN KRAUSS , P ROTECTIONISM: THE WELFARE STATE AND INTERNATIONAL
TRADE 6 (1978); LUDWIG VON MISES , H UMAN ACTION 750 (1966).
35
MILTON AND ROSE FRIEDMAN, F REE TO CHOOSE 41 (1979/80).
36
Some economists have made the point that a subsidy is more efficient (less
inefficient) than a tariff because a subsidy distorts only production decisions, whereas a
tariff distorts both production and consumption decisions. See MELVYN KRAUSS ,
PROTECTIONISM, supra, at 13 and 32-34. Other authors hold that quotas are more
harmful than tariffs because tariffs, while harmful, do not interfere as seriously with the
market economy and do not destroy the price mechanism, whereas quotas do tend to
have that effect. See GOTTFRIED HABERLER, QUANTITATIVE TRADE CONTROLS,
THEIR CAUSES AND NATURE 20 (1943). But there is no need to settle for second or
third choice. Tariffs may be less harmful than quotas, but both quotas and tariffs are
more harmful than the free market, which allocates resources in the manner most
consistent with consumer preferences. The logical choice would be to favor free
markets over either tariffs or quotas.
37
For an elaboration on this theme, see FREDERIC BASTIAT, ECONOMIC
HARMONIES, 478-86 (1964); Samuel H. Husbands, Free Trade and Foreign Wars, in
FREE TRADE: T HE NECESSARY FOUNDATION FOR WORLD PEACE (Joan Kennedy
Taylor, ed. 1986), at 97-105.
38
Federal agencies must pay up to a 6% premium for domestically produced goods
and some defense purchases have premiums of up to 50%. Some states are required to
buy only American automobiles or steel, even though it might be more expensive than a
foreign product. Murray Weidenbaum, The High Cost of Protectionism, 3 C ATO J.
777, at 780-82 (1983/84).
39
Abba Lerner, The Symmetry between Import and Export Taxes, 3 E CONOMICA 306
(August, 1936); Victor Canto, U.S. Trade Policy: History and Evidence, 3 C ATO J.
679, at 695 (1983/84).
40
Robert Higgs and Charlotte Twight, Economic Warfare Hurts Us More Than Them,
in THE FREE MARKET READER (Llewellyn H. Rockwell, Jr., ed. 1988), at 146-49;
Catherine L. Mann and Gary Hufbauer, Protection and Retaliation: Changing the
"Rules of the Game," 1 BROOKINGS PAPERS ON ECONOMIC ACTIVITY 311-48
36
(1987). An early case of trade retaliation occurred in 432b.c., when Pericles, the
Athenian leader, imposed sanctions on Megara. Megara asked Sparta for aid, and the
result was the Peloponnesian War. WILL DURANT, T HE LIFE OF GREECE 441 (1939),
as cited by Bruce Bartlett, What's Wrong With Trade Sanctions, Policy Analysis No.
64, Cato Institute, December 23, 1985, at 1. The sanctions President Roosevelt
imposed on Japan forced Japan to bomb Pearl Harbor. ROBERT J. C. B UTOW, T OJO
AND THE COMING OF THE WAR 242 (1961); WILLIAM L. L ANGER AND S. E VERETT
GLEASON, T HE UNDECLARED WAR, 1940-1941 708 (1953),as cited by Bartlett at 2.
It should also be noted that economic sanctions seldom achieve what they were set out
to achieve. G ARY CLYDE HUFBAUER, J EFFREY J. S CHOTT AND KIMBERLY ANN
ELLIOTT, ECONOMIC SANCTIONS RECONSIDERED, second edition (1990); GARY
CLYDE HUFBAUER, J EFFREY J. S CHOTT AND KIMBERLY ANN ELLIOTT, E CONOMIC
SANCTIONS RECONSIDERED: SUPPLEMENTAL CASE HISTORIES, second edition
(1990).
41
This view of government has been expressed by numerous individuals over the
centuries, including J OHN LOCKE, S ECOND TREATISE ON GOVERNMENT (1690). It
should be pointed out that Thomas Jefferson borrowed heavily from the ideas in this
book when he wrote the Declaration of Independence. A modern exponent of this view
is ROBERT NOZICK, supra.
42
Alan Murray, As Free-Trade Bastion, U.S. Isn't Half as Pure as Many People
Think, W ALL ST. J., November 1, 1985, at 1.
43
Robert E. Baldwin and Richard K. Green, The Effects of Protection on Domestic
Output, in T RADE POLICY ISSUES AND EMPIRICAL ANALYSIS (Robert E. Baldwin,
ed. 1988), at 223-4.
44
Susan Hickok, The Consumer Cost of U.S. Trade Restraints, F EDERAL RESERVE
BANK OF NEW YORK QUARTERLY REVIEW 1-12 (Summer, 1985).
45
James Bovard, High Cost of Textile Protection. J. C OM. at A 12 (December 10,
1991). Also cited in Protectionism's Adverse Economic Impact, written testimony of
Daniel Oliver (former chairman of the Federal Trade Commission) before the U.S.
International Trade Commission, Investigation No. 332-325, October 14, 1992, at 7.
46
Peter Passell, The Victim Has a Blue Collar, But Free Trade Has an Alibi, N EW
YORK TIMES, August 16, 1992, at E4, cited by Daniel Oliver, supra, at 7. For a
detailed breakdown of how protectionism affects different income groups, see
WILLIAM R. C LINE, T HE FUTURE OF WORLD TRADE IN TEXTILES AND APPAREL
201-206 (1990).
47
It should be pointed out that "voluntary" export agreements are not really voluntary
because coercion is involved. Using terms like "voluntary" just makes the policy seem
more gentle, just like "revenue enhancements" sounds more pleasant than tax increases.
48
CLIFFORD WINSTON AND ASSOCIATES , B LIND INTERSECTION? P OLICY AND THE
AUTOMOBILE INDUSTRY (Brookings Institution, 1987), summarized in Thomas D.
Hopkins, Cost of Regulation, a Rochester Institute of Technology Working Paper,
December, 1991, at B8-9.
37
49
Jaime de Melo and David Tarr, Welfare Costs of U.S. Quotas in Textiles, Steel and
Autos, 72 REV. ECON. & STAT. 489-97 (August, 1990); C. FRED BERGSTEN,
KIMBERLY ANN ELLIOTT, J EFFREY J. S CHOTT AND WENDY E. T AKACS, A UCTION
QUOTAS AND UNITED STATE TRADE POLICY 42 (1987).
50
Robert C. Feenstra, Quality Change Under Trade Restraints in Japanese Autos, 103
Q. J. ECON. 131-46 (February, 1988).
51
Robert Crandall, The Effects of U.S. Trade Protection for Autos and Steel,
BROOKINGS PAPERS ON ECONOMIC ACTIVITY 271-88 (July/August, 1987).
52
David Tarr and Morris E. Morkre, Aggregate Costs to the United States of Tariffs
and Quotas on Imports, Bureau of Economics Staff Report to the Federal Trade
Commission, December, 1984. This figure was computed by dividing the total cost of
protection by the estimated number of jobs saved by protection. Other studies have
computed different costs per job saved, depending on the year in question and the
specific piece of legislation being considered. Crandall estimated the 1983 cost to be
$160,000 per job saved. Robert W. Crandall, Import Quotas and the Automobile
Industry: The Costs of Protectionism 2 BROOKINGS REV. 8-16 (Summer, 1984).
Hufbauer, Berliner and Elliott estimated the 1984 cost to be $105,000. GARY CLYDE
HUFBAUER, DIANE T. BERLINER AND KIMBERLY ANN ELLIOTT, TRADE
PROTECTION IN THE UNITED STATES: 31 CASE STUDIES 258 (1986).
53
Elias Dinopoulos and Mordechai E. Kreinin, Effects of the U.S. -- Japan Auto VER
on European Prices and on U.S. Welfare, 70 R EV. E CON. & S TAT. 484-91, at 490
(1988).. They arrived at their figures by dividing the average labor productivity
(output/labor) ratio into the VER-induced additional auto output.
54
Average annual compensation in the auto industry for the years in question was
about $35,000.
55
Hufbauer, Berliner and Elliott, supra, at 178-79. This figure represents a 5% tariff
and a 25% scarcity premium that resulted from the pre-1985 restraint agreement with
the European Community and the informal understanding with Japan.
56
Id., 178-79. This estimate was based on the price rise associated with the crimp in
supply that resulted from restraint agreements.
57
Hufbauer, Berliner and Elliott, supra, summarize these studies at 179.
58
Tarr and Morkre, supra, at 25.
59
Susan Hickok, supra, at 8.
60
Hufbauer, Berliner and Elliott, supra, at 179. Based on a U.S. Congressional
Budget Office study that reflected the projected additional cost of the 15% quota under
the proposed Fair Trade in Steel Act.
61
The Effects of the Steel Voluntary Restraint Agreements on U.S. Steel-Consuming
Industries, Report to the Subcommittee on Trade of the House Committee on Ways and
Means on Investigation No. 332-270 Under Section 332 of the Tariff Act of 1930,
38
U.S. International Trade Commission Publication 2182, May, 1989, at viii. Another
estimate of steel-user costs for 1988 is $800 million. Janet Novack, Does Big Steel
really need protection? FORBES, March 16, 1992, at 37.
62
David Tarr, Effects of Restraining Steel Exports from the Republic of Korea to the
United States and the European Economic Community, 1 W ORLD BANK ECON. R EV.
379-418 (1987); J. Michael Finger, Trade Policies in the United States, in N ATIONAL
TRADE POLICIES (Dominick Salvatore, ed., 1992), at 79.
63
Hufbauer, Berliner and Elliott, supra, at 146.
64
Cline, supra, at 15.
65
Hufbauer, Berliner and Elliott, supra, at 146.
66
Carl Hamilton, AN ASSESSMENT OF VOLUNTARY RESTRAINTS ON HONG KONG
EXPORTS TO EUROPE AND THE U.S.A. (Stockholm: Institute for International
Economic Studies, University of Stockholm, 1985), 8. A similar paper was published
by Carl Hamilton under the same title in 53 ECONOMICA 339-50 (1986).
67
Hickok, supra, at 6.
68
Cline, supra, at 15.
69
Id., 191.
70
Hufbauer, Berliner and Elliott, supra, at 146.
71
Cline, supra, at 191.
72
Hufbauer, Berliner and Elliott, supra, at 146.
73
Carl Hamilton, Voluntary Export Restraints on Asia: Tariff Equivalents, Rents and
Trade Barrier Formation. Seminar Paper 276, Institute for International Economic
Studies, University of Stockholm, April, 1984, p. 8.
74
Hufbauer, Berliner and Elliott, supra, at 149.
75
Cline, supra note, at 191.
76
Hufbauer, Berliner and Elliott, supra, at 149.
77
Cline, supra, at 191.
78
Bruce L. Gardner, The United States, in Fred H. Sanderson (editor),
AGRICULTURAL PROTECTIONISM IN THE INDUSTRIALIZED WORLD (Fred H.
Sanderson, ed., 1990), at 52.
79
Hufbauer, Berliner and Elliott, supra. Robert C. Feenstra also cites this figure in
How Costly is Protectionism? 6 J. E CON. P ERSPECTIVES , at 163 (Summer, 1992). At
39
164, Feenstra mentions that most of this deadweight loss is due to restrictions on
cheese imports.
80
Bergsten et al, supra, at 42.
81
James E. Anderson, The Relative Inefficiency of Quotas, 75 AM. E CON. R EV. 178-
90 (March, 1985). He estimated the loss to be $20 million.
82
Laura Megna Baughman and Thomas Emrich, Analysis of the Impact of the Textile
and Apparel Trade Enforcement Act of 1985, International Business and Economic
Research Corporation, June, 1985, table 4. Cited in I.M. DESTLER AND JOHN S.
ODELL, ANTI-PROTECTION: CHANGING FORCES IN UNITED STATES TRADE POLITICS
(1987), 54, n. 40 and 56, n. 43.
83
Denzau, supra.
84
Jose A. Mendez, The Short-Run Trade and Employment Effects of Steel Import
Restraints, 20 J. WORLD TRADE L. 554-66 (September-October, 1986).
85
ARTHUR T. DENZAU, AMERICAN STEEL: RESPONDING TO FOREIGN COMPETITION
(1985).
86
Arthur Denzau, The Unlevel Playing Field: How High Steel Prices and Trade
Protection Help Deindustrialize America, Working Paper 128, Center for the Study of
American Business, Washington University, St. Louis, Mo. (August, 1989), at 20.
87
Cline, supra, at 15, 191, 193.
88
Tariffs and quotas.
89
It should be pointed out that the Cline figures are based on wholesale prices. If
these figures were converted to retail prices, the numbers could be as much as 100%
higher, since the markup in the retail end of the business is about 100%. Whether these
numbers should be doubled, though, depends on what percentage of the profit margin
can be passed on to consumers, since, in the absence of protection, the increased
competition might force some sellers to reduce their profit margins in order to compete.
It would be reasonable to expect that the actual numbers, at retail, would be somewhat
higher than the wholesale numbers that Cline reports, but perhaps not 100% higher.
Cline, 193.
90
Cline, supra, at 15 and 193.
91
Hufbauer, Berliner and Elliott, supra, at 177.
92
Id., at 75.
93
Id., at 358.
94
For more on this point, see BERTRAND DE JOUVENEL, THE ETHICS OF
REDISTRIBUTION (1952).
40
95
Perhaps the first major antidumping law in the United States was included in the
Revenue Act of 1916, ch. 463, §§ 800-801, 39 Stat. 798, codified at 15 U.S.C. § 72.
RICHARD DALE, ANTI-DUMPING LAW IN A LIBERAL TRADE ORDER 12 (1980) points
out that the Sherman Antitrust Act of 1890 and section 73 of the Wilson Tariff Act of
1894 could have been applied to dumping situations.
96
Note, Managing Dumping in a Global Economy, 21 G EO. W ASH. J. I NT' L L. &
ECON 511, n. 50 (1988).
97
N. David Palmeter, Torquemada and the Tariff Act: The Inquisitor Rides Again, 20
INT' L LAW. 641 (1986).
98
J AMES BOVARD, T HE FAIR TRADE FRAUD, at 136; Investigation 731-TA-426,
listed in I. M. DESTLER, supra, at 393.
99
James Bovard, U.S. Protectionists Claim a Russian Victim, W ALL ST. J., June 8,
1992, at A-10, col. 3. For more on the antidumping Investigation that was filed in
November, 1991 against Soviet uranium importers by U.S. mining interests, see U.S.
General Accounting Office, Uranium Enrichment: Unresolved Trade Issues Leave
Uncertain Future for U.S. Uranium Industry, GAO/RCED-92-194, June 19, 1992;
U.S. International Trade Commission, Uranium from the U.S.S.R. , Investigation 731-
TA-539, Publication No. 2471, December, 1991.
100
James Bovard, U.S. Protectionists Claim a Russian Victim, supra, at A-10, col. 5.
101
JAMES BOVARD, supra, at 135.
102
Id., at 139.
103
Id., at 155.
104
N. David Palmeter, Exchange Rates and Antidumping Determinations, 22 J.
WORLD TRADE 73-80 (1988).
105
Gilbert B. Kaplan, Lynn G. Kamarck and Marie Parker, Cost Analysis under the
Antidumping Law, 21 GEO. W ASH. J. I NT' L L. & ECON. 357, at 358 (1988).
106
Bovard, supra, at 126. The rules for determining material production cost and
administrative overhead are at 19 U.S.C.A. § 1677b(e)(1)(A) and (B)(i) (1980 and
1992 Supp.), respectively.
107
The Big-3 U.S. automakers would be especially thrilled to make this high a return,
since, in recent years, they have at times not made any profit at all.
108
Bovard, supra, at 119; Luciano Pisoni Fabbrica Accessori Instrumenti Musicali v.
United States, 640 F.Supp. 255 (CIT 1986).
109
Bovard, supra, at 119-21.
110
Id., at 121.
41
111
Id, at 122.
112
Id, at 123; U.S. International Trade Commission, Stainless Steel Pipes and Tubes,
Publication No. 1919 (1986).
113
Bovard, supra, at 123-24.
114
Wesley K. Caine, A Case for Repealing the Antidumping Provisions of the Tariff
Act of 1930, 13 L. & POL' Y IN INT' L BUS. 681 - 726, at 693 (1981).
115 115115 It would be interesting to explore this point in depth, but this is not the
place. One might ask whether preventing consenting adults from entering into any kind
of nonrights violating activity is ever justified. Examples might include consuming
illegal drugs, prostitution, dwarf tossing, ticket scalping, and so forth. Don't
individuals have the right to use their bodies as they see fit? Shouldn't they be able to
trade the fruits of their labor in any way they want? What is wrong with paying $100
for a ticket to the Superbowl game if the official price is only $30? And if you own
your own body, why should anyone prevent you from committing suicide quickly with
a gun, or more slowly with heroin? After all, it is your body. To the extent that some
government prevents you from doing with your own body as you see fit, it is taking an
ownership interest in your body. Does any government have the right to do this? For a
discussion of some of these points, see WALTER BLOCK, DEFENDING THE
UNDEFENDABLE (1976).
116
Officials Outline IRS Help in Setting Up Polish Tax System, D AILY TAX REP.
(BNA), April 6, 1992, at G-1.
117
For documentation of these abuses, see GEORGE HANSEN, TO HARASS OUR
PEOPLE: THE IRS AND GOVERNMENT ABUSE OF POWER (1984); DAVID BURNHAM,
A LAW UNTO ITSELF : POWER, P OLITICS AND THE IRS (1989).
118
For a discussion of this point, see Walter Block and Robert W. McGee, Must
Protectionism Always Violate Rights? INTERNATIONAL JOURNAL OF SOCIAL
ECONOMICS, forthcoming.
119
Bovard, supra, at 71. The farm program Congress passed in 1985 guaranteed
U.S. sugar beet and sugar cane farmers about 21.5 cents a pound for their product
when the world market price was about 4 cents a pound. Janet Novack, Three Yards
and a Cloud of (Sugar) Dust, F ORBES, September 4, 1989, at 39.
120
Steven Greenhouse, Trade Curbs: Do They Do the Job? NEW YORK TIMES, April
16, 1992, at D10.
121
Anne O. Krueger and Baran Tuncer, An Empirical Test of the Infant Industry
Argument, 75 AM. ECON. REV. 1142 (1982); LILA J. TRUETT AND DALE B.
TRUETT, E CONOMICS 726 (1987).
122
Charles P. Kindleberger, International Trade and National Prosperity, 3 C ATO J. at
630 (Winter 1983/84); Larry E. Westphal, Empirical Justification for Infant Industry
Protection, World Bank Working Paper No. 445, Washington, DC, March, 1981;
Edward Tower, Some Empirical Results on Trade and National Prosperity, 3 C ATO J.
at 642 (Winter 1983/84).
42
123
Cline, supra, at 193. Cline estimates the cost to be $20.3 billion. But this estimate
is based on wholesale prices. At retail, the cost might be double, or $40 billion, since
markups are about 100% in the textile and apparel industries.
124
Id, at 194. The $134,686 and $81,973 figures are based on wholesale prices. The
actual costs might actually be double these amounts.
125
U.S. Department of Labor, Bureau of Labor Statistics, Displaced Workers, 1979-
83, Bulletin 2240 (Washington: Department of Labor, July, 1985), at 28-29, as cited
by Cline, supra, at 195.
126
At 195, Cline, supra, points out that displaced apparel workers earned about 2.5%
less on their new jobs and displaced textile workers earned about 3.3% more on their
new jobs. Of course, these figures would differ for different industries. In autos and
steel, for example, displaced workers from western countries would probably earn less
on their new jobs, since auto and steelworkers earn more, on average, than other
industrial workers.
127
The author knows of one instance where an acquaintance in the state of
Pennsylvania lost his job and received unemployment benefits equal to about 60% of
previous pay for 52 weeks. During this time, he did not even try to find other
employment. He treated his unemployment as a paid vacation. When the benefits ran
out, in week 53, he found another job. So even if unemployed workers are paid a
percentage of their former wages, an unemployment compensation system may have a
tendency to reduce the incentive to work.
128
For some treatises on the failure of the U.S. welfare system, see MARTIN
ANDERSON, W ELFARE:THE POLITICAL ECONOMY OF WELFARE REFORM IN THE
UNITED STATES (Stanford: Hoover Institution Press, 1978); CHARLES MURRAY,
LOSING GROUND (1984); CHARLES MURRAY, IN PURSUIT OF HAPPINESS AND
GOOD GOVERNMENT (1988); C LARENCE B. C ARSON, T HE WELFARE STATE 1929-
1985, A Basic History of the United States, Volume 5 (1986); CLARENCE B.
CARSON, T HE WAR ON THE POOR (1969). For a recent suggestion for improvement,
see MARVIN OLASKY, T HE TRAGEDY OF AMERICAN COMPASSION (1992).
129
Even if one subscribes to the redistributionist approach, it is difficult to justify
redistribution from consumers to producers, which is exactly the kind of redistribution
that takes place under protectionism. Protectionism results in higher prices, which
consumers must pay to producers.