The Rising Protectionist Tide; D. Bechara

DennisBechara THE RISING PROTECTION1ST TIDE INTERNATIONALtrade imparts bene fits to all countries that participate. The United States, for example, ex ports twenty per cent of its indus trial production as well as forty per cent of its agricultural products. In fact, approximately fifteen per cent of total U.S. output is exported. Foreign trade has been· responsi ble for a substantial amount of do mestic investment, and practically all Western schools of economics agree that free trade is the best course of action for all nations. Yet, during the past few years, various countries, including the United States, have attempted to· somehow shield themselves from foreign trade. Recently, an agree ment was reached between the U.S. and the Japanese governments Mr. Bechara is an attorney in Mayaguez, Puerto Rico. whereby Japan will comply with so called voluntary export restrictions in the sale of cars to America. Im ported steel has been curtailed, and more restrictions on the importation of foreign textiles and apparel have been implemented. As Time re cently pointed out: Many Europeans now fear that the U.8.

will impose trade barriers, such as those that already exist for automobiles and steel, on other products to protect Amer ican businesses. Pressure for protection ist measures has been mushrooming. A Florida manufacturer of machine tools has asked the White House to block in vestment tax credits on Japanese-made machinery. Chemical companies will be actively seeking additional shelter from foreign imports in the next session of Congress. Even uranium producers are invoking national security as an excuse to ban the purchase of uranium over seas. I 545 546 THE FREEMAN September The range of worldwide restric tions varies, but they inexorably lead to a further reduction in foreign trade. Countries in Central Amer ica, for example, have adopted a pol icy of substituting imports, with the intention of industrializing their economies. Industrialized countries, on the other hand, have other poli cies which curtail the free flow of goods and services between coun tries. As an example of the restric tive policies in effect, a commenta tor recently pointed out: Airlines in France, Italy and West Germany, for instance, keep U.S. carri ers out of their reservation computers, preventing passengers from booking on American carriers, in, say, an Air France office in Paris. Australia forbids the screening of television ads produced abroad, and Canada has issued guide lines that encourage Canadian TV sta tions to use domestically produced com mercials. West Germany requires German models in all advertising produced in the country.2 The international situation may perhaps degenerate into the present trade relationship between France and Hong Kong. Alarmed by the massive importation of electronic quartz watches manufactured in Hong Kong, France imposed a quota on their. importation. Although the incident cannot vitally affect Hong Kong's economy, the watch manu facturers, in turn, have promoted a boycott of French cognac.3 Fostering Free Trade The general worldwide trend since World War II has been to foster free foreign trade. The General Agree ment on Tariffs and Trade (GATT) is a reflection of this trend, which has been successful in reducing bar riers to trade between nations. At the present time, the average world tariffs amount to approximately 5 per cent of imports. 4 Yet, partly as a re sult of this new trend favoring pro tectionist measures, world trade has been adversely affected. In fact, GATT figures indicate that "inter national trade levelled off in the middle of 1979 and has been flat ever since. Adjusted for inflation, trade volume actually went down in 1980 and 1981 and further falloff is pre dicted."5 In addition, a GATT confer ence held in the fall of 1982 failed to reach any significant lowering of trade barriers.

Although the trend seems to be in the direction of additional protec tionist measures, an opposite move ment is simultaneously taking place. A Federal relief program, entitled Trade Adjustment Assistance, which has granted aid to those unem ployed as a result of foreign compet ition, is scheduled to be phased out this fall. This program is illustra tive of the failure of interventionist policies that attempt to offset for eign trade. Although the Trade Adjustment Assistance program has been in ef1983 THE RISING PROTECTIONIST TIDE 547 fect since 1962, its effects were neg ligible because of the application of strict guidelines in the granting of benefits. Essentially, a group of workers had to establish that they lost their jobs primarily because of an increase in imports. The increase in imports, on the other hand, had to be related to a so-called trade concession granted by the U.S. gov ernment. However, the Trade Act of 1974, which took effect in 1975, amended and substantially liberal ized the provisions and interpreta tions of the program. Perhaps one of the most substantial amendments was that now imports need not be the most important reason causing unemployment. If imports contrib uted to the loss of jobs, it was not necessary that they be the principal cause. Consequently, the assistance program mushroomed. The number of workers certified as eligible in creased from 62,000 in 1976 to 531,000 in 1980.6 Aiding the Victims of ForeignTrade An avowed purpose of the Trade Adjustment Assistance program was to promote foreign trade while cush ioning the immediate adverse ef fects of foreign trade upon domestic producers. The rationale has been that since everyone benefits from free foreign trade, those that do suffer from it ought to receive assistance.

The realities of the program, on the other hand, establish that the as serted goals were far from reached. One of the immediate effects of this program was the creation of an ar tificial amount of temporary layoffs in different industries. As one com mentator put it: Troubled companies, for example those in the steel industry, would lay people off, allowing them to collect unemploy ment insurance plus TAA benefits for a while. Then the company would rehire them, at the same time laying off a new bunch.? A General Accounting Office study confirms this view, inasmuch as 85 per cent of the beneficiaries of the TAA program were temporarily laid off.8 Yet, perhaps the leading benefici aries of this assistance program have been labor unions, as the majority of the recipients were unionized em ployees. This should not be surpris ing since it is more likely that unionized firms have working con ditions that tend to be less competi tive than non-unionized firms. Con sequently, other things being equal, unionized industries would tend to suffer from foreign competition.

9 In effect, the assistance program has perpetuated inefficient producers. The evidence suggests that al though funds were available to pro mote relocation and job searches, a small fraction of the recipients en gaged in active search for alterna tive jobs. Of the 1,320,733 benefici548 THE FREEMAN September aries who were receiving assistance within the April 3, 1975 and Sep tember 30, 1981 period, "only 5,133 or .39 per cent engaged in job search, as measured by the number of work ers receiving job search allow ances."lO Spending in this program has substantially decreased since Sep tember 30,1981. The reason for this is that the Omnibus Budget Recon ciliation Act of 1981 amended TAA and the standards required to estab lish eligibility in the program have been restricted. Spending, which in fiscal year 1981 was $1.4 billion, de creased the following year to $101.6 million. Unless Congress acts oth erwise, the program will cease to be in effect as of September 30, 1983.

Essentially, the Trade Adjust ment Assistance program was the politicians' effort to promote free in ternational trade. As foreign com peti tion undoubtedly affected some sectors of the economy, especially the heavily unionized ones, companies were forced to layoff employees. This is normally taken care of in the market order as resources are placed in more efficient areas of production. By withdrawing resources from the more efficient sectors of the economy into the less efficient areas, TAA only acted to increase inefficiency, to pro mote the production of more costly goods and to shield the labor unions from being publicly held responsible for raising the costs of production. The clamor for protectionist mea sures, however, remains unabated. Import Substitution As all uded to before, Central American countries have taken an other path which they feel will lead to industrialization. This is the pol icy known as import substitution, which is another form of protection ism. Essentially, the policy was aimed at promoting the local manu facture of imported goods so as to satisfy domestic demand. However, governments in those countries needed to erect high tariff walls in order to encourage the investment of capital in those industries. The ef fects of this policy soon began to emerge. Since locally manufactured goods were either more expensive or qualitatively less competitive in the world market, "... very little of the new industrial output could be ex ported. Instead of gaining indepen dence from having to import con sumer and intermediate goods, countries merely shifted imports to different kinds of products (inputs, raw materials and capital goods).

They became far more dependent on imports due to the fact that in small economies, even simple production requires imported input. The inevi table result was the development of a far more severe balance of pay ment constraint, and business cycles far deeper than in open, competitive economies. "11 1983 THE RISING PROTECTIONIST TIDE 549 As those countries invested sub stantial amounts of capital in the emerging manufacturing sector, for eign currency had to be obtained in order to pay for the imported capital goods. Yet, the problem became in soluble as the goods that were man ufactured internally could not find a ready market outside the domestic market. Foreign exchange was available through the exportation of the traditional basic commodities, but as capital was drained into the less efficient manufacturing enti ties, the growth of the exporting sec tor was limited. With less foreign exchange available, there was a smaller amount of capital available to meet the needs of the domestic markets. Thus, the drive to indus trialize and seek development through the policy of import substi tution has left those countries worse off than before.

The common denominator in all of these protectionist measures is a general misunderstanding of for eign trade. If foreign trade. causes unemployment in one sector of the economy, the conventional response is to restrict the introduction of the foreign goods which created the un employment. Yet, this reaction does not take into account the fact that although some workers may lose their jobs as a result of foreign com petition, the domestic consumers will have more resources left at their disposal as a result of purchasing the cheaper foreign goods. Thus, domes tic consumers will adjust their be havior, and will spend or save the additional purchasing power brought about by the introduction of less costly foreign goods. Inevitably, jobs will be created in the economy as a result of this. The Principle of Comparative Advantage Through Trade The argument against foreign trade may be likened to the opposi tion to the introduction of ma chinery brought forth during the In dustrial Revolution in England. The opponents set out to ban machinery, and in many instances destroyed the machines outright. This opposition was grounded on the belief that ma chines created unemployment, for it seemed that fewer employees were needed to produce goods because of automation. The historic evidence, however, has refuted these fears.

Machines have increased employ ment beyond all expectations, be cause by loweri~g the cost of goods to the consumer, they helped in crease demand for those goods. Similarly, the principle of com parative advantage should be stressed again and again in order to illustrate the advantages of foreign trade. In order to understand this principle, it is important to grasp the fact that foreign trade is essentially like domestic trade. Specialization occurs within any trading area.

550 THE FREEMAN It is common to observe that some areas of a country are identified with a particular industry. In the United States, for example, Detroit is asso ciated with the automobile industry, Pittsburgh with the steel industry, Hollywood with the film industry, Seattle with the aerospace industry, and Dallas with oil. This specializa tion may be traced to different rea sons, but it should be understood that the natural forces of the market have created this situation. On the other hand, there is no immutable law that perpetuates .specific economic spe cialization in a given geographical area. New England, for example, used to be the textile center in America. The market is always in a state of flux, and capital and labor tend to be attracted to the more ef ficient and hospitable areas. Foreign trade permits, on an in ternational scale, the specialization that often occurs within the confines of a local economy. Countries more efficient in the production of cars, textiles, wines, food or any other product will tend to export such goods because of their quality and lower cost to the consumer. Those same countries will have the incentive to import goods that may be acquired at a lower cost from outside sources.

Clearly an optimum utilization of resources is achieved and employ ment is maximized. However, when a country raises tariffs or quotas or implements any protectionist policy, it only succeeds in misallocating resources, lowering worldwide production and raising the prices of goods to the consumers. Protectionist policies may succeed in preserving some jobs in specific in dustries, but only at the expense of the general welfare of the country. In order to stem the tide of protec tionism, it is imperative that the facts about foreign trade be learned. Oth erwise, more quotas and tariffs will be erected, to the detriment of all. , -FOOTNOTESITime (November 9, 1982) p. 55. 2Fortune International (November 29, 1982), p.54. 3Fortune International (February 7, 1982), p. 62. 4Fortune International (March 21, 1983), p. 79. 5Fortune International (November 29, 1982), p.52. 6Fortune International (March 21, 1983), p.

79. 7Ibid. 8VO!. 2, The Cato Journal (1982), p. 884. 9Ibid, p. 878. . lOIbid.,p. 888. llVol. 12, California WesternInternational Law Journal (1982), p. 470.