Protectionism and Economic Recovery

With protectionism gaining political momentum, Dennis considers the impact of such policy on economic recovery.

Wilmington NC – [Click the LISTEN button to hear Dennis' commentary.]

Economic recovery in the US appears to have real traction. It has spread from impressive growth in retail sales and now includes an up-turn in business investment and a more promising outlook for new jobs. Further, other major economies, notably Germany and Japan, which have been a long-time drag on global economic vigor, have registered real growth in recent months.

Granted, their growth rates ? about 2 percent in Japan and 1 percent in Germany ? are modest compared to America?s recent 8 percent or so. But when viewed in total, it does appear that the global economy is now in its early stages of a true cyclical up-turn. Last summer?s surge in retail sales in the US helped boost demand for imports, stimulating industrial expansion elsewhere. Now, real growth in Japan and Germany ? the world?s second and third largest economies ? creates demand for US exports, further stimulating our economy. This is the way of a reasonably-well integrated global economy.

Thus, it is not difficult to be bullish on the economy in the near term. Good times are here, or at least coming on rather rapidly. However, worrisome developments are beginning to cloud my outlook for the longer haul. Most troublesome is that protectionism seems to be gaining political momentum in the US.

Last year, largely in response to lobbying by steel workers in Ohio, Pennsylvania and West Virginia, President Bush imposed steep tariffs on imported steel. While these may be moderated under threat of retaliation by other countries and penalties by the World Trade Organization, other signs of protectionism abound. For example, the 2002 farm bill increased domestic agricultural subsidies by nearly 80 percent, further distancing US farmers from a free-trade regime. Just last month quotas were imposed on imports of some Chinese textile goods to appease voters in the Southeast. Further, the Administration did not seem bothered by the collapse of recent negotiations over free trade in the Americas.

Indeed, industry after industry is knocking on lawmakers doors in Washington, blaming overseas competitors for loss of jobs and income. And, lawmakers are responding with both anti-trade rhetoric and policy, no matter that American consumers have been major beneficiaries of competition from abroad.

There is an impressive body of research that demonstrates the benefits of international trade. Because trade allows things to be produced where most efficient, people pay less and can buy more than under autarky. That is, without trade. This increases wealth and living standards. Further, open markets increase competitive incentives for domestic industry to innovate. This enhances efficiency, making our resources go farther. Protectionism threatens these broad-based economic gains, to the benefit of the relatively few who are otherwise temporarily displaced and must find alternative work.

Take the steel tariffs as an example. Steel workers did get some relief. But the cost of steel increased to domestic manufacturers that use it. This made their products less competitive ? foreign steel-using manufacturers gained market share, and US manufacturing employment fell. Recent studies have put the number of American workers who lost their jobs in steel-using factories due to the tariffs at more than 25 thousand; perhaps as many as 40 thousand. While some US steel workers remain employed, total income to American factory workers declined by more than a half billion dollars.

Trade restrictions do not cause immediate economic turmoil, as would a sudden spike in interest rates. But they do gradually drag down economic prosperity. Strong support for open-trade does carry short-term political costs ? mainly in the form of lost votes from displaced workers. But open trade is a positive-sum policy. A strong political commitment would go a long way in staving off uncertainty regarding sustainability of the current recovery.