Mar 1, 1978

The New Protectionism

“The most important beneficiary of free trade is the consumer. If this fact can be made clear to the American people, then we may yet avoid a trade war.”

One of the most disturbing developments of the past year is the resurgence of protectionism in the United States and throughout the world. The mounting pressure for protectionism is becoming so acute, in fact, that the prospects of a full scale trade war—with all that implies—are growing all the time.

At its convention in December, the AFL-CIO issued a strong statement favoring legislation protecting U.S. industry from foreign imports. George Meany, president of the labor federation, went so far as to say: “Free trade is a joke and a myth. And a government trade policy predicated on old ideas of free trade is worse than a joke—it is a prescription for disaster. The answer is fair trade, do unto others as they do to us—barrier for barier, closed door for closed door.”

This pronouncement is important because it reverses labor’s historically held position favoring free trade. In the 19th century, Cobden and Bright in England, Frederic Bastiat in France, and Henry George in the United States proved that free trade benefits the masses and that no overall benefit can come from tariffs, which only raise prices for goods workers must buy.

Business has always favored tariffs, on the quite natural grounds that such levies protect it from competition and thereby increase its profits. Thus, we have always had business on one side and labor on the other. Politically, the Democratic Party traditionally has been the party of free trade while the Republican Party was the party of the tariff.

Labor has reversed its position because it feels that free trade has led to the “export” of American jobs. It has asserted that hundreds of thousands of jobs have been “lost” due to imports in clothing, shoes, steel, autos, consumer and industrial electronics, and communications equipment.


A modicum of thought will show that the simple logic of the protectionists is easy enough to refute. As Milton Friedman wrote in a recent Newsweekcolumn: “If the Japanese can sell color TV-sets in the U.S. more cheaply than U.S. manufacturers, that will mean fewer jobs in the U.S. television-manufacturing industry. But it will mean more jobs in those industries that can now export more to Japan.”

The Carter administration has attempted thus far to walk a tightrope, trying to placate labor while avoiding quotas and tariffs. In the case of the steel industry, which has been especially hard-hit by imports from Japan, the administration adopted a reference price system designed to prevent the Japanese from selling steel for less than their cost of production. Allegedly, the Japanese have adopted this tactic in order to undercut American steel manufacturers and take over the market.

The fact is, however, that Japanese manufacturers are not baldly “dumping” their steel in the United States. It’s just that the Japanese steel industry is vastly more efficient. According to a study by the American Iron and Steel Institute, Japanese workers are as much as 50 percent more productive than American steel workers— largely because Japanese steel plants are much more modern and efficient than American steel plants. Moreover, according to the Council on Wage and Price Stability, American steel companies have granted pay increases to their workers which are totally out of line with the economics of the industry. Steel workers are currently among the highest paid workers in America. At present their wages are more than 60 percent higher than the average wage for all manufacturing industries.

But even if the Japanese are “dumping,” who cares? If they want to present a felicitous gift to the American people in the form of underpriced goods, why should we be concerned? The result can be only that all goods made with steel will be cheaper than they otherwise would have been— thereby creating more jobs in steel-related industries, such as automobile production.

The most serious danger in the United States’ adoption of large-scale tariffs or quotas is the nearly certain retaliation in kind by other countries and a resultant breakdown of world trade. The last time this happened was when the United States adopted the Smoot-Hawley Tariff in 1929. This one act may have done more to create and prolong the Great Depression than any other single event. (See Jude Wanniski’s article, “The Crash of ’29—A New View,”Wall Street Journal, October 28,1977.)

Take this path one step further: A disintegration of world trade along these lines not only would lead to acute economic suffering around the world but also would intensify the likelihood of war. One needs to think back only a few years to the oil embargo of 1973-4, when world trade virtually ground to a halt and American policy-makers began to talk seriously about invading the Middle East to get oil, to get a whiff of what might ensue.

Thus prospects for free trade are not bright. As Macaulay once said, “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.”

There is always the possibility that the traditional liberal support for free trade may hold—although some prominent free traders in Congress (like Representative Charles Vanik, chairman of the Trade Subcommittee) have called openly for quotas—and that groups with vested interests in free trade, like farmers and other exporters, may offset the pressure for protection. In the end, though, the most important beneficiary of free trade is the consumer. If this fact can be made clear to the American people, then we may yet avoid a trade war.