All Commentary
Tuesday, August 1, 1995

Protectionism, Old and New

Trade Restrictions Hurt Consumers and Foreigners

Protectionism, which is the policy of protecting home industries from foreign competition, has many origins. Some date back to the ways of tribal societies which generally viewed foreigners as aliens and enemies. Others are singularly American, arising from economic stagnation and dollar decline. All are the result of misinformation which is more harmful than non-information. Error is always more active than ignorance.

Every form of protectionism builds on raw political force. It takes an army of tax collectors, administrators, and border guards to protect domestic industries by levying import tariffs and other restrictions on foreign products, or by paying bounties on domestic products. Protectionism builds on the governmental power to tax one man to help the business of another. Taking money from one American and giving it to another is the source of much social and economic conflict.

Protectionism receives its political strength from advocates of political power who welcome additions to governmental power. They are supported by mainstream economists who look to government officials for full employment and economic growth. Their primary concern is national income, national spending, and national employment. They favor national planning which obviously cannot tolerate international free trade; it would upset, disrupt, and quickly undo any planning.

The staunchest allies of these politicos are labor unions to whom government protection is of crucial importance. They live by the doctrine that union members have an inherent right to a job in their particular industry, at their present location, and at rates of pay that exceed market rates. Plagued by the inability to compete and by high rates of unemployment, they argue forcefully against everything foreign.

Unemployment undoubtedly is a great social evil that concerns us all. It is an economic phenomenon of loss and waste that harms not only the jobless but also their fellow workers who are forced to support them. Alleviation of unemployment has become an important political task by which governments are judged and measured. But the problem also raises a basic question: can import restrictions increase the demand for labor and reduce unemployment? Unfortunately, they cannot, because they reduce the productivity of labor and, therefore, reduce the demand for labor. Surely, a newly protected industry gains temporarily from the reduction of competition: it can raise prices, earn higher profits, and pay higher wages. But other industries will consequently suffer from the loss of trade and the higher costs of labor. Consumers everywhere experience reduced purchasing power.

In many respects, trade barriers are similar to natural obstacles that thwart human effort and impair man’s well-being. Both increase the demand for specific labor. For example, the destruction of housing by flood, earthquake, or fire increases the demand for housing supplies and construction labor, while also reducing the demand for a myriad of other goods which the destruction victims must now forgo. Similarly, import restrictions on foreign cars may boost the demand for domestic cars, but they also reduce the demand for other goods which the restriction victims, that is, consumers, must forgo.

Trade restrictions thus destroy more jobs than they can possibly create. Yet most American workers are convinced that they need such government protection. Without trade barriers, they believe, foreign products made by cheap foreign labor would flood American markets and force American workers to suffer substantial wage cuts or outright unemployment. Americans can trade with each other because they have similar income and working conditions, but they cannot trade with foreigners who work for less at lower living standards.

When carried to its logical conclusion, this wage-rate argument bars all foreign trade because no two countries are identical in labor productivity and income. It may even bar interstate commerce because wage rates differ from state to state. Wage rates in New York State are generally higher than those in Mississippi, by this argument, therefore, New Yorkers must not trade with Mississippians. In actual fact, the cost of labor is merely one of many cost factors determining the competitiveness of a product.

It is significant that the loudest agitation for protection is heard in those industries competing with high-cost foreign labor. The American automobile industry is competing with Japanese and German carmakers who pay considerably higher wages and fringe benefits. If the wage argument were correct, there would be few Japanese and German cars on American roads.

When the labor argument is not believable, American protectionists quickly retreat to a sixteenth-century defense: the balance-of-payments doctrine. It contends that government should promote exports to bring money into the country and stifle imports. The modern version urges legislation and regulation to restrict the use of foreign goods and encourages exports for the purpose of creating jobs in the country. Both versions, the old and the new, are spurious and erroneous.

The United States is currently experiencing chronic balance-of-payment deficits with Japan. The ordinary Japanese trade surplus runs at about $10 billion a month, of which $5-$6 billion are with the United States. They consist of dollar earnings which the Bank of Japan then promptly invests in U.S. Treasury obligations. The Bank of Japan is the world’s biggest financier of U.S. deficits, both in the federal budget as well as in current trade accounts, and is the strongest supporter of the U.S. bond market. If it were not for this solid support by Japan, the world’s biggest creditor country, the financial conditions of the United States, the world’s largest debtor, would be rather precarious.

In many parts of the world the U.S. dollar is greatly undervalued in terms of purchasing power. The dollar buys 30 percent to 50 percent less in Japan and Germany than it does here in the United States. Yet in this age of instant communication and capital mobility, it is not purchasing-power parity that determines exchange rates but capital profitability and opportunity. U.S. balance-of-payment deficits are the result of excessive monetary ease on the part of U.S. monetary authorities, of low interest rates, of high taxes on capital and on savings, and of chronic deficit spending by the federal government. America is consuming too much while saving and investing far too little.

Protectionism makes for strange bedfellows. It brings together big business and big labor, politicians counting votes and government officials yearning for power, sixteenth-century thinkers and twentieth-century economists. It unites many petitioners for political favors and largess in a common cause against consumers and foreigners.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.