The high cost of protectionism and what can be done about it

Protectionism is expensive. Undoubtedly most consumers have heard that message from antiprotectionists before. Nonetheless, some numbers put together by two economists in a study for the Institute for International Economics in Washington do emerge as startling. Overall, American consumers paid $58 billion extra in 1984 to protect 19 industries from foreign competition, calculate Gary Clyde Hufbauer and Howard F. Rosen.

Looking at individual industries, the two figure that American book buyers paid an extra $500 million because of an ``escape clause action'' to protect the domestic book manufacturing industry. That cost $100,000 per job saved.

Buyers of cars had to pay an extra $5.8 billion as a result of the quotas on imports. In this case, it works out to $105,000 per job saved. Because the quotas allow domestic automakers to charge more than if imports were unlimited, buyers of both domestic and foreign cars pay the bill.

Users of carbon steel must fork out an extra $6.8 billion, or $750,000 per job saved. Those buying specialty steel pay $520 million for the privilege of saving that industry from import competition. In this case it cost $1 million per job saved.

Most expensive of all is the protection granted the textiles and apparel industry -- $27 billion. That works out to some $112 per American -- man, woman, child -- to maintain the domestic industry. With a large number of employees in that industry, it costs ``only'' $42,000 per job saved.

Restraints on dairy imports cost $5.5 billion, or $220,000 per job saved or $1,800 per cow ``saved'' from the slaughterhouse.

Keeping the nation's relatively few peanut farmers protected costs $170 million, about $1,000 per acre that would be otherwise diverted to some other crop or taken out of production. That's not peanuts!

And so on.

Most of the American labor movement is today protectionist in its views. It believes that the export of modern technology is so easy that there will be future waves of newly industrialized nations like Taiwan and South Korea to manufacture goods cheaply with low wages and undercut the product of American workers.

Mr. Hufbauer, now a professor of international finance at Georgetown University, holds that US labor exaggerates the mobility of technology.

In other words, it may be possible to build brand new up-to-date steel, auto, or textile plants in South Korea or some other nation with a relatively high education level. But it won't be so easy to export more complicated technology to all developing countries at a rapid rate. Most such nations are poor largely because of low education levels.

The basic point of Hufbauer and Rosen's exercise is this: If political necessity requires the president and Congress to come to the rescue of domestic industry when it is especially beset by foreign competition, then, as Mr. Hufbauer put it, ``Do it sensibly. Do it at less cost. Do it in a way that is temporary.''

At the moment, a favorite protectionist device is quotas on imports.

Domestic industries like quotas because they assure them their share of the domestic market and reduce the variability of prices. Quotas may also be easier to obtain politically compared with tariffs since the public does not fully appreciate their effect on prices and thus on consumer costs.

Hufbauer and Rosen calculate a rough equivalent in tariffs of the quotas. It would be 40 percent on books, 30 percent on textiles and apparel, 30 percent on carbon steel and 25 percent on specialty steel, 80 percent on dairy products, and 28 percent on peanuts.

Foreign exporters prefer quotas to tariffs because usually they do not have to cut back exports, they are often protected from foreign newcomers in the US market, and they benefit from what economists call ``valuable scarcity rents.'' That means they can charge more for their product, even though it may cost no more to produce. They get some compensation to offset the lost opportunity for expanding their exports.

For example, the Japanese automobile companies have been making massive profits on their exports to the US, money that was used to further automate their plants and in some cases invest in new plants in the US. The dramatic increase in the value of the yen may have shrunk those profit margins considerably in recent months.

Hufbauer and Rosen argue that quotas used in 17 protected industries should be converted to equivalent tariffs. Alternatively, the quotas could be auctioned to the foreign exporters by the US government. This would enable the US Treasury to capture an estimated $9 billion in revenues this year that would, in effect, otherwise go indirectly to foreign or domestic producers.

The two economists admit that the current ``US system of special protection is far from the worst system imaginable.''

The usual presidential policy of making slow and grudging concessions to troubled industries, coupled with less-than-watertight regimes of protection, has resulted in noncompetitive industries shedding substantial numbers of workers and losing market share to imports. That process shifts resources to more competitive industries.

But they figure their proposed system of tariffs and various kinds of trade adjustment assistance would be superior. Professor Hufbauer thinks there is a chance that some of its features may be adapted into omnibus trade legislation Congress might pass next year.