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Protectionism threatens U.S. prosperity
615 words The Freeman
page 1 of 3 Foundation for Economic Education
Irvington-on-Hudson, New York 10533
(914) 591-7230
Protectionism Threatens U.S. Prosperity
by Gene Smiley
Congress is preparing a number of trade bills designed to
"protect" American firms and labor, reduce the flow of
imports, and thereby cut the trade deficit. Michigan Senator
Donald Riegle has said that these moves "will strengthen our
nation -- and begin to restore our international financial
standing."
If the citizens of the United States can be made better
off by reducing international trade, then the same logic must
apply to individual states. The citizens of Wisconsin,
Michigan, New York, California, or any other state should be
made better off if their state governments reduce or eliminate
trade with other states. Why stop there? Why not give the
citizens of Los Angeles, San Francisco, Chicago, Milwaukee,
Detroit, or New York an improved quality of life by having
their city governments reduce or eliminate trade with other
cities? It would be even better if, say, the residents of the
Sherman Park neighborhood of Milwaukee were prevented from
trading with all outsiders. Finally, if this restriction of
trade is so beneficial, then let us have the government stop
the members of each household from trading with any other
household. Let each household become self-sufficient.
The logical conclusion is that if trade is harmful at the
international level, then surely they must be harmful all the
way down to the level of each individual. We recognize that
this is absurd because it would impoverish us all. Voluntary
trade at any level simply is not harmful.
If the government imposes quotas or tariffs on, say,
imported steel, then reduced supplies and higher prices for
imported steel allow domestic steel producers to sell more
steel and raise their prices. That, in fact, is what has
recently happened. Firms that purchase steel, such as the
producers of stainless steel kitchenware, are facing rising
prices. Rexworks, a small industrial firm in Milwaukee, found
that even though it had an excellent year in production and
sales, unanticipated increases in steel prices wiped out $2
million in profits. Meanwhile the steel producers are reaping
huge gains.
These harmful effects extend far beyond the direct
purchasers of the protected products. The reduced sales of
foreign steel decrease the number of American dollars foreign
countries receive. Because foreigners have fewer dollars,
their demand for American exports must fall. American
exporters find that there is less foreign demand for their
products, and their sales and prices and incomes fall.
While the measures designed to protect selected U.S.
firms raise their incomes, they reduce the incomes of American
firms and individuals that serve foreign markets. Consumers
who buy protected products must pay higher prices and face a
reduced range of choices. The benefit for the protected firms
and industries, then, comes at the expense of consumers in
general and firms that export.
Unfortunately, the losses incurred by those who are
harmed by the protective measures will be greater than the
gains of those who are helped. In free markets,
specialization and exchange encourage people to engage in
those activities for which they are the most productive.
Trade protection stifles this process, so that total output
falls. And, when this occurs, we begin the long trek down the
road to the general impoverishment of our society -- in the
name of "protecting" those firms whose owners and employees
are enriched at everyone else's expense.
We have gone through this before. In June 1930, during
the early stages of the Great Depression, Congress tried to
protect Americans by enacting huge tariff increases. Such
intervention served only to lengthen and worsen the
depression. Current proposals are inviting another Great
Depression. The freedom to choose our specialization and to
exchange with whomever we wish is the only way to guarantee
prosperity.
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Dr. Smiley is Associate Professor of Economics at Marquette
University. This article is adapted from the October 1989
issue of The Freeman, published by The Foundation for Economic
Education, Irvington-on-Hudson, New York.
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