"According to Team Trump’s website, we’re told that “blue-collar towns and cities have watched their factories close and good-paying jobs move overseas, while Americans face a mounting trade deficit and a devastated manufacturing base. By fighting for fair but tough trade deals, we can bring jobs back to America’s shores, increase wages, and support U.S. manufacturing.”
Actually, it’s been capital investments in labor-saving technologies like robotics and increasing worker productivity that have led to the large majority of US factory job losses, not trade or outsourcing, as I documented recently here. And there’s been no devastation of America’s manufacturing base; to the contrary, real US manufacturing output has reached all-time high levels in recent quarters.
What’s Trump’s solution to the loss of US manufacturing jobs? America’s “first authentic protectionist to win the White House since the 1920s” has outlined a series of protectionist trade measures including tariffs (30-40-50%), “tougher trade deals” (likely trade deals to protect US manufacturers from foreign competition), “Buy American” policies, and border adjustment taxes, among other strategies to “save American jobs.”
Here’s a relevant question to ask: How have protectionist trade policies in the past worked out for the US economy and how expensive is it to save American jobs with the protectionist trade policies Trump is proposing? We can find some answers to those questions in a Federal Reserve Bank of St. Louis research article published in 1988 by three economists “Protectionist Trade Policies: A Survey of Theory, Evidence and Rationale,” which presented a summary of the empirical evidence on trade protectionism from the 1986 book published by the Institute for International Economics Trade Protection in the United States: 31 Case Studies. Even though the research and empirical results are from the 1980s, this article and book provide useful empirical evidence on the costs of protectionism to bring some much-needed sanity to the debate on trade policy to counterbalance the favorable treatment being given to protectionism these days.
Here’s the introductory paragraph of the research article, which certainly sounds like it could have been written today, even though it was written to describe the rising protectionist tide in the 1980s (emphasis added):
Protectionist pressures have been mounting worldwide during the 1980s. These pressures are due to various economic problems including the large and persistent balance of trade deficits in the United States; the hard times experienced by several industries; and the slow growth of many foreign counties. Proponents of protectionist trade policies argue that international trade has contributed substantially to these problems and that protectionist trade policies will head to improved results. Professional economists in the United States, however, generally agree that trade restrictions such as tariffs and quotas substantially reduce a nation’s economic well-being.Here’s a discussion of the summary of the empirical evidence on trade protection from the article, based on the results in the Hafbauer et al. book (and summarized in the table above):
Hufbauer et al. (1986) examined 31 cases in which trade volumes exceeded $100 million and the United States imposed protectionist trade restrictions. They generated estimates of the welfare consequences for each major group affected (see table above). The figures in the table indicate that annual consumer losses exceed $100 million in all but six of the cases. The largest losses, $27 billion per year, come from protecting the textiles and apparel industry. There also are large consumer losses associated with protection in carbon steel ($6.8 billion), automobiles ($5.8 billion) and dairy products ($5.5 billion). The table above also reveals that domestic producers were the primary beneficiaries of protectionist policies…..Here’s from the paper’s conclusion (emphasis added):
The purpose of protectionism is to protect jobs in specific industries. A useful approach to gain some perspective on consumer losses is to express these losses on a per-job-saved basis. In 18 of the 31 cases, the cost per-job-saved is $100,000 or more per year; the consumer losses per-job-saved in benzenoid chemicals, carbon steel, specialty steel, and bolts, nuts and screws exceeded $500,000 per year [in 1986 dollars, see the last column for annual consumer losses per-job-saved re-stated in 2016 dollars].
The empirical evidence is clear-cut. The costs of protectionist trade policies far exceed the benefits. The losses suffered by consumers exceed the gains reaped by domestic producers and government. Low income consumers are relatively more adversely affected than high-income consumers. Not only are there inefficiencies associated with excessive domestic production and restricted consumption, but there are costs associated with the enforcement of the protectionist legislation and attempts to influence trade policy.MP: In other words, an increase in protectionist trade policies would “Make America Poorer” — not “great again” — and would especially impoverish the most vulnerable Americans – the poor and low-income families. Further, the wasteful costs to enforce protectionist trade policies create a further drag on the economy. And here below the authors use public choice theory to explain the popularity of protectionism, which applies today just as it did in the 1980s:
The primary reason for these costly protectionist policies relies on a public choice argument. The desire to influence trade policy arises from the fact that trade policy changes benefit some groups, while harming others. Consumers are harmed by protectionist legislation; however, ignorance, small individual costs, and the high costs of organizing consumers prevent the consumers from being an effective force. On the other hand, workers and other resource owners in an industry are more likely to be effective politically because of their relative ease of organizing and their individually large and easy-to-identify benefits. Politicians interested in re-election will most likely respond to the demands for protectionist legislation of such an interest group.MP: As H.L. Mencken explained it, protectionism results for political, and not economic reasons, because the legislative process is like having two foxes (producers and politicians) and a chicken (consumers) taking a vote on what eat for dinner. Finally, the long-run effects of protectionism on economic growth are discussed, as well as the inevitable tendency for protectionism to breed more protectionism:
The empirical evidence also suggests that the adverse consumer effects of protectionist trade policies are not short-lived. These policies generate lower economic growth rates than the rates associated with free trade policies. In turn, slow growth contributes to additional protectionist pressures.Bottom Line: Let me re-phrase that last paragraph as follows:
Interest group pressures from industries experiencing difficulty and the general appeal of a “level playing field’’ combine to make the reduction of trade barriers especially difficult at the present time in the United States. Nonetheless, national interests will be served best by such an admittedly difficult political course.
Interest group pressures from industries like manufacturing experiencing difficulty producing products, the general now popular appeal of a “level playing field,’’ and the election of the first authentic protectionist president in nearly a century combine to make the
reductionintroduction of trade barriers especially difficultlikely at the present time in the United States. Nonetheless, national interests will not be served best by such an admittedly difficultpolitically popular course.
The popularity of protectionist trade policy is growing and is being actively promoted by President Trump. The appeal is clear and understandable: protectionism does save and protect some American jobs in protected industries, and those jobs are easily visible, identifiable, and measurable; in fact, they provide wonderful photo opportunities and hand-shaking opportunities for protectionist presidents and politicians. And that’s all we hear about from President Trump are the factory jobs that he’ll save by protecting American manufacturers and their workers from foreign competition. But the one group of Americans we never hear about from Trump when he discusses international trade are the most important group of Americans – the American consumers (including especially the poor and low-income households) — who are the group that have the most to gain from international trade and the group that has the most to lose from trade barriers. But by not considering the most important group — consumers — we get a biased and distorted viewpoint of protectionism because we only hear about the benefits of protectionism to some producers and workers whose jobs are saved, while ignoring the huge and burdensome costs of protectionism imposed on consumers.
The empirical evidence above helps us to understand a very important economic lesson about international trade, call it “protectionist math” — and that mathematical reality is that the costs of protectionism imposed on American consumers in the form of higher prices and a reduction in trade will always be greater than the benefits generated for the protected industries and the workers in those industries. And here’s another part of that “protectionist math” that helps us answer the question: Sure, we can save US jobs with protectionist trade policies, but how much does it cost consumers for every job saved with protectionist trade policy, and is that cost worth it? Economic analysis and the empirical evidence presented above suggest that it’s very, very expensive to save US jobs with protectionism — more than half-a-million dollars on average per year per job in 2016 dollars (see chart above). If Trump enacts protectionist policies that save $50,000 per year US factory jobs but at a cost to consumer of $500,000 annually for each job saved, that’s a surefire formula to “Make America Expensive and Poor Again,” not “great again.”
Tuesday, January 24, 2017
Yes, protectionism can save some US jobs, but at what cost? Empirical evidence suggests it’s very, very expensive
From Mark Perry.