The False Allure of Managed Trade

With China disrupting global markets, the U.S. is trying to limit certain imports to protect American industry. It’s a strategy that backfired in the past.

By Chad P. Bown. He is with the Peterson Institute for International Economics. Excerpts:

"managed trade . . . carries serious costs."

"The first of these concerned cotton clothing, which Japan exported to the U.S. at such volume that the U.S. garment industry and textile mills feared for their survival. In 1957, President Dwight D. Eisenhower convinced Japan to voluntarily hold back its exports, but that just led companies in South Korea, Hong Kong and Taiwan to rush into the breach. In the early 1960s, the Kennedy administration helped to negotiate managed trade deals that culminated with the Long Term Arrangement on Cotton Textiles.

To get around trade limits on cotton goods, manufacturers pushed products made from synthetic fabrics as well as wool. The managed trade response in 1974 was to broaden the agreement, making it the Multi-Fiber Arrangement, or MFA—a mind-numbingly complex web of import and export restrictions that had the effect of raising consumer prices for nearly all textiles. By the mid-1990s, a U.S. government study found that the MFA program cost the U.S. economy about $10 billion a year. Managed trade in textiles wouldn’t be finally phased out until 2005.

Trade quotas require active management. Government bureaucrats, often working under rigid rules and with very little data, are expected to level out supply and demand. When a product can only be imported in limited amounts, for example, companies rush to fill the quota before their competitors can do so. Jennifer Hillman, a former government official in charge of administering the U.S. MFA program in the early 1990s, recollects getting tearful calls from brides-to-be whose wedding dresses were stuck at the dock and eight-year-old Little Leaguers whose baseball uniforms couldn’t be let in in time for the season opener, in both cases because quotas had already been filled.

Cotton clothing was far from the only industry the U.S. tried to manage in order to compete with Japanese imports. Japanese cars—smaller, cheaper and more fuel-efficient than their U.S. counterparts—threatened to dominate the American market in the 1970s, leaving Chrysler on the brink of bankruptcy. Congress threatened to impose quotas, and in 1981 the Reagan administration convinced Japan to accept what became a series of voluntary export restraints on autos. To get around these restrictions, Toyota, Honda, Nissan and others built assembly plants in the U.S. 

They also shifted their product mix: Rather than fill their quota each year with budget models, Japanese auto makers added horsepower as well as other features and developed more lucrative luxury brands, such as Acura, Lexus and Infiniti, which competed even more directly with American-made sedans.

Japanese semiconductors, too, surged into the U.S. market during this period, and in 1986, the Reagan administration convinced the Japanese chip industry to reduce its sales globally. When the Japanese side proved unable to follow through, the U.S. imposed tariffs. Eventually Japan did restrict its chip exports, but doing so made its products more expensive. That proved a boon to competition from Taiwan and South Korea, which then came to dominate much of the semiconductor market, pushing many U.S. and Japanese manufacturers aside."