International trade has surfaced as an issue because of Pat Buchanan's campaign promise to protect American businesses and workers against "unfair" foreign competition. Trade issues are fertile grounds for demagoguery, so let's look at it.
Regardless of protectionist rhetoric, the bottom-line objective and result of import restrictions is to enable domestic companies to charge higher prices than they could in the presence of open competition with foreign producers. Protected companies earn higher profits. Their workers can demand higher wages and keep their jobs.Without a doubt, there are benefits to import restrictions. During the 1980s, the Reagan administration caved in to U.S. steel industry pressure to impose import restrictions on "cheap" foreign steel. Professor Arthur T. Denzau, of St. Louis' Washington University, published a report showing that those restrictions saved 17,000 jobs in the steel industry. That's a blessed congressional miracle. Before you rush to endorse Buchanan's ideas, you may want to check out the victim side of the equation.
Many American companies use steel. President Ronald Reagan's import restrictions led to higher steel prices that raised their production costs.
A minor concrete example of this is the Davis Walker Corp. of Los Angeles - once one of the largest U.S. independent steel-wire producers. After Reagan's trade restrictions, Davis Walker Corp. was forced to buy 60 percent of its steel from domestic producers at higher prices. Its foreign competitors, able to buy cheaper steel, were able to underprice Davis Walker on world markets. The company was forced to close plants in Houston, Dallas, New Orleans, Colorado and Mississippi and eventually went bankrupt.
Companies such as Caterpillar saw their competitive position weakened by having to pay higher steel prices. That's one of the reasons we see so much foreign-produced heavy construction equipment.
Denzau says the import restrictions on steel led to a loss of 52,400 jobs in American steel-using industries. How's that for brains? For every job "saved," three were lost.
Pat Buchanan's economic adviser might say, "Williams, the problem was Reagan didn't go far enough. Pat's not going to have such half-measures!" He'd be right. Davis Walker Corp. might have survived if import restrictions had been imposed on steel-wire products entering the United States. Caterpillar wouldn't have suffered losses and layoffs if import restrictions had been imposed on foreign heavy construction equipment. But restrictions on those goods would have driven up their prices, requiring another miracle.
Steel wire and heavy construction equipment are used by American companies to produce other products. Higher prices resulting from trade restrictions would put these companies at a competitive disadvantage. Then, a Buchanan administration would have to create a miracle for them. The problem facing Pat was insightfully described in Marcus Cook Connelly's play, "Green Pastures," where a frustrated God said to the Angel Gabriel, "Every time I passes a miracle, I have to pass four or five more to catch up with it."
Buchanan's right about Japan's oppressive trade restrictions. As a result of those restrictions, in 1993, Japanese people paid $7.60 for a spark plug that Americans got for $1.69. The Japanese pay four times the world price for rice and over $2,000 for a laser printer that we get for less than $1,000.
The question for brother Pat is: How smart is it for us to get even with Japan by enacting protectionist policies that make Americans pay high prices too? Or put another way: Suppose you and I were in a rowboat. If I shot a hole in my end of the boat, would you retaliate by shooting a hole in your end of the boat?