Beating Back Predatory Trade

Alan Tonelson

From Foreign Affairs, July/August 1994

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Summary:  Laissez-faire economists contend that trade barriers make domestic industries lazy, fat and greedy. But five U.S. industries afforded import relief, automotive, steel, machine tools, semiconductors and textiles, have dramatically improved productivity, boosted R&D and recaptured market share. Free trade champions who plead the case of the purportedly forgotten consumer ignore the benefits of import relief such as savings on retraining dislocated workers. Government can intelligently structure policies to give threatened industries a second chance.

Alan Tonelson is Research Director of the Economic Strategy Institute. He wishes to acknowledge the research assistance of Nisha Mody and Hallet Hastert.

CONFOUNDING THE CONVENTIONAL WISDOM

Contrary to widespread beliefs, relief from predatory foreign trade practices has played a major role in revitalizing key American industries in recent years. Five major American industries, automotive, steel, machine tool, semiconductor and textile, have received significant relief from imports through intelligently structured trade laws. Those industries have confounded the predictions of laissez-faire economic ideologies by gaining market share at home and in some cases abroad, contributing to job creation and reinvigorating American competitiveness. Even in industries that have aggressively downsized since the early 1980s, such as the steel industry, relief from imports has prevented job loss from worsening. In addition, the cost of these programs is far smaller than commonly believed.

President Bill Clinton has given trade policy unprecedented attention not only by supporting the North American Free Trade Agreement (NAFTA) and the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), but by making sallies against trade barriers in Europe and promoting American business in the Pacific Basin. Moreover, his efforts in the framework talks with Japan and recent export initiatives have sought to strengthen American industry and create high-wage jobs by opening foreign markets to U.S. goods. But the Clinton administration?s policies and programs have come under attack from many foreign governments, who portray them as unilateral protectionism in violation of world trade law, and from many economists, who consider them threats to freer trade. On the contrary, if not addressed in the implementing legislation that must be passed by Congress, significant problems for the economy could be created by the recently signed Uruguay Round agreement. It could significantly dilute several U.S. trade laws and import relief programs, weakening America?s ability to respond to predatory foreign trade practices.

THE IMPORT RELIEF RECORD

The notion that import relief can achieve lasting net benefits clashes violently with the prevailing wisdom of laissez-faire economics. Protectionism of any kind or degree, many economists insist, only shelters inefficient companies and hinders the process of "creative destruction", an oxymoron coined in 1942 by economist Joseph Schumpeter, the process through which capitalism unsettles people?s lives through job losses and career changes but eventually enriches most of them.1 In particular, this orthodoxy teaches that industries and companies receiving import relief grow lazy and greedy. Shielded from competition, these firms allegedly lose incentives to innovate, boost efficiency and hold down prices. Instead, they rest on their technological laurels, forget about quality, jack up prices and greedily suck windfall profits out of captive markets.

These textbook staples, however logical-sounding, have been completely contradicted by much of America?s recent experience with import relief. The U.S. automobile, semiconductor, machine tool, steel and textile industries all received significant import relief throughout the 1980s and 1990s. In all five industries, which total hundreds of companies, employ millions of workers and span the technological spectrum, new investments in plant, equipment and research and development surged, productivity shot up, quality improved and prices rose at rates very close to overall inflation rates, and sometimes below them. ...

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