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.