ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Thursday, October 26, 2006

Why Protectionism Is Idiotic

Now, given our global economy, I don't think it matters which party is in power in Congress or in the White House. While the GOP is much more in favor of free trade, even the Dems recognize that there's no going back to a 19th century economy. While they may not move as quickly on free trade, they are not stupid enough to turn back the clock - although they could surprise me...

First, a tip of the hat to Cafe Hayek, who links to this article by Walter Williams in the Washington Times regarding Free Trade:

Trade Charade
By Walter E. Williams
Published October 26, 2006

There are only a handful of products that Americans import that cannot be produced at home and therefore create jobs for Americans. Let's look at a few.

We import cocoa from Ghana and coffee from Africa and Latin America. We import saffron from Spain and India and cinnamon from Sri Lanka. In fact, India produces 86 percent of the world tonnage of spices. There's absolutely no reason these products cannot be produced by Americans, and we could be independent as to cocoa, coffee and spices.

You say, "Williams, that's crazy. We don't have the climate and soil conditions to produce those products. Many spices, for example, require a moist tropical environment." No problem. We have the technology that can simulate both the soil and weather conditions. We could build greenhouses in which to grow cinnamon trees and get our scientists to create the same soil conditions of Sri Lanka.

Greenhouses could also be built to simulate the climate conditions in Africa and Latin America to grow cocoa and coffee. In the case of cocoa, the greenhouses would have to be Superdome size to accommodate trees as high as 50 feet.

You say, "Williams, that's still crazy. Imagine the high costs and the higher product prices of your crazy scheme." I say, "Aha, you're getting the picture."

There are several nearly self-evident factors about our being cocoa, coffee and spices independent. Without a doubt, jobs would be created in our cocoa, coffee and spices industries, but consumers would pay much more than now. Therefore, nearly 300 million American consumers would be worse off, paying those higher prices or doing without, but those with the new jobs would be better off.

So let's be honest with ourselves. Why do we choose to import cocoa, coffee and spices rather than produce them ourselves? It is cheaper to do so. That means we enjoy a higher standard of living than if we tried to produce them ourselves.

If we can enjoy, say, coffee, at a cheaper price than producing it ourselves, we have more money left over to buy other goods. That not only applies to cocoa, coffee and spices. It's a general principle: If a good can be purchased more cheaply abroad, we enjoy a higher standard of living by trading than by producing it ourselves.

No one denies that international trade has unpleasant consequences for some workers. They have to find other jobs that might not pay as much, but should we protect those jobs through trade restrictions?

The Washington-based Institute for International Economics has assembled data that might help with the answer. Tariffs and quotas on imported sugar saved 2,261 jobs during the 1990s. As a result of those restrictions, the average household pays $21 more per year for sugar. The total cost, nationally, sums to $826,000 for each job saved. Trade restrictions on luggage saved 226 jobs and cost consumers $1.2 million in higher prices for each job saved. Restrictions on apparel and textiles saved 168,786 jobs at a cost of nearly $200,000 for each job saved.

You might wonder how it is possible for, say, the sugar industry to rip off consumers. After all, there are far more consumers than sugar workers and bosses.

It's easy. A lot is at stake for those in the sugar industry, workers and bosses. They dedicate huge resources to pressure Congress into enacting trade restrictions. But how many of us consumers will devote the same resources to unseat a congressman who voted for sugar restrictions that forced us to pay $21 more for the sugar our family uses? It's the problem of visible beneficiaries of trade restrictions, sugar workers and sugar bosses, gaining at the expense of invisible victims -- sugar consumers. We might think of it as congressional price-gouging.

Lou Dobbs & Co would argue that it would be better to keep the sugar farmers employed in a dead-end industry and impose higher costs on the average American rather than just allowing the free market to work as it should. I'll propose a compromise for each industry:
  1. Sugar - Eliminate protectionism regarding sugar and give each sugar worker a one-time $413,000 payment for them to either quit their job or to invest in better technology for them to be more competitive against foreign competitors.
  2. Luggage - Give each luggage worker a $5,000 bonus and tell them to either become competitive or find a new job
  3. Textiles - Give each textile worker a one-time $100,000 payment and have them find a new job or help their company to become more competitive

Consider this hypothetical which demonstrates how idiotic Lou Dobbs and the Protectionists are: if you had the ability to apply a new technology that would improve the efficiency of a textile plant - and reduce costs to the consumers, increase your share of the market for apparel, and improve the profit margins for your company (allowing for additional investment in new technology) - is it a positive or negative thing for you to apply this technology in your plant if it results in the elimination the need for 50% of your workers?

Or, to put it more simply - is it better to have an autombile or a horse-drawn wagon - even though buggy whip manufacturers, horseshoe blacksmiths, and teamsters are no longer required in the economy?

Even Lou Dobbs has to recognize that the benefits of competition and creative destruction far outweigh the benefits of keeping the economy static. (I pick on Lou Dobbs because he was recently on the radio here in St Louis and made a complete ass of himself.)

Simple mathematics proves that free trade (as demonstrated by Ricardo) benefits both parties - even when one party has a comparative advantage in relation to the other country in all industries. That this topic is something that has to be revisited and explained on an on-going basis demonstrates that our education system as it regards simple economics is completely and totally failing.

Your Co-Conspirator,
ARC: St Wendeler