Example of how Protectionist Trade Policy Doesn't Work

[Aristotle]

Protectionist trade policy is like wetting the bed: it feels good while you're doing it but eventually you have to get up and clean the sheets.

http://www.townhall.com/columnists/w...20040225.shtml

American sugar producers fight tooth and nail to keep foreign sugar imports out of our country. They've spent $722,000 in campaign contributions to both Democratic and Republican congressmen to enact sugar import tariffs and quotas.

As a result of their successful effort to get Congress to do their bidding, our domestic sugar prices are about three times higher than the world market price. While that's a miracle for the sugar industry and its employees, unfortunately, the miracle story doesn't end there. We all know that for every benefit there's a cost.

According to the Sugar Users' Association, an organization that represents companies who use sugar as an input, such as candy manufacturers, the protectionist miracle that Congress has created for the sugar industry has cost anywhere from 7,500 to 10,000 jobs in sugar-using industries due to higher sugar costs. Higher sugar costs make U.S. candy manufacturers less competitive in both domestic and world markets. Life Savers became more competitive simply by moving to Canada -- it saved itself a whopping $10 million dollars a year in sugar costs.

In 1970, employment by Chicago's candy manufacturers totaled 15,000, and now it's 8,000 and falling. Brach used to employ about 2,300 people; now most of its jobs are in Mexico. Ferrara Pan Candy has also moved much of its production to Mexico. Yes, wages are lower in Mexico, but wages aren't the only factor in candy manufacturers' flight from America. After all, Life Savers, which for 90 years manufactured in America, has moved to Canada, where wages are comparable to ours.

[Lokrian]

These quotes make no attempt to line out why the sugar costs are so low elsewhere. If it has to do with people working at the poverty line or raw materials being got at rediculous prices from third world nations without environmental or worker protections, all you are achieving is putting off the cost of upgrading that nations infrastructure while you benefit from something very akin to slave labor.

Slave labor is cheap, sure. Fine. Go for it.

[Aristotle]

It doesn't matter why the sugar is cheaper other places.

The fact is that by putting a tariff, you think you are helping domestic industry when you end up destroying another industry.

The point is that protectionist trade policy has real ramifications that are often more disasterous than whatever you are trying to stave off in the first place.

The nice thing about economics is that no amount of bed wetting liberal BS can change realities.

Don't like it that company's outsource? Then stop forcing them to provide so many mandatory benefits to 100% of their employees.

No amount of whining about how "fair" it is to provide health care, family and medical leave, etc. will prevent the economic reality that when the business cannot afford to pay those costs they can and MUST leave (in order to avoid bankruptcy).

The same goes for protectionist trade policy.

You can cry that sugar prices are cheaper elsewhere because they import sugar from countries where people work for cheap in the sugar cane fields.

You can cry until you are swimming in your tears but the reality is that if we put a big fat tarrif on the product anyone who depends upon that product will eventually have to leave to stay in business.

[Aristotle]

Originally posted by Lokrian
Slave labor is cheap, sure. Fine. Go for it.

Incidentally, this is an exceptionally uneducated statement.

The myth of exploitation of third world labor is just that: a myth.

In those countries, the jobs they receive when a western company builds a factory are dramatically superior to anything they had before.

We love to be paternalistic and rage about people getting paid #1 a day. We love to get outraged that the people making Nike shoes could never afford to buy a pair.

But when you talk to the actual PEOPLE who have those jobs they are absolutely ecstatic. Those jobs allow them to put a roof over their family's heads and food on the table- more food and a better roof than they could ever have DREAMED of before the company located the factory or plant there.

One man's trash is another man's treasure. That is an idiom that applies to jobs as well.

[Aristotle]

This seems to be a popular topic of late.

Another article on the negative realities of protectionist trade policy.

Here are some interesting paragraphs. It is a long quote but the article makes a lot of cogent points:

Just about every economist in modern times, and every president, including New Democrat Bill Clinton, has recognized the net benefits of free trade and open markets - including labor markets. History has proved that the United States creates better jobs and more of them - supported by those jobs that move overseas.

Countries with larger pools of labor have a comparative advantage in labor-intensive goods. They are wise to specialize accordingly. Countries with natural resources (oil, agriculture, minerals, etc.) will do the same. Trade facilitates the process of specialization and raises living standards in participating countries. Countries that refuse to open their borders are tragically left behind. The longer we distort markets through protectionism, the longer the world uses its precious resources less efficiently and diverts more efficient economic patterns, to the detriment of everyone, including the United States.

While the process of replacing old jobs with new ones is painful for those who benefit from the old order of things - in this case, families and workers - any form of progress has this same characteristic. The longer we subsidize and consequently postpone the laws of supply and demand, the more difficult that inevitable transition becomes.

Moreover, free trade and open markets are part of any successful foreign policy. If you want to make certain that the disaffected poor in the least-developed nations are not drawn into terrorist training camps against the United States, the greatest policy is to help them through trade-related jobs.

America is always about the future. That future, by definition, cannot be about the jobs of the past - those that are headed overseas - but the jobs of the future, those we cannot even see. What will matter in the end is our focus on the productivity and quality of our own labor force, not the relative cheapness of another's. The beauty of a free market is that consumers have proved to be excellent at sorting out the best combination of each.

[Salimar]

Just a comment. Two weeks ago, the U.S. signed a Free Trade Agreement with Australia. The U.S. continues with its protectionist policy. As an example, sugar is not included in the agreement (amongst other materials), so Australia won't be able to export sugar to the U.S. without paying a tariff.

Salimar

[tharun]

As was just mentioned by Salimar, the US and Australia recently signed a Free Trade Agreement. I'm sure all the committed capitalists already celebrated with champagne and caviar at this glorious union of Australian and American Trade; but as Salimar pointed out it isn't exactly a very 'free' Free Trade Agreement. Ari mentioned the issue of sugar in his original post, which was highlighted in the article at the Washington Post:http://www.washingtonpost.com/ac2/wp...&notFound=true

Basically, the US and Australia agreed that their producers would exchange goods tariff free, after signing a free trade agreement. However the US sugar producers didn't like that, spent a huge amount of money complaining, so of course Bush acquaisced to their demands. Instead the the US and Australia signed an agreement which ignored the sugar, so that US sugar producers could continue to sell it WAY above the market rate, the high price being caused directly by the subsidies they were receiving. They were selling sugar at a much higher price than Australian sugar producers would have been, given free access to the market, despite them being burdened with the cost of exporting it half way round the world to the US market.

In fact, sugar wasn't the only item that was ignored, I'm fairly certain that a number of other agricultural and dairy products were also excluded from the deal. In essence, it was a free trade deal, only insofar as it did not irritate 'important' American producers (that may also be acceptably read as 'the American producers who would be sufficiently threatened, and have enough money to prevent, through vigorous lobbying, any threat posed by Australian exporters to the US').

All in all, for fans of global free trade and de-regulation, it was a pretty shit free trade agreement. For most Americans it is totally inconsequential. A lot of Australians will however notice how the shit the deal is. Bush has, like many American leaders before him espoused the benefits of free trade, encouraging it in third world nations which are barely in a position to produce (though which might benefit from taxing imports), and has again imposed his own restrictions on trade. It was only a few months ago that the US imposed massive (illegal) steel tariffs, which almost resulted in a trade war with Europe. An isolationist, protectionist policy designed to defend all internal production from cheaper industrial output elsewhere is fair enough if that is what the government and people espouse, however if a nation actively advocates and encourages free trade, as the US has done, its actions over the last few years are open to criticism of the strongest order.

-tharun

[Lokrian]

First off, in order for there to be international free trade, there would have to be an international organization to enforce the trade.

Fact is, Europe coddles its agricultural industry against US advances in GMO's while complaining about what the US does in other venues. All the while, China unloads massive amounts of steel in the US against existing regulations, and so on and on around the globe.

Free trade in the sense people seem to talk about it simply does not exist because it would require a setup very much like the US constitution or something similar, where countries, just as our individual states did, sign over much of their own independence to a higher authority. This is something that free traders rarely bring up in their arguments. If true free trade existed, including the ability for people to move to where the work is or the wages are, then that would be one thing, but no one yet is seriously contemplating free trade of that magnitude, and what we have now is just thinly veiled opportunism posing as some sort of high flown ideal about "free" trade.

What's funny is they then call any attempt at regulation for the benefit of workers as "government interference". The trade wouldn't even exist in the first place without some form of "government interference". It appears it is ok to protect the interests of the tiny percentage of people who own and operate industries, but the millions whose work is necessary to keep it all going are not worth the trouble.

One thing that is absent from this particular thread is the idea that individual nations have to maintain within their borders at least enough of a skeleton of everything necessary to an industrial base or else if there is an international breakdown, that nation will find itself in a tight place, with nothing but extremely outdated closed down mines, factories and so forth to take up the slack when there is a sudden shortfall from international trade. People seem painfully aware, for example, of the need to develop some form of independence from foreign oil, but fail to see any need to remain independent from foreign steel.

Let people start talking real free trade and then I will give it more resect. Right now "free trade" translates to corporate welfare.

[Aristotle]

I have to say that Europe can go fuck itself if it wants to whine about ANYTHING trade related.

Virtually every industry of theirs is propped by by direct and massive government investment which is just a sneaky tariff from the back end.

This is especially true in ALL manufacturing, aerospace, agriculture, and worst of all pharmaceuticals.

And speaking of pharmaceuticals, the way we get hosed in the US because of the drug deals European nations ram down drug companies' throats just blows.

Of course, I blame dirty US politicians at the pharmaceuticals trough just as much.

[Wyden]

This falls into my line of business because part of what I'm trying to do is get some of the companies we invest in to look into overseas opportunities.

Outside of NAFTA and Australia, the US currently has trade agreements with Israel, Canada, Mexico, Chile and Jordan and is in the process of negotiating with the five Central American countries (Costa Rica, Nicaragua, Honduras, Guatemala and El Salvador) as well as the Dominican Republic and the four countries in the Andes region of South America (Bolivia, Columbia, Ecuador and Peru). Negotiations with Singapore and Morocco were also under way last I checked a few weeks ago.

I am all for free trade and think that eventually countries that don't open up their doors to trade and loosen restrictions and lower tariffs will end up screwed in the long run. I know it's a catch-phrase, but the world is moving towards a global economy.