Trade Policy Turning Protectionist

Since Adam Smith wrote the Wealth of Nations in 1776, economists have advocated free and open international trade, believing that trade allows a country to specialize in the production of goods and services in which it has a comparative advantage.  Increasing trade neither creates nor destroys jobs but transfers labor and other resources from newly importing industries to newly exporting industries.  This conclusion is supported by the high levels of employment that the United States enjoyed from 1983 through 2008, a period of expanding trade.  Trade benefits a nation by allowing it to specialize in what it does best, and to consume not only what it does best, but what other countries do best as well.  It makes countries wealthier.   

Trade policy in the United States currently seems to be directed by elected officials who do not understand or ignore the benefits of trade.  They seem to suffer from what Bryan Caplan calls antiforeign bias and make-work bias.  Antiforeign bias is a tendency to underestimate the value of economic interchange with foreigners.  Make-work bias focuses on jobs, whether or not they are productive, and ignores the benefits of conserving labor.  An excellent article focusing on U.S. and Canadian trade by Anthony Faiola and Lori Montgomery ("Trade Wars Brewing In Economic Malaise," Washington Post, May 15, 2009) illustrates how these biases seem to be guiding policy makers.  They give several examples legislation containing protectionist buy American clauses.  They include the stimulus package, a $14 billion program to fund clean-water projects, and a $6 billion program to fund environmentally friendly school construction.   Besides limiting trade, the buy American clauses value jobs over productivity.  A clean water project that uses only American products will result in less clean water and at a higher price than a project that buys the best resources regardless of their point of origin. 

Faiola and Montgomery provide an intriguing example of a buy American provision gone awry.

Take, for instance, Duferco Farrell Corp., a Swiss-Russian partnership that took over a previously bankrupt U.S. steel plant near Pittsburgh in the 1990s and employed 600 people there.

The new buy American provisions, the company said, are being so broadly interpreted that Duferco Farrell is on the verge of shutting down. Part of an increasingly global supply chain that seeks efficiencies by spreading production among multiple nations, it manufactures coils at its Pennsylvania plant using imported steel slabs that are generally not sold commercially in the United States. The partially foreign production process means the company's coils do not fit the current definition of made in the USA -- a designation that the stimulus law requires for thousands of public works projects across the nation.

In recent weeks, its largest client -- a steel pipemaker located one mile down the road -- notified Duferco Farrell that it would be canceling orders. Instead, the client is buying from companies with 100 percent U.S. production to meet the new stimulus regulations. Duferco has had to furlough 80 percent of its workforce.

"You need to tell me how inhibiting business between two companies located one mile apart is going to save American jobs," said Bob Miller, Duferco Farrell's executive vice president. "I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?"

Protectionists have forgotten the lesson of the Smoot-Hawley Tariff Act, which its authors believed would create American jobs by making foreign goods more expensive.  Our tariffs led to retaliation and lengthened and deepened the Great Depression.  Other countries like Canada will react.

Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.

We will not get out of the recession by attempting to push off our unemployment onto our friends.  Stimulus policy should focus on funding worthwhile projects at the lowest cost--the projects that most enhance productivity. These projects will set the stage for economic recovery and long-run growth.