The Myopia Behind the Protectionism

There appears to be something in the protectionist genome that triggers obsessive factual cherry-picking. Genetics may explain the protectionist propensity for Malthusian sensationalism, too. Some of the folks at the U.S. Business and Industry Council provide the latest example.

In an article that ran in yesterday’s Pittsburgh Post-Gazette, erstwhile doomsayer Alan Tonelson and a colleague present their view that the “fiscal stimulus” will have limited impact because consumers have few alternatives to spending their checks on imports. They provide statistics showing the rising import share in major consumable goods categories to support their argument that even if consumers wanted to buy American, it is becoming close to impossible. As a result, the stimulus “benefits will leak overseas,” and the “near-term economic performance will be modest at very best.”

And, as sure as all roads lead to Rome, “failed trade policies deserve much of the blame” for allowing the “import tide [to grow] large enough to sandbag Washington’s best –laid stimulus plans?” Let me review critical assertions from the article and suggest some genetic tweaks (i.e., the truth).

Assertion 1: “[B]uying products (or services) made in the United States creates the biggest and quickest domestic growth bang per stimulus buck because it encourages companies to ramp up output and possibly build new facilities and hire more workers.”

But in fact…

…the fiscal stimulus package is unlikely to have any effect on output and investment. Even if Americans could only purchase domestic goods and services, suppliers would know that the uptick in demand was a short-term response to the stimulus, and not worthy of expanded investment and output.

Assertion 2: “American spending on imports would increase U.S. growth as well – by stimulating the wholesale and retail and transportation and warehousing sectors.”

Kudos for the half-truth, but…

… let me add that U.S. spending on imports helps American industries all along the supply chain – not just in the four sectors mentioned. U.S. design, advertising, marketing, legal and other professional services, and yes, manufacturing industries (like components, raw materials, and capital equipment suppliers) all partake of the benefits of import sales in the United States. Protectionists have difficulty comprehending that the world is no longer characterized by “our producers” against “their producers.” With proliferation of global supply chains, import sales support more profitable U.S. activities at both ends of the value chain (from product design and finance operations to logistics and advertising).

Assertion 3: “Higher profits and stock prices in these sectors [wholesale, retail, transportation, and warehousing] would help, too, by enriching American investors.”

Uh huh, but…

…didn’t John Edwards just drop out of the race because he couldn’t convince voters that there are two Americas? Indeed, higher profits and stock prices would benefit American investors, but the phrase “enriching American investors” is intended to connote “The Rich.” In fact, Americans across income groups hold stock or mutual funds.

Assertion 4: “Unfortunately, this smaller stimulus bounce is inevitable – and resulting growth will fall well short of politicians’ and voters’ expectations – because import levels have grown so high for so many types of manufactured products.”

Right, but more wrong because…

…a negligible stimulus bounce is inevitable, but it has nothing to do with imports. If imports were at the considerably lower levels that the authors implicitly prescribe, there wouldn’t be any discussion about a stimulus plan. Policymakers wouldn’t be panicking about a relatively mild slowdown after 25 years of nearly uninterrupted economic growth. Instead, without imports, our $14 trillion economy would be a considerably smaller economy, with anemic annual growth rates evocative of Japan—the bête noire of protectionists past. Our problem would be quite serious. Instead, the increasing volume of imports has inspired competition and U.S. productivity gains, which has delivered better prices, higher quality and more choices, while freeing up resources to invest or purchase U.S. and foreign goods and services.

Assertion 5: “In many major consumer goods categories … the rates of import penetration are much higher. For example, in 2006, nearly 96 percent of the men’s dress and sport shirts sold in the United States were imports. More than 90 percent of the non-athletic shoes came from overseas, along with nearly 90 percent of the women’s coats, and more than 86 percent of the women’s blouses.”

Good statistics that support a different conclusion because…

…even though Americans rely heavily on imported shoes and clothing (as evidenced by the stats), those products are subject to the highest duties in the U.S. tariff schedule. In fact, while clothing and footwear comprised 5.1 percent of the total value of imports in 2005, duties collected on clothing and footwear accounted for 42.3 percent of all duties collected. Not only are these tariffs some of the worst regressive taxes under U.S. law (lower-income Americans spend a higher percentage of their income on these necessities), but if you’re worried about “leakage” from the stimulus package then you should support abolishing those tariffs. What’s the sense in handing chunks of your allowance back to the government?

Protectionists tend to see the U.S. market as the reserve of U.S. producers, while simultaneously berating foreigners for protecting their own. But there is a strong linkage between imports and exports. If Americans don’t buy imports, foreigners can’t buy U.S. exports. If Americans spend large chunks of their stimulus checks on imports, U.S. manufacturers are sure to add to the record export (and output and profit) performance they’ve been experiencing over the past couple years.