The Economic Effects of Significant U.S. Import Restraints

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On behalf of the Cato Institute's Center for Trade PolicyStudies, I would like to thank the U.S. International TradeCommission for considering our perspective on the economic impactof U.S. trade barriers. Cato is a non-profit educational institutefounded in 1977 to further understanding of the traditionalAmerican principles of limited government, individual liberty, freemarkets and peace. The Center for Trade Policy Studies is aresearch center within Cato that promotes understanding of thebenefits of free trade and the costs of protectionism.

Among the many studies the International Trade Commissionundertakes, its series on "The Economic Effects of Significant U.S.Import Restraints" is among the most useful for trade policyanalysis. The original study in 1993 and the two subsequent updateswere good-faith efforts to attach a hard-number price tag to costlyU.S. import barriers. Americans deserve to know the full and realcost of barriers to trade imposed by their government.

Import Restraints Yield Few Winners and ManyLosers

One of the most valuable contributions a third update could makewould be to quantify the effect of U.S. protectionism not only onnet national welfare but also on the redistribution of incomewithin the United States. The net welfare impact of a trade barrieris an important thing to measure but it understates the true impactof protection. The deadweight loss of lower consumption andhigher-cost production can mask a much greater transfer of incomewithin society from consumers to producers. Any future ITC studyshould include specific estimates of the economic costs imposed byimport restraints on consumers and estimates of the gainsredistributed to protected producers and to the government throughtariff revenue or quota rents. Americans should know who loses andwho gains, and by how much, from existing trade barriers.

The commission's analysis should attempt to measure the impactof barriers on specific industries and income groups. It is alamentable fact of U.S. trade policy that some of the government'shighest barriers are aimed at products that are consumeddisproportionately by low-income households. Those necessitiesinclude clothing, textiles, footwear, and food items such as sugar,orange juice, peanuts, and dairy products. The commission's studyshould measure the impact of barriers on the household budgets of across-section of American families. One method would be to measurethe impact of price changes on household welfare relative tohousehold income.

Research at the Cato Institute has confirmed the high cost ofimport barriers to consumers and producers alike. In a July 2000study of the U.S.-Canadian Softwood Lumber Agreement, for example,our research found that import barriers imposed by the agreementwere responsible for raising prices in the U.S. market by between$50 and $80 per thousand board feet. [1]Because three-quarters ofsoftwood lumber usage in the United States is for home constructionor repairs, those costs fell most heavily on American familieslooking to buy a home. Higher lumber prices lead directly to higherhome costs, pricing some 300,000 low- and middle-income familiesout of the housing market each year. Higher lumber prices alsoraise costs and reduced profitability in lumber-using industries,which employ six million workers compared to 217,000 in domesticlogging and sawmill industries a 27 to 1 ratio. The story is muchthe same in the steel[2]and sugar[3] markets. Import barriersallow a small group of producers to enjoy artificially highdomestic prices at the expense of the mass of consumers andimport-using producers.

In the debate over U.S. trade policy, the interests of those whopay the cost of protectionism are systematically ignored.Industries and interests that benefit from protection are usuallyconcentrated, organized, and politically connected. The integratedsteel industry, sugar producers, and textile manufacturers areobvious examples. In contrast, those who pay the price forprotection, namely consumers but also import-using producers, aretypically more dispersed and politically unorganized. As a result,their interests are discounted in the national debate over trade. Acredible study of the economic effects of import restraints canhelp to correct this political imbalance by drawing attention tothe specific losers as well as the more vocal if less numerouswinners.

The commission should also study the redistributive impact oftrade barriers on the world's less developed nations. Tradebarriers in the United States and other advanced economies remainstubbornly high against those exports, such as clothing, textiles,footwear, and farm products, that are most important to producersin less developed countries. Studies by the World Bank confirm thatU.S. barriers to imports from less developed countries aresignificantly higher than barriers against imports from otheradvanced economies.[4] Those barriers reduce the income offarmers and workers in poor countries, many of them already livingat or near a subsistence level, for the benefit of a small group ofproducers in rich countries. Policy makers deserve to know theinternational economic effects of U.S. trade barriers to betterassess the impact of U.S. trade policy on foreign policy andinternational aid policy.

Import Restraints and Jobs

Another important contribution of a third update would be toshine the light of economic analysis on the mistaken notion thattrade barriers "save jobs." Import barriers may save some jobs incertain protected industries, but at the cost of destroying jobs inother, more globally competitive industries. Trade liberalizationdoes not cause a net loss of jobs (or a net increase, for thatmatter) but a better, more productive mix of jobs in the economy.Like advances in technology, trade liberalization raises overallproductivity, allowing Americans to specialize in producing goodsand services in which we enjoy the greatest productivity advantage.The result is greater labor productivity and higher real incomesfor American families.

Opponents of trade liberalization routinely blame imports fordestroying jobs. They argue that imports displace domesticproduction, reducing employment in import-competing industries.While imports can reduce output and employment in some industries,there is no evidence that rising imports reduce overall output oremployment. If capital and labor are reasonably free to movebetween sectors, imports that cause one industry to contract willin turn create opportunities for other industries to expand byfreeing up resources in the domestic economy and creating demandabroad for exports. The net impact on the total number of jobs willbe neutral.

In reality, imports, output, and employment in the U.S. economytend to rise and fall together. The reason for this is simple. Anexpanding economy raises demand both for imports and for domesticproduction. Consumers with rising incomes buy more goods, bothimported and domestic. American producers also import moreintermediate goods, such as auto parts and computer components, andcapital goods. In fact, more than half of U.S. imported goods arenot consumer products but are inputs and capital machinery for U.S.businesses. For example, steel imports help keep costs down for awide swath of U.S. industry, including automobiles and lighttrucks, fabricated metals, and construction.

As a result, imports tend to rise along with domestic output.Figure 2

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shows the strong connection between manufacturingoutput and imports. It shows the growth in the volume of importedgoods and manufacturing output for each year from 1989 through2000. If the critics of trade were correct in their assertion thatrising imports have displaced domestic manufacturing output, wewould expect manufacturing output to decline as the volume ofimported goods rose. But since 1989, manufacturing output hasgenerally expanded along with import volume, with output risingfastest during years in which the growth of real goods imports hasalso grown most rapidly. As with so many other indicators, the sameeconomic expansion that spurs manufacturing output also attractsmore imports and enlarges the trade deficit. The recent economicdownturn only proves the connection, although in the opposite way:Since their peak levels in mid-2000, imports, the trade deficit,employment, and manufacturing output have all fallen sharply.

Sectors for Further Study

Lastly, the commission should consider expanding the list ofprotected sectors for detailed study. One would be the domesticairline industry, which is protected from foreign competition byour domestic cabotage rules and restrictions on foreign investment.Those laws reduce potential competition on domestic flights,raising prices and reducing choices for domestic airline travelers.The relative efficiency of U.S. carriers makes it unlikely thatforeign carriers would serve a large share of the domestic U.S.market, but even the threat of foreign entry could have a dampeningeffect on airfares. If the number of domestic carriers contractsbecause of the current downturn and terrorism-related worries aboutair travel, foreign competition could ensure that domestic carriersdo not use their market power to raise prices.[5]

Any study of the economic impact of significant U.S. importrestraints will be incomplete without considering the impact ofU.S. administrative trade laws. The third update should includerecent Section 201 cases affecting imported wheat gluten, lambmeat, and assorted steel products, including any restraintsresulting from the 201 action initiated in June by the Bushadministration.

Antidumping and countervailing duty actions also affect a widerange of imports and impose real costs on American consumers andimport-using industries. These laws also impose a more difficult tomeasure but equally real cost by spurring foreign antidumpingactions against U.S. exports[6] and by deterring vigorous pricecompetition in particular sectors even when duties may not beultimately imposed. Of course, any decision to include AD, CVD, andother administrative trade restrictions must be made by the U.S.Trade Representative or other requesting agency, but thecommission's worthy efforts to measure the true impact of importbarriers will be incomplete as long as this glaring omissionpersists.


[1]Brink Lindsey, Mark A. Groombridge, andPrakash Loungani, "Nailing the Homeowner: The Economic Impact ofTrade Protection of the Softwood Lumber Industry," Cato TradePolicy Analysis no. 11, July 6, 2000. All Cato studies cited inthis testimony are available at www.freetrade.org.

[2]Brink Lindsey, Daniel T. Griswold and AaronLukas, "The Steel 'Crisis' and the Costs of Protectionism," CatoTrade Briefing Paper no. 4, April 16, 1999.

[3]Mark A. Groombridge, "America's BittersweetSugar Policy," Cato Trade Briefing Paper no. 13, December 4,2001.

[4]See, for example, The World Bank, GlobalEconomic Prospects and Developing Countries 2001 (Washington:World Bank, 2000).

[5]For more information on reducing barriers todomestic airline service, see Kenneth J. Button, "Opening U.S.Skies to Global Airline Competition," Cato Trade Policy Analysisno. 5, November 24, 1998.

[6]For evidence of this, see "Brink Lindsey andDaniel J. Ikenson, "Coming Home to Roost: Proliferating AntidumpingLaws and the Growing Threat to U.S. Exports," Cato Trade PolicyAnalysis no. 14, July 30, 2001.