The Economic Effects of Significant U.S. Import Restraints

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On behalf of the Cato Institute’s Center for Trade Policy Studies, I would like to thank the U.S. International Trade Commission for considering our perspective on the economic impact of U.S. trade barriers. Cato is a non‐​profit educational institute founded in 1977 to further understanding of the traditional American principles of limited government, individual liberty, free markets and peace. The Center for Trade Policy Studies is a research center within Cato that promotes understanding of the benefits of free trade and the costs of protectionism.

Among the many studies the International Trade Commission undertakes, its series on “The Economic Effects of Significant U.S. Import Restraints” is among the most useful for trade policy analysis. The original study in 1993 and the two subsequent updates were good‐​faith efforts to attach a hard‐​number price tag to costly U.S. import barriers. Americans deserve to know the full and real cost of barriers to trade imposed by their government.

Import Restraints Yield Few Winners and Many Losers

One of the most valuable contributions a third update could make would be to quantify the effect of U.S. protectionism not only on net national welfare but also on the redistribution of income within the United States. The net welfare impact of a trade barrier is an important thing to measure but it understates the true impact of protection. The deadweight loss of lower consumption and higher‐​cost production can mask a much greater transfer of income within society from consumers to producers. Any future ITC study should include specific estimates of the economic costs imposed by import restraints on consumers and estimates of the gains redistributed to protected producers and to the government through tariff revenue or quota rents. Americans should know who loses and who gains, and by how much, from existing trade barriers.

The commission’s analysis should attempt to measure the impact of barriers on specific industries and income groups. It is a lamentable fact of U.S. trade policy that some of the government’s highest barriers are aimed at products that are consumed disproportionately by low‐​income households. Those necessities include clothing, textiles, footwear, and food items such as sugar, orange juice, peanuts, and dairy products. The commission’s study should measure the impact of barriers on the household budgets of a cross‐​section of American families. One method would be to measure the impact of price changes on household welfare relative to household income.

Research at the Cato Institute has confirmed the high cost of import barriers to consumers and producers alike. In a July 2000 study of the U.S.-Canadian Softwood Lumber Agreement, for example, our research found that import barriers imposed by the agreement were responsible for raising prices in the U.S. market by between $50 and $80 per thousand board feet. [1]Because three‐​quarters of softwood lumber usage in the United States is for home construction or repairs, those costs fell most heavily on American families looking to buy a home. Higher lumber prices lead directly to higher home costs, pricing some 300,000 low‐ and middle‐​income families out of the housing market each year. Higher lumber prices also raise costs and reduced profitability in lumber‐​using industries, which employ six million workers compared to 217,000 in domestic logging and sawmill industries a 27 to 1 ratio. The story is much the same in the steel[2]and sugar[3] markets. Import barriers allow a small group of producers to enjoy artificially high domestic prices at the expense of the mass of consumers and import‐​using producers.

In the debate over U.S. trade policy, the interests of those who pay the cost of protectionism are systematically ignored. Industries and interests that benefit from protection are usually concentrated, organized, and politically connected. The integrated steel industry, sugar producers, and textile manufacturers are obvious examples. In contrast, those who pay the price for protection, namely consumers but also import‐​using producers, are typically more dispersed and politically unorganized. As a result, their interests are discounted in the national debate over trade. A credible study of the economic effects of import restraints can help to correct this political imbalance by drawing attention to the specific losers as well as the more vocal if less numerous winners.

The commission should also study the redistributive impact of trade barriers on the world’s less developed nations. Trade barriers in the United States and other advanced economies remain stubbornly high against those exports, such as clothing, textiles, footwear, and farm products, that are most important to producers in less developed countries. Studies by the World Bank confirm that U.S. barriers to imports from less developed countries are significantly higher than barriers against imports from other advanced economies.[4] Those barriers reduce the income of farmers and workers in poor countries, many of them already living at or near a subsistence level, for the benefit of a small group of producers in rich countries. Policy makers deserve to know the international economic effects of U.S. trade barriers to better assess the impact of U.S. trade policy on foreign policy and international aid policy.

Import Restraints and Jobs

Another important contribution of a third update would be to shine the light of economic analysis on the mistaken notion that trade barriers “save jobs.” Import barriers may save some jobs in certain protected industries, but at the cost of destroying jobs in other, more globally competitive industries. Trade liberalization does not cause a net loss of jobs (or a net increase, for that matter) but a better, more productive mix of jobs in the economy. Like advances in technology, trade liberalization raises overall productivity, allowing Americans to specialize in producing goods and services in which we enjoy the greatest productivity advantage. The result is greater labor productivity and higher real incomes for American families.

Opponents of trade liberalization routinely blame imports for destroying jobs. They argue that imports displace domestic production, 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 or employment. If capital and labor are reasonably free to move between sectors, imports that cause one industry to contract will in turn create opportunities for other industries to expand by freeing up resources in the domestic economy and creating demand abroad for exports. The net impact on the total number of jobs will be neutral.

In reality, imports, output, and employment in the U.S. economy tend to rise and fall together. The reason for this is simple. An expanding economy raises demand both for imports and for domestic production. Consumers with rising incomes buy more goods, both imported and domestic. American producers also import more intermediate goods, such as auto parts and computer components, and capital goods. In fact, more than half of U.S. imported goods are not consumer products but are inputs and capital machinery for U.S. businesses. For example, steel imports help keep costs down for a wide swath of U.S. industry, including automobiles and light trucks, fabricated metals, and construction.

As a result, imports tend to rise along with domestic output. Figure 2 shows the strong connection between manufacturing output and imports. It shows the growth in the volume of imported goods and manufacturing output for each year from 1989 through 2000. If the critics of trade were correct in their assertion that rising imports have displaced domestic manufacturing output, we would expect manufacturing output to decline as the volume of imported goods rose. But since 1989, manufacturing output has generally expanded along with import volume, with output rising fastest during years in which the growth of real goods imports has also grown most rapidly. As with so many other indicators, the same economic expansion that spurs manufacturing output also attracts more imports and enlarges the trade deficit. The recent economic downturn 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 of protected sectors for detailed study. One would be the domestic airline industry, which is protected from foreign competition by our 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 that foreign carriers would serve a large share of the domestic U.S. market, but even the threat of foreign entry could have a dampening effect on airfares. If the number of domestic carriers contracts because of the current downturn and terrorism‐​related worries about air travel, foreign competition could ensure that domestic carriers do not use their market power to raise prices.[5]

Any study of the economic impact of significant U.S. import restraints will be incomplete without considering the impact of U.S. administrative trade laws. The third update should include recent Section 201 cases affecting imported wheat gluten, lamb meat, and assorted steel products, including any restraints resulting from the 201 action initiated in June by the Bush administration.

Antidumping and countervailing duty actions also affect a wide range of imports and impose real costs on American consumers and import‐​using industries. These laws also impose a more difficult to measure but equally real cost by spurring foreign antidumping actions against U.S. exports[6] and by deterring vigorous price competition in particular sectors even when duties may not be ultimately imposed. Of course, any decision to include AD, CVD, and other administrative trade restrictions must be made by the U.S. Trade Representative or other requesting agency, but the commission’s worthy efforts to measure the true impact of import barriers will be incomplete as long as this glaring omission persists.

[1]Brink Lindsey, Mark A. Groombridge, and Prakash Loungani, “Nailing the Homeowner: The Economic Impact of Trade Protection of the Softwood Lumber Industry,” Cato Trade Policy Analysis no. 11, July 6, 2000. All Cato studies cited in this testimony are available at www​.free​trade​.org.

[2]Brink Lindsey, Daniel T. Griswold and Aaron Lukas, “The Steel ‘Crisis’ and the Costs of Protectionism,” Cato Trade Briefing Paper no. 4, April 16, 1999.

[3]Mark A. Groombridge, “America’s Bittersweet Sugar Policy,” Cato Trade Briefing Paper no. 13, December 4, 2001.

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

[5]For more information on reducing barriers to domestic airline service, see Kenneth J. Button, “Opening U.S. Skies to Global Airline Competition,” Cato Trade Policy Analysis no. 5, November 24, 1998.

[6]For evidence of this, see “Brink Lindsey and Daniel J. Ikenson, “Coming Home to Roost: Proliferating Antidumping Laws and the Growing Threat to U.S. Exports,” Cato Trade Policy Analysis no. 14, July 30, 2001.