Those Foolish Steel Tarifs

This comes near the end of a much longer article … you probably should read the whole thing, but you should probably do so at home with a drink in one hand, stroking the head of the cat with the other. The Baron – Discussions in Politics, Law, and Philosophy: “There are clear examples of jobs being sent across U.S. borders because of U.S. trade policy — but not for the reasons that critics of outsourcing believe. Consider the example of candy-cane manufacturers: despite the fact that 90 percent of the world’s candy canes are consumed in the United States, manufacturers have sent much of their production south of the border in the past five years. The attraction of moving abroad, however, has little to do with low wages and much to do with protectionism. U.S. quotas on sugar imports have, in recent years, caused the domestic price of sugar to become 350 percent higher than world market prices. As candy makers have relocated production to countries where sugar is cheaper, between 7,500 and 10,000 workers in the Midwest have lost their jobs — victims not of outsourcing but of the kind of protectionism called for by outsourcing’s critics.

A similar story can be told of the steel tariffs that the Bush administration foolishly imposed from March 2002 until December 2003 (when a ruling by the World Trade Organization prompted their cancellation). The tariffs were allegedly meant to protect steelworkers. But in the United States, steel users employ roughly 40 times more people than do steel producers. Thus, according to estimates by the Institute for International Economics, between 45,000 and 75,000 jobs were lost because higher steel prices made U.S. steel-using industries less competitive.

These examples illustrate the problem with relying on anecdotes when debating the effects of offshore outsourcing. Anecdotes are incomplete narratives that fail to capture opportunity costs. In the cases of steel and sugar, the opportunity cost of using protectionism to save jobs was the much larger number of jobs lost in sectors rendered less productive by higher input prices. TTrade protectionism amounts to an inefficient subsidy for uncompetitive sectors of the economy, which leads to higher prices for consumers and a lower rate of return for investors. It preserves jobs in less competitive sectors while destroying current and future jobs in sectors that have a comparative advantage. Thus, if barriers are erected to prevent offshore outsourcing, the overall effect will not be to create jobs but to destroy them.

So if protectionism is not the answer, what is the correct response? The best piece of advice is also the most difficult for elected officials to follow: do no harm. Politicians never get credit for inaction, even when inaction is the best policy. President George H.W. Bush, for example, was pilloried for refusing to follow Japan’s lead by protecting domestic markets — even though his refusal helped pave the way for the 1990s boom by letting market forces allocate resources to industries at the technological frontier. Restraint is anathema to the political class, but it is still the most important response to the furor over offshore outsourcing. As Robert McTeer, president of the Federal Reserve Bank of Dallas, said when asked about policy responses to outsourcing, “If we are lucky, we can get through the year without doing something really, really stupid.”

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