One Lesson from the Debate: Protectionism Is Alive

by Veronique de Rugy

In his book Economics in One Lesson, Henry Hazlitt made a very effective case against protectionism. Quoting the great Adam Smith, he writes:

In general Smith rested his case on one fundamental proposition: “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.” “The proposition is so very manifest,” Smith continued, “that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind.”

And yet, last night, both candidates proved Adam Smith wrong. The benefits of free trade are not self-evident to everyone.

As Patrick noted earlier, the president last night seemed very proud to have protected Americans from cheap tires from China in the name of protecting American jobs (understand American tire-makers). But at what cost? Patrick has the answer:

Aggressive trade policy like this can sometimes have tangible effects in jobs saved (often it soon fails at that too), and Obama is correct that it’s estimated that the tire tariffs did save up to 1,200 American jobs. In return, as we can expect, costs rose for consumers significantly, a number that is often ignored and rarely quantified. But here we know how much: Obama’s policy cost American consumers’ $1.1 billion, or $900,000 out of their pockets for every job saved.

Over at Cafe Hayek, Don Boudreaux offers addition comments on the issue:

By this logic, the President’s policy is inexcusably lame.  If creating more jobs in U.S. tire factories justifies forcing consumers to pay higher prices for tires, the Obama administration should also outlaw the sale of used tires (which, like low-priced imports, are “flooding our domestic market”).  Indeed, the president should seek legislation mandating that all rubber used to make tires be non-vulcanized.  The resulting decline in tire durability will create even more jobs in U.S. tire factories by “protecting” our market from being “flooded” with cheap tire durability – that is, with tires that last for tens of thousands of miles before needing to be replaced.

Unfortunately, Mr. Romney didn’t do a better job on this issue. For one, he again accused China of being a currency manipulator and pledged to address that as soon as he gets to the White House. Is China a currency manipulator? Probably. But technically, so is the United States and every country with a central bank and a monetary policy.

More important, the underlying belief that, if China were forced to reevaluate its currency, the U.S. would benefit because of the policy’s impact on our trade deficit doesn’t seem to hold water. Two main reasons for that. First, past currency reevaluations in China or Japan have not had the impact on U.S. trade deficits that we’d hoped for (see this piece by Scott Sumner). And as Tyler Cowen explains:

The trade effects of a revaluation of the yuan are unlikely to be large, in part because many Chinese exporters specialize in assembly. China sends out money buying components like semiconductors and turns them into finished goods, thereby running a trade deficit with East Asia. A new and higher value for the yuan would largely be a wash for these activities. With a stronger currency, China would have a harder time selling its electronic goods, but this would be offset by its greater purchasing power over the semiconductors. It would not do much damage to the Chinese competitive position.

The second reason that even if buying things in the U.S. were to become more affordable and beneficial for the Chinese, it is unlikely that it would have a direct impact on our exports. China has been and remains a poor country. The average Chinese family saves most of its income and spends the rest on local basic goods that aren’t really potential U.S. exports, such as health care, education, and food. (See Cowen’s piece here.)

The bottom line is that we shouldn’t expect that protectionism will create jobs in the US. And if it does, it will be at great cost the the American people.

Now, I want to believe that Mr. Romney actually understands that protectionism isn’t the answer. In fact, during the debate last night he repeated several times that “the government can’t create jobs,” and at other times indicated he believes that the best thing the government can actually do to help the American people is to get out of the way. Unfortunately, I can’t say the same of Mr. Obama. While the president claims that he believes in free markets, most of his comments and policy recommendations suggest that he doesn’t.

By the way, I am sure that you noticed that neither candidate complained about one particular import from China last night: The large amount of money that our government borrows from them every year.

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