The president's decision not to impose a quota on shoe imports was both politically courageous and economically correct.
It was politically courageous because public opinion is becoming more protectionist, and the Democrats threaten to use the trade deficit as the basis for an attack on the president's economic policies. But if the president had succumbed to the pressure to block the imports of lower-cost shoes from abroad, American consumers and workers in other industries would have been hurt and the world would have been one step closer to an all-out trade war. If the president can convince the American public that protectionist policies would actually hurt them, he and his allies in the Republican Party may benefit politically from the current confrontation.
When Congress returns from its summer recess, protectionist legislation will be at the top of the agenda of many members. Several hundred pieces of protectionist legislation have already been introduced that would impose quotas or tariffs to restrict imports to the United States, and many more bills are sure to come in the weeks ahead.
It's not surprising that Congress is responding in this way to the pressure from firms (and their employees) that compete with products from abroad. What is surprising is that we are getting so close to protectionist legislation without an equally loud outcry from those who would be hurt by such legislation.
Not only would consumers be hurt by higher prices, but protectionism would also hurt America's export industries and our interest-sensitive industries ranging from homebuilders to the manufacturers of business equipment and consumer durables.
A tariff is a tax on imports, and automatically raises the price of the imported product. A quota restricts the import of the foreign product and, by making it less abundant here, allows importers to raise their price. It's been estimated that the proposed shoe quota would raise prices so much that consumers would spend more than $50,000 for each extra American shoe-making job.
But protectionism is bad employment policy not because it is costly but because it is ineffective. Although a quota or tariff could increase employment in the protected industries, it would have side effects that would reduce employment in other industries.
What advocates of protectionist policies generally overlook is that the imposition of a tariff or quota would cause the value of the dollar to rise. A stronger dollar would make American products more expensive to foreigners and would therefore make it more difficult for American firms to sell their products abroad.
Exports would also be reduced in two other ways.
Fir imported materials are an ingredient in almost every U.S. export. An American exporter of machinery may use imported steel, while a farmer whose produce is exported may use imported chemicals. A tariff or quota that raises the price of these imported ingredients increases the cost of U.S. exports and makes them harder to sell abroad.
But most importantly, foreign governments wouldn't stand still if the United States imposed a tariff or quota that hurt their economies. Political pressures abroad would force these governments to take retaliatory action that would not only hurt U.S. exports but could precipitate a major trade war that destroys our world trading system and plunges us into a worldwide recession.
The second major group of firms and workers who would be hurt by the side effects of tariffs or quotas would be in the capital-intensive and interest-sensitive sectors. To the extent that import restrictions succeed in reducing our trade deficit, they would cause an equal reduction in the inflow of funds from abroad.
The reduced inflow of foreign capital would mean a smaller pool of funds in the United States to finance housing construction and outlays for business plant and machinery. More generally, the smaller pool of funds would raise interest rates and thereby shrink the demand for all kinds of interest-sensitive products including automobiles and household appliances, as well as business machinery and construction. The result would be a widespread fall of employment in these industries.
Now that protectionism has become a clear and imminent danger, it's crucial for those who would be hurt to let Congress hear from them: consumers, exporters, firms in interest-sensitive industries, and the employees of those firms. Perhaps if enough of those who would be hurt by protectionist policies make themselves heard, our political system will be responsive and will drop its current flirtation with protectionism.
The only way to reduce our trade deficit and achieve a healthy, balanced recovery is to reduce the budget deficit, which is the real root of our trade problem. Congress made a substantial step in that direction this summer when it agreed to cut projected government spending. But the future budget deficits that remain are still too large for a healthy and balanced recovery. Congress should stop wasting time with dangerous and inappropriate trade nostrums and turn its attention to the fundamental problem.