-Caveat Lector-
COST OF PROTECTIONISM
Ironically, political pressure for trade protection has grown
during the current economic expansion. Similarly, the infamous
Smoot-Hawley Tariff was enacted at a time of unprecedented
prosperity. It may be that economists have not done a very good
job of explaining either the benefits of free trade or the costs
of protection.
A new study from the Federal Reserve Bank of St. Louis estimates
the cost of protectionism to the United States.
o St. Louis Fed economist Howard Wall calculates that U.S.
exports would have been 26.2 percent higher in 1996 if
other countries practiced free trade.
o Wall found that U.S. protectionism also hurt, costing
consumers more than $100 billion.
o In a recent speech in Dallas, Federal Reserve Chairman
Alan Greenspan said the ultimate cost of protection can be
even higher if it blocks the flow of technology and new
ideas that are the life's blood of economic progress.
Similarly, the benefits of free trade may not be as apparent as
their perceived costs in terms of job displacement. However, the
benefits are large.
o According to a new study by the Department of Foreign
Affairs and Trade in Australia, a 50 percent reduction in
world tariffs would increase the world economy by more
than $400 billion per year (see figure
http://www.ncpa.org/pd/gif/pd6799.gif ).
o Complete elimination of tariffs would add $750 billion to
the world economy annually.
A final source of protectionist sentiment may be the
understatement of U.S. exports, which exacerbates the recorded
trade deficit. According to the U.S. Census Bureau, exports may
be understated by as much as 10 percent, due to the undercounting
of small exports and other factors. This may make people think
that restricting imports is necessary to restore balance. More
accurate counting of exports, therefore, may help reduce
protectionist pressure.
Source: Bruce Bartlett, senior fellow, National Center for Policy
Analysis, June 7, 1999.
For text http://www.ncpa.org/oped/bartlett.html
For Australian study
http://www.dfat.gov.au/trade/negotiations/gtr_2000.pdf
For St. Louis Fed study
http://www.stls.frb.org/docs/publications/review/99/01/9901hw.pdf
For Alan Greenspan's speech
http://www.bog.frb.fed.us/boarddocs/speeches/1999/19990416.htm
For Census Bureau study
http://www.census.gov/foreign-trade/aip/expunder2.html
For more on Tariffs & Trade Barriers and Free Trade Agreements
http://www.ncpa.org/pi/internat/intdex12.html
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