Mere days after Donald Trump’s inauguration as the 45th president, it looks as though protectionism is very much in the ascendant in Washington, DC.
Already, Mr. Trump is being hailed as a hero of the working people, “saving” jobs, striking “deals”, staving off outsourcing or offshoring, whichever his audiences crave and believe in most. Bashing foreigners, “America First” is his credo. Theatrics involving the slapping of duties, withdrawing from multilateral trade agreements are the time-tested mainstay of Mr. Trump’s showmanship. But the common denominator behind these publicity stunts is protectionism.
Much has been written on the economic theory as to why these policies do not and will not work. Apparently, to little avail. To many, the economics of free trade may seem esoteric. Sadly, one needn’t resort to abstract concepts. For decades, the United States has been plagued by nakedly protectionist policies that divert resources away from their best economic use, away from the consumer, and toward a clique of special interests in politically connected industries. Rather than “levelling the playing field”, they skew the scales in favor of a select few to the detriment of the broader economy. Negative externalities, unnatural concentration of market power and warped regulatory environment accumulate, creating growth-stifling deadweight losses. Losses that far exceed any perceived benefits from protectionism. For if the losses from free trade are concentrated, and benefits dispersed, it is vice versa with their protectionist “panacea”.
Just how much exactly are these losses then? Below is a short summary of a couple of the most egregious protectionist staples with various reputable econometric estimates as to the precise dollar-value, yearly, aggregate economic costs they represent.
Government Procurement
From 2008 through 2012, the average annual US government expenditure on the procurement of goods and services, including capital investment hovered at about $1.7tn – that is spending on all levels of government, from central, through state, and local. But under the so-called “Buy American” clauses tucked into the Obama administration’s American Recovery and Reinvestment Act of 2009 (ARRA), all iron, steel and manufactured products used in public works and building projects provided for by the initially planned $787bn stimulus package had to be obtained from domestic sources only.
Irrespective of the ARRA stipulations, however, only a tiny part of that amount would have been obtained from abroad anyways. Data marshalled by the Federal Procurement Data System (FPDS) indicates that only 10% of all federal goods purchases are foreign-sourced. Buy American protectionism is deeply ingrained. 1.3% may be exempted thanks to nondomestic availability or public interest determinations, or waived because it came from trade agreement partners. All that is left is the remaining 8.7%. Similarly, only a fraction of the $4.4tn is covered by the GPA and US FTAs, and only an infinitesimal fragment of that fraction is open to businesses outside the strictest realm of domestic firms.
The economics is very clear that this generates a deadweight loss – a loss to the US economy and hundreds of millions of American consumers, whose taxpayer money is thus wasted on often unnecessarily steep receipts that go toward these government purchases. Stripped of market competition, the goods and services procured by the US government from purely domestic sources frequently mean lower quality and higher price than goods and services purchasable on the open market through the forces of supply and demand.
The Bureau of Economic Analysis (BEA) reports the US GDP, seasonally adjusted at annual rates, was about $18tn in 2015, or about $15.2tn as the 2008-2012 five-year average. That means government procurement makes up about 11% of US GDP. A conservative back-of-the-envelope guestimate shows that, if opening US government procurement to foreign competition could save the American taxpayers just 10% off the current costs, then the equivalent of 1.1% of US GDP would be freed up to be put to more productive uses.
But we don’t have to guess. FPDS data allows us to be a little more precise. Assuming that these numbers aren’t susceptible to enormous year-on-year volatility, we know that, depending on how zealously the newest Buy American rules are enforced, between 90 and 98.7% of $1.7tn could be foreign-sourced but isn’t. Let’s say, conservatively, that we opened the remaining 90% to foreign competition and doing so would save us a paltry 10% off the current purchases’ cost. That works out to about $153bn a year, or about the size of the GDP of the Dominican Republic – or Berlin for that matter.
Put another way, every year, the United States might, hypothetically, add the economy of one Berlin to its map.
Antidumping and Countervailing Duties
Another nakedly protectionist behavior costing the US economy billions of dollars annually is the use of antidumping (AD) and countervailing duties (CVD). Their frequent application against merchandise purportedly dumped on the US market at below the so-called “normal” or “fair” value, or imports found to have received a government subsidy at home, hurting the importing country’s industry, introduces a special “offsetting” import tax sought for as a trade “remedy”. The idea is that distortions to international trade, provided that they are prohibited or actionable under international trade law, are to be remedied by counter-distortions, thus restoring the balance.
The econometric difficulty of arriving at justifiable dumping margins, fair value valuations, and (threat of) material injury determinations aside, these AD-CVD actions often result in greater overall economic losses than the material relief they may provide for a select few industries. This is another bookmark in the classic tale of the dichotomy between that which is “seen” and the largely “unseen” damage done to the economy, by protectionism from the French economist Frédéric Bastiat. Here, too, the AD-CVD action protects workers in a handful of industries to the detriment of the many more downstream businesses that use their output as input in their production.
Specifically, in 1999, relying on computable general equilibrium analysis, a team of economists from the University of Oregon economics department determined the economic welfare cost to be $4bn for the year 1993 alone. Using various modeling assumptions, they found that AC-CVD duties “saved” 14,250 jobs, translating into $161,000 to $281,000 per job per year. Another study, by the USITC, spanning a longer timeframe assessed these losses to be in the ballpark of $1.6 annually. It found that insofar as profits and wages were concerned, protected workers and businesses gained about $658m, while unprotected ones lost about $1.85bn.
Time for a Change?
What these numbers show is that while protectionism, disguised under outwardly reasonable veils, may appear a sensible response to many ills (real and imagined), it comes at a price that greatly exceeds its purported benefits. The precise contours may vary, but the picture these studies paint is unambiguously ugly.
Protectionism is a phenomenon whereby a gardener plunges the entire greenhouse into darkness because a speck of tulips is complaining of overexposure. It doesn’t solve the problem in the long haul and it sends the rest of its occupants on a slippery slope of inevitable decay. The trouble is that while import-competing industries and their workers perceive their pain acutely, the much larger societal hurting is dispersed across hundreds of millions of voiceless individuals and probably tens of thousands of small and medium businesses that can’t afford a powerful lobbying machine to intervene on their behalf.
But macroeconomics needn’t be elusive. The numbers are out there and credible analyses are readily available. Protectionists’ objections notwithstanding, the costs incurred by the American consumers and the overall economy warrant a new approach: one that is cognizant of the broader benefits to be realized by removing these barriers and allowing the laws of economics to work their magic through free trade and open markets.
Andrej Arpas is a Washington-based economic research. He formerly worked at the Slovak labor ministry.
