Trading losses - how import quotas have hurt more industries than they have helped - Editorial

MOVE OVER, Paul Krugman, Laura Tyson, and Lester Thurow. Another economist--Alan Tonelson of the Economic Strategy Institute--has joined the protectionist chorus. Writing in Foreign Affairs, Mr. Tonelson contends that imports controls enacted during the 1980s saved five major American industries--autos, steel, machine tools, computer chips, and textiles. In each case the protected industry gained market share, "contributing to job creation and reinvigorating American competitiveness." Free trade, on the other hand, is counterproductive in a world where most nations don't abide by it.

Pat Buchanan couldn't be happier. Professor Tonelson sees world trade, in Mr. Buchanan's words, as being "like the mean streets of an inner city that need constant policing to ensure against rip-offs." But the professor's thesis will strike an equally harmonious chord with mainstream Washington. For while GATT and NAFTA get the headlines, the substance of U.S. trade policy is increasingly interventionist. Proponents of subsidies, import quotas, and high countervailing tariffs on behalf of "strategic" industries have marshaled reams of supporting data. At best, their evidence is ambiguous. Usually it is just plain wrong.

Take steel. The industry was indeed losing money and market share to heavily subsidized foreign producers before import quotas were imposed in the early 1980s. Those restrictions restored profitability and saved 17,000 jobs--but at a cost. Studies show that for every steel job saved, three jobs were lost elsewhere. The reason is simple: more than twenty times as many Americans work in steel-using industries as in the steel industry itself. Higher steel prices hurt a larger segment of the workforce than they helped.

The automobile story is equally revealing. In 1981 Japan agreed to limit exports "voluntarily" to 1.65 million cars a year--about 120,000 below the then current level. This was to be a more temporary measure, giving Detroit time to retool for fuel-efficient cars. Thirteen years later, they're still with us.

Two things happened. First, the quotas enabled Detroit's Big Three to raise prices and profits, promptly reducing their desire to cut costs. Instead of building better car plants GM bought Hughes Aircraft and EDS, Ford bought an S&L, and Chrysler purchased Gulfstream Aerospace and a piece of E.F. Hutton. Secondly, because the quotas restricted the number of cars rather than their dollar value, Honda, Toyota, and other carmakers started exporting larger, more profitable cars to the United States. Unlike their U.S. counterparts, Japanese automakers plowed those profits into new plants here. The result: Today Japan captures more market share and Americans pay about $3,000 more per car.

Protectionists acknowledge that consumers pay dearly for trade restrictions. Saving a vital industry, they say, is worth a lower standard of living. Yet as in the case of steel, helping one sector often hurts other, equally strategic, industrial sectors.

GATT and NAFTA flourish because most nations realize they can live better--and export more--only if they receive more low-cost imports. But free trade inevitably creates losers--mainly inefficient, older firms that can't survive without government aid. Not surprisingly, these companies are among the most politically well connected.

Mr. Tonelson and Mr. Buchanan would have us aid the economic past at the expense of the future.

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