ED042596b: The Truth About Free Trade and Protectionism

COMMENTARY Global Politics

ED042596b: The Truth About Free Trade and Protectionism

Apr 25th, 1996 3 min read

Visiting Fellow

There's a notion afoot that free trade is hurting the U.S. worker, that it is causing corporations to downsize and lay off their employees, and that the answer is for the U.S. government to impose economic sanctions against foreign countries like Japan.

In reality, this would be very unwise. History and economic common sense show that the "trade wars" approach to the world marketplace simply doesn't work. Consider the following myths:

Myth #1
Free trade has allowed manufacturers to go overseas to obtain cheap labor, destroying America's manufacturing infrastructure and losing American jobs.

If U.S. manufacturing companies were moving overseas in droves, manufacturing as a percentage of the total U.S. economy would have suffered a steep decline. Instead, it has maintained a constant level of about 21 percent of the total economy for three decades. And if cheap labor were the big draw people like Pat Buchanan and H. Ross Perot say it is, U.S. companies would be invested up to their eyeballs in countries like Haiti, Somalia and the Dominican Republic. Obviously they're not, or these countries wouldn't be destitute.

Myth #2
We must protect high-paying manufacturing jobs from foreign competition.

Not if such protection costs an even greater number of jobs in other industries and causes consumer prices to rise. Consider for example, U.S. import quotas on automobiles, which caused the price of new American autos to increase by 41 percent from 1981 to 1984. The auto industry claims these price hikes saved up to 22,000 jobs. But they also reduced sales -- by about 1 million cars. This drop forced some 50,000 layoffs by the late 1980s. In other words, even though protectionism saved some 22,000 jobs, it caused a net job loss of 30,000. Some "protection."

Myth #3
Free trade is causing America to lose its technological edge.

America by far is the world's leader in technological innovation and is the world's largest manufacturer of computer microprocessors, semiconductors, advanced consumer electronics, health equipment, telecommunications equipment, computers and computer software, and host of other information technologies and high-tech products. Over time, competition from other nations like Japan is making us do better, not worse.

Myth #4
U.S. trade deficits -- especially with Japan -- mean America is becoming poorer while others become richer.

If this were true, the United States wouldn't be the economic powerhouse it is today. The real reason the United States has a trade deficit with Japan is because there are twice as many Americans as there are Japanese. In order for America to have a trade "balance" with Japan, each and every Japanese would need to buy twice as much from America as Americans buy from Japan.

Myth #5
Trade deficits cost jobs.

History shows that as the U.S. trade deficit increases, unemployment actually decreases. For example, as the U.S. trade deficit leaped in 1983-84 and peaked in 1987, the U.S. unemployment rate plummeted. Conversely, when the trade deficit shrank, from 1989 to 1991, unemployment began to increase. The reason some major companies lay off large numbers of workers has nothing to do with trade deficits and everything to do with burdensome regulatory policies here at home.

Myth #6
U.S. companies will go under unless the government limits competition from foreign imports and forces foreign governments to purchase more U.S. goods.

U.S. companies who use this scare tactic to stampede lawmakers into passing protectionist policies are trying to protect themselves from competition, both foreign and domestic. If American companies are so beset by closed markets overseas, why is America the world's largest exporter? The U.S. auto industry -- so beat up by the Japanese years ago -- is now winning. It racked up $14 billion in profits last year and is making cars that are better built, have fewer flaws and are bigger sellers than many of their Japanese and European counterparts. They have free trade to thank, not government meddling.

In short, while it may be tempting to blame other countries when U.S. companies downsize or lay off workers, there is no evidence that free trade is hurting us, or that "trade wars" are the answer. Rather, it shows that free trade is the road to prosperity.

Note: Bryan Johnson is a policy analyst at The Heritage Foundation, a Washington-based public policy research institute.