January 17, 2001 | Commentary on Foreign Aid and Development

ED011701b: During Slowdowns, Bad News Often Means Bad Trade Law

Economic downturns generally bring not only a spate of bad news but also bad policies that can turn a mild economic slowdown into a recession.

When the economy starts heading south, the temptation for some industries--most notably the steel industry and the textile and apparel industries--to look to the government to mitigate the effects of a slowing economy increases. If the government raises the tariff rate on foreign products, then the domestic industry faces less competition and generates more sales.

But enacting such policies is a big mistake. It may alleviate some of the hardship faced by those in the industry, but it also harms the vast majority of Americans who are also suffering from the economic downturn.

When the government imposes a tariff or quota on a product, it effectively raises the price of the product and is equivalent to placing a tax on consumers. For instance, it is estimated that for every $1-a-ton price rise on steel due to protectionist policies, American consumers pay an additional $120 million a year.

When unemployment is rising and incomes are falling, government- induced price rises exacerbate the problems of the economic slowdown the hikes were intended to address.

Not only does such a policy harm American consumers, but it also discourages U.S. steel and textile and apparel manufacturers from seeking out more efficient means of production. If these industries know the government will bail them out when the economy slows down, then they know they don't have to discover ways to counter the economic slowdown without government assistance.

Undoubtedly, the producers in these industries are exploring new ways to increase production. But the incentive to discover more efficient methods is surely greater if the government does not come to their rescue when the economy declines.

A further ill effect of such a policy is that it harms the countries selling steel, or textile and apparel products to the United States. A number of these countries depend on the United States for their economic health, and many receive U.S. developmental aid.

When the United States raises the cost of selling products to American consumers, it puts factories and employees out of work. The sad part of this story is that the unemployed resulting from rising U.S. trade barriers often have no alternative means of work.

Furthermore, most of these countries don't have the safety net the United States provides, so rising trade barriers often means total despair in those countries.

Finally, raising trade barriers in an economic slowdown sets a bad example to other countries by running counter to what the United States often encourages other countries to so, which is to lower trade barriers.

When the world's largest economy raises its trade barriers when times get tough, the incentive for other countries to keep their own barriers low is weakened.

In fact, raising U.S. trade barriers invites other countries to respond in like manner, which hurts U.S. exporters.

As the economy slows, the temptation for the steel and textile and apparel industries to lobby for higher trade barriers. Congress should set a new precedent by not giving into the special interests. This would mitigate the economic hardships of a slowdown faced by a majority of Americans and developing countries.

It would also encourage producers in the steel and textile and apparel industries to seek efficient forms of production, demonstrate U.S. leadership in promoting free trade around the world and reduce the probability of turning a slowdown into a recession.

Aaron Schavey is a policy analyst at the Center for International Trade and Economics at the Heritage Foundation.

About the Author

Aaron Schavey Policy Analyst
Finance and Accounting

Related Issues: Foreign Aid and Development

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