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516 June 17, 1986 INTRODUCTION In an effort to stem the protectionist tide in Congress last December, Ronald Reagan vetoed legislation passed overwhelmingly by Congress that would severely restrict imports of textiles and shoes.
Congress is expected to seek to override the President's veto this summer. If the override is successful, it would be costly for the American consumer. And while. textiles have been the principal focus of the debate thus far, the impact of the legislation on the cost of shoes for Americans could be considerable imports of nonrubber footwear. have caused Itserious injury" to the U. S footwear industry and its workers. Accordingly, it recommended to the P resident that ha impose quotas to roll back footwear imports to their 1983 levels-or approximately 18 percent below the 1984 level of 575 million pairs. The legislation vetoed by Reagan generally followed the ITC reconunendations The 'International Trade Commission (ITC) declared last year that In the past, the U.S. footwear industry has enjoyed the benefits of selective quotas, such as those applied only to imports from South Korea and the Republic of China on Taiwan (ROC) from 1977 to 19
81. Now the industry is asking for nearly global quotas that would restrain shoe imports from more than 70 countries.
Studies of the South Korea and ROC quotas conducted in 1981 reveal that restricting the supply and raising the price of shoes forced U.S. consumers to pay as much as $1.6 billion more per year (in 1980 prices) than they otherwise would have during the 197 7 -1981 period. Even though this protection may temporarily have increased the number of jobs in the U.S. footwear manufacturing industry (at the expense, of course, of jobs elsewhere in the U.S., such as in retailing and wholesaling studies indicate that t he cost to consumers for each job saved was approximately $40,0
00. This may be a high price for temporarily "saving'l jobs that paid an average wage of 9,100 in 1981.
The proposed global quotas would be much more costly. Recent studies show that the quot as would force U.S. consumers alone to pay as much as $3.1 billion more for footwear annually. This would mean an estimated cost per job saved of $95,385--almost.seven times the average footwear manufacturing salary of $14,000 in 19
85. It is hard to imagine a better example of why it makes no sense to use quotas to l1save1l jobs. Lawmakers should consider this heavy cost when they consider overriding the veto.
THE BENEFITS AND COSTS OF PARTIAL PROTECTIONISM In 1977 the U.S. government negotiated five-yea r ltvoluntary'n trade restrictions on footwear imported from South Korea and the Republic of China. This "partial protectionismll provides a case study of the .costs imposed by quotas Who Paw the Costs of Protectionism?
Studies of these restrictions revea l that, by reducing supply and driving up prices, the Totas cost consumers as much as $1.6 billion per year in 1980 prices. This amounts to an average annual consumer cost of as much as $40,000 per job "saved" by protectionism in the domestic footwear ind ustry.
There is much evidence, moreover, that protectionism's costs are not borne equally among Americans in different income categories.
Protectionism is the equivalent of a regressive tax, imposing proportionately greater hardship on lower-income groups than on those in higher brackets.
The quotas on South Korean and ROC footwear manufacturers limited theytotal volume of shoes imported into the U.S. Research shows that such supply restrictions drive,up the price by approximately the same absolute amount for all shoes, regardless of quality. This means that higher quality shoes become relatively cheaper average price increase of; say, $10, then a $20 pair of shoes will climb to $30, while a $40 pair will climb to $
50. Originally, the If quotas cause an 1. See Michael C. Munger, "The Costs of Protectionism," Challenae, January/February 1984, PP. 54-58 2cheaper shoes were half the price of the more expensive pair after the price hike, the cheaper shoes cost 60 percent of the other pair. sfioes-are better v alue for the money. In the case of the shoes from South Korea and Taiwan, economist Joon Suh of Washington University in St Louis found that prices on imports were increased more proportionately among lower-priced (and lower-quality) items A survey by the U.S. Bureau of Labor Statistics of the Department of Labor also found that lower-income families spend proport$onately more of their income on footwear than do wealthier families. The survey reported that those families with after-tax income under 7,000 p e r year spent 1.03 percent of their income on footwear; by contrast those with after-tax income exceeding 25,000 spent only 0.56 percent of that on footwear. Thus, even a proportionate increase in kootwear prices among footwear of different quality would i mpose almost twice the burden on the low income groups as on the high income groups.
In fact, the burden is even more regressive because quotas cause more than proportionate price increases among lower-prked shoes which are purchased in greater volume by l ower-income families Suh calculates that the poorest families in the Bureau of Labor Statistics survey, those with after-tax income under 7,000, paid a "quota tax ratell (that is, the increase in shoe expenditures divided by family income) that was three t imes greater than the rate paid by the wealthier families But Many consumers are likely to conclude that the higher-priced Over time, moreover, the higher relative price for better quality footwear from South Korea and the ROC caused an increase in the su p ply of those items, thereby reducing production costs through economies of scale and actually lowering their price in the importing country. The net effect of quotas thus is a regressive tax that burdens lower-income. families most harshly, coupled with a 11subsidy18 to wealthier consumers in the form of lower prices for the higher quality items they can afford purchase more costly shoes, quotas force them to spend an even greater portion of their income on footwear even greater burden for the poor And by forcing lower-income consumers to This makes the "quota tax1
an Despite the dismal results of the five-year experiment with quotas on South Korean and ROC footwear, the American Footwear Industries Association and such labor unions as the Amalgamated 2. J oon Suh, "Voluntary Export Restraints and Their Effects on Exporters and Consumers The Case of Footwear Quotas," Working Paper No. 71, Center for the Study of American Business, Washington University at St. Louis, October 198 1 3. U.S. Department of Labor , Bureau of Labor Statistics, Consumer ExDenditure Survev 1972-197Q (Washington, D.C.: U.S. Government Printing Office, 1974 3Clothing and Textile Workers Union and the United Food and Commercial Worker International Union are pressing for global protectio nism.
Testifying before the Senate Finance Committee, they urged Iltough action1# to control Ilimports from the entire world through...global quotas 1l4 Some Effects of the ITC ProBosals Worldwide quotas on footwear imports would impose heavy burdens on Am erican consumers shoes purchased multiplied by the increase in price imported footwear prices depends on both the percentage reduction in imports achieved by the proposed quota (the ITC proposes a 17.6 percent cutback) and the responsiveness of consumer d e mand to-price increases (or the Ilelasticity of demand1I--the percentage change in the quantity demanded for a one percent rise in price The total cost would be equal to the total The increase in The best estimate of the price elasticity of demand for foo t wear is -1.5; this means that for every 1 percent increase in import prices, quantity demanded falls by 1.5 percent To achieve the 17.6 percent cutback of imports proposed by the ITC, price.s of imports would have to rise by 11.7 percent (17.6 percent/l.5 ) . Since the quantity of footwear supplied to the total U.S. market would be reduced, prices of domestically manufactured footwear.almost surely would increase by approximately the same degree price of all footwear in the U.S imported and domestically manu factured, was approximately $22.82 per pair.
Americans purchased 864.4 million pairs of shoes in 1984.
Assuming that quotas cut imports by 17.6 percent, imports would decline by 101 million pairs. At the same time, higher prices would spur an output increase of 79.4 million pairs by domestic producers since the responsiveness of supply to changes in price (known as the l'price elasticity of supplyI1) in this industry is estimated as 2.28-that is, every 1 perc e nt increase in price induces a 2.28 percent increase in quantity supplied. Thus the total volume of consumption, with quotas, would be 842.8 million pairs. Multiplying the 11.7 percent rise in price by the average of consumption volume before and after th e quota (853.6 million pairs) yields approximately 2.3 billion. This is, by conservative estimates, the extra annual cost of footwear to American consumers imposed by global quotas. The ITC, meanwhile, expects that its suggested quota would increase prices In 1984 the average 6 4. Testimony of F.A. Meister, President of the American Footwear Industries Association before the U.S. Senate. Finance Committee, Subcommittee on International Trade, September 9, 1980, p. 156 4i I I I I I I i by 19 percent rather t han 11.7 percent annual costs by approximately $3.1 billion annually.
President's Cpncil of Economic Advisers estimates the added costs at 2.9 billion This would gncrease the The In sum, the ITC's proposed global quotas are likely to cost consumers beeween $2.3 billion and $3.1 billion annually over a five-year period. This is a very high price to pay for the net employment created by the quotas in any case, only be temporary. Moreover, the inequities already experienced with partial protectionism likely w o uld be intensified by global quotas. Indeed, the regressive effects of the import quotas imposed on South Korea and the ROC from 1977 to 1981 resulted from only a 3 percent increase in the average price of imported shoes, and that amounted to an extra 1.6 billion "tax" on U.S. consumers.
Global quotas would intensify these inequities, since footwear prices would rise up to six times more than under the system of partial quotas The increase in employment would Another cost is that imposed on.other American industries and workers by trade restrictions. Foreign industries likely would lobby their governments to impose retaliatory protectionist measures against American firms. The costs of such measures are uncertain, but the President's Council of Economic Ad visers projects thep at approximately 2.2 billion in lost profits and wages. This would increase the estimate of the costs of protectionism to between $4.5 billion and $5.7 billion.
These costs are very high compared with the number of jobs created per worker in 19
80. On this basis, the estimated 80 million extra pairs produced in America with quotas in effect would create about 32,500 jobs. Therefore, the annual cost for llsaving'v each job in the domestic footwear industry would be between $138,461 and 175,384--aboUt ten to twelve-and-a-half times the $14,000 annual salary paid for such jobs in 19
85. It would be much cheaper simply to give footwear manufacturing workers $14,000 in cash to pay them off The ratio of shoe production tq employees was 2,464 pairs 6. Official Transcript, "Proceedings Before the U.S. International Trade Commission Washington, D.C.: ITC, June 12,1985 7. As cited in "Relief for the Footwear Industry," Message from the President of the United Sta.tes House Document 99-100, 99the Congress, 1st Session, September 4, 1985 Washington, D.C US. Government Printing Office, 1985 8. Ibid 5EMPLOYMENT AND PRODUCTIVITY EFFECTS Global quotas would raise domestic footwear prices, which would bring about a larger supply and, consequently, an in c reased "derived demand" for employment in the industry. But there also would be job losses in the wholesale and retail footwear trade, since the higher prices resulting from global quotas would reduce the total supply of footwear on the market With the nu m ber of shoes purchased falling by 2.2 percent because of-the proposed quotas, and assuming that wholesale and retail employment would decline by the same 2.2 percent 7,165 jobs would be lost as a result of the global.quotas (given the 325,685 shoe retaili ng jobs in 1984 markets. Over time, it is competition that provides incentives for all manufacturers to innovate and to make use of cost-reducing or quality-enhancing technology.
Incentives for technological advance, however, would be reduced by protection ism. Slowing the advances would put the U-.S. footwear manufacturing industry at a further disadvantage in international markets, which in turn would lead to further demands for protection stifling technology even more. Dependence on protectionism is no b etter for an industryls long-run economic health than dependence on welfare payments is for an indi~idual~s Global quotas also would impair the dynamics of competitive Technological change is a major engine of economic expansion.
NIT economist Robert M. So low estimates that,i$ probably accounts for as much as 80 percent of B.S. economic growth support this calculation incentive for innovation will make the U.S. footwear manufacturing industry less competitive in international markets this means fewer jobs for Americans Other studies Thus protectionism by reducing the In the long run If protectionism could save jobs, then the most protected industries, such as steel, textiles, and automobiles, should be among the most robust for employment.
Decades of protec tionism has stifled competitiveness, resulting in thousands of employees being thrown out of work. International competition can never be eliminated, only forestalled. The International Trade Commission itself has admitted recently that, when the footwear manufacturing industry was faced with a more than 100 In reality the opposite is true 9. Robert M. Solow, "Technological Change and the Aggregate Production Function Review gf Economics and Stat istics August 1957, pp. 312-320 10. Morton Kamien and Nancy S chwartz, Market Structu re and Innovation (New York Cambridge University Press, 1981 6percent increase in the demand for athletic footwear, from 1979 to 1983 Ildomestic firms were slow to respond, permitting foreign manufacturers to capture a much larger market share.
Congress as an excuse to enact protectionist policies footwear manufacturing industry has not lived up to its past promises of improved productivity in return for protectionism; it is not likely to do so in the future Promises of productivity improvements are routinely offered to But the Table 1 Pairs of Shoes Pairs of Shoes Made Real Capikal Per Worker Per Hour Worked Expenditures Per Year in the Industry thousands per year 1972 Dollars 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1 982 1983 1984 2.706 2 725 2 679 2 628 2.620 2.273 2 665 2.645 2 679 2 690 2.541 2 524 2 677 2 464 1971-1976 2.655 1977-1981 2 644 1982-1984 2 558 1.388 1.365 1.377 1.369 1.327 1.359 1.400 1.378 1.423 1.417 1.346 1.373 1.395 n.a 1.364 1.393 1.384 31.8 37.0 42.6 25.7 23.5 38.1 24.0 24.6 33.1 33.9 47.0 27.4 n.a n.a 33.1 32.5 n.a Source U.S. Department of Commerce, Survev of Current Business Business Statistics 1971, and 1985 U.S. Industrial Outlo Footwear Industries of America, Footwear Manual 1983, Footwear I ndustries of America et. al., in the I'Matter of Nonrubber Footwear,Il Preliminary Brief before the ITC k Investigation No. TA-201-55 i and International Trade Commission 11. International Trade Commission, Reoott to the P resident, p. 22 7 Labor producti vity did not rise significantly during the quota period, 1977 to 1981, or afterwards See Table 1.) Nor did real investment in the industry increase substantially during this period.
In fact, real annual capital expenditures were actually lower than during the prior five-year period industry will increase its investment spending in return for protectionist favors. If-anything, protectionism reduces the incentives for productivity enhancement, a view supported by Table 1 These data belie the view that the Th e re are two ways the footwear industry can raise its profits it can compete in the market by trying to reduce costs or improve the quality of its product, thereby increasing sales: or it can lobby the government for special privileges in the form of import quotas, which limit competition. Once the industry has succeeded at lobbying, it is likely to trust politics rather than improved efficiency as the surest route to profits.
The notion that granting an industry monopoly power and isolating it from competit ion will induce it to become more innovative entrepreneurial, and competitive defies common sense. -Both theory and evidence indicate that the opposite is more likely monopoly privilege by abolishing trade restrictions will create an environment conducive to entrepreneurship and productivity enhancement Only eliminating CONCLUSION The issue of protectionism is usually discussed as a means of protecting the livelihood of Americans against the threat of foreign imports. Protectionism is thus defended on the g rounds that the interests of American citizens'should be placed above those of citizens of'South Korea, the Republic of China, Japan, and other foreign trade bogeymen. At best, however,,the global quotas proposed by the footwear manufacturing industry and its political allies in organized labor will provide short-lived benefits for a few Americans at a great cost to all other Americans. And such quotas will impose a disproportionate burden on lower-income families.
In the long run, these costs cannot be justified even on the grounds that they save jobs industry from the rigors of competition is that it becomes lethargic less competitive, and ever more reliant upon governmental handouts.
The end result is fewer jobs, not more, as is apparent in some of the most heavily protected industries such as automobiles, steel, and textiles far outweigh any possible benefits, the benefits are highly visible--the industry and its unions are quick to thank Members of The long-run effect of protecting'an The threat of protectionism.exists because, even though the costs 8- Congress in very tangible ways for voting for tariffs and quotas. In distressing contrast, protectionism's costs are hidden. Citizens have little incentive or opp ortunity to determine their.share of the costs of protectionism so are usually fooled into thinking that to favor protectionist policies is to favor Americans over foreigners.
Thus far Ronald Reagan has rejected pleas for additional protectionism in the do mestic footwear industry by vetoing legislation incorporating quotas. He should continue to stand firm, and Congress should avoid protectionist legislation that may spell good politics in a few districts, but bad economics for American consumers.
Prepared for The Heritage Foundation by Thomas J. DiLorenzo Associate Professor of Economics George Mason University Fairfax, Virginia 9-