Why We Need a Little Ronald Reagan-Style Protectionism
A few months ago, the Japanese automobile maker Toyota announced that it would be building a new plant in Canada. According to the Canadian Broadcasting Corporation, even though several states were prepared to offer larger financial incentives to Toyota to locate in America, the car company built in Canada anyway:
[Gerry Fedchun, president of the Automotive Parts Manufacturers’ Association] said Nissan and Honda have encountered difficulties getting new plants up to full production in recent years in Mississippi and Alabama due to an untrained - and often illiterate - workforce. In Alabama, trainers had to use "pictorials" to teach some illiterate workers how to use high-tech plant equipment.
"The educational level and the skill level of the people down there is so much lower than it is in Ontario," Fedchun said.
In addition to lower training costs, Canadian workers are also $4 to $5 cheaper to employ partly thanks to the taxpayer-funded health-care system in Canada, said federal Industry Minister David Emmerson.
But this essay is not about education or healthcare. I wish the American education system could train better workers and I believe that nationalizing at least part of the American healthcare system is worth considering. However, absent these two changes it still might have been possible to get that new Toyota plant built in the United States if only this country did not adhere to the principles of free trade in such a self-destructive manner.
To illustrate what I mean, consider the way that Ronald Reagan treated foreign automobile manufacturers. As the Car Connection.com explained shortly after his death last year:
Reagan also was a free trader and generally turned his bad ear on the demands from unions and Detroit executives such as Iacocca about imposing tough restrictions on Japanese imports. Reagan, however, was also a pragmatic politician and during the heat of the Presidential campaign in 1980, he agreed to support quotas on Japanese autos imports. The quotas were imposed but the end result was that it pushed the Japanese Big Three, Toyota, Honda and Nissan, to expedite the construction of new plants in the United States. Honda already had made plans to open a plant in the U.S. but the plant quickly expanded. The competition ultimately helped make American and foreign cars better.
Indeed, there is a 1988 essay by Sheldon Richman published by the Ludwig von Mises Institute entitled, “Ronald Reagan: Protectionist,” that is still available on its web site which details many other violations of the principles of free trade which the Reagan administration adopted as policy.
Perhaps the best way to look at Reagan’s actions is to compare trade quotas or tariffs to the relationships between trade unions and strikes. A successful union does not want to strike because if it does both its members and the employers those workers depend upon might face significant financial losses. However, a successful union has to be prepared to strike in order to have employers take it seriously. Recent administrations, Democratic and Republican alike, have telegraphed their willingness to allow corporations to walk all over them so that companies no longer fear any kind of political retaliation for taking American markets for granted.
Consider one corporation that has been all over the news lately for many reasons, including its effect on U.S. trade deficit: Wal-Mart Stores, Inc. As Business Week explains, about 70 percent of Wal-Mart’s products sold in the U.S. are made in China (obviously, that figure must exclude food). In contrast, go to the web site of Wal-Mart in China and you will see that 95 percent of the products in Chinese Wal-Marts are procured locally. That’s a great deal for the Chinese, but what are we thinking? As former Wal-Mart CEO David Glass explained to the journalist Tom Friedman, “One of my concerns is that, with the manufacturing out of this country, one day we'll all be selling hamburgers to each other.”
The reason this situation exists is that George W. Bush is no Ronald Reagan. While Bush was willing to raise tariffs on some kinds of imported steel in order to court Rust Belt votes for his re-election, on the whole his administration has introduced a trade policy of unilateral disarmament. Companies like Wal-Mart destroy American jobs coming and going, yet there is not a peep out of the president or the Republicans who control Congress in support of the workers who are being hurt by globalization.
Granted, the Clinton Administration was no better in this regard. It was Bill Clinton who shepherded the North American Free Trade Agreement, the granddaddy of all job outsourcing arrangements, through Congress without the support of many in his own party. Even today, liberals who support free trade try to change the subject when the conversation turns to the effects of that trade on their own political base. The Princeton economist and former Federal Reserve Vice-Chair during the Clinton administration, Alan Blinder, titled a post at the liberal web site TPM Cafe, “Let’s Abandon the Circular Firing Squad”:
[I]nternational trade is not the most important economic issue facing our nation today.
In fact, the areas about which we agree vastly outstrip the areas in which we disagree, both in numbers and in importance.
That’s easy for him to write. Princeton is unlikely to be outsourcing economics professors any time soon.
Lest you think otherwise, I am not suggesting that protectionism is the solution to our problems. Free trade that runs in both directions is beneficial to all countries that participate in it. What I believe is that by taking protectionism completely off the table, this country is being taken advantage of by firms like Toyota that know they can build plants in Canada and still have completely unfettered access to the U.S. market.
My solution is to run trade more like Ronald Reagan did. Love the free market, but remember that a country can’t prosper with a trade policy that is all carrot and no stick.
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Oscar Chamberlain - 12/5/2005
Property Rights in Slavery and the Coming of the Civil War
James L. Huston
The Journal of Southern History, Vol. 65, No. 2. (May, 1999), pp. 249-286.
Stable URL: http://links.jstor.org/sici?sici=0022-4642%28199905%2965%3A2%3C249%3APRISAT%3E2.0.CO%3B2-1
The situations in the US in the 1850s and the World Market today are far from identical. But the difficulties of uniting countries with free labor and countries with suppressed labor within a single market system are similar enough to the antebelum situation to stimulate thought.
John H. Lederer - 12/1/2005
"Even if we limit our arguments to the world of economics, slight national gains can obscure sharp local and regional losses"
I believe it was Bastiat who pointed out the political underpinnings of duties. Duties generally benefit a very narrow group of producers, while their cost is felt over a wide spectrum of consumers, and thus slightly on each individual.
The honest way to help a group of procucers to to pay them directly with tax monies, not hide the subsidy through duties.
In the case of softwood duties the problems are not solely one of possible Canadian subsidies. American lumber mills were devastated by changing policies on harvesting national forests and increased environmental demands. The duties are to some extent an attempt to make Canada, and consumers generally, alleviate the harm government policies caused.
Oscar Chamberlain - 12/1/2005
"In a full accounting would not the lack of those safeguards be an economic cost to production in China?"
What matters is not the full accounting but the accounting that is actually done. It's entirely possible that China's policies will be self-destructive in the long run, but in the short run those same policies have helped it gain market share.
That long term possibility of failure in no manner mitigates the harm done here in the short run by having our workers compete against an economy subsidized by its own oppression.
Oscar Chamberlain - 12/1/2005
I must dissent from the criticism here, at least in part.
1. Economic values are not the only values. As simply one example: Stability of community--which I believe is essential to family stability among many other things--requires a certain stability of employment. The opening and closing of factories with no regard for local circumstances does the sort of damage that economics statistics cannot capture. One essential purpose of government in a free market is to assert those essential values that the market does not address.
2. Even if we limit our arguments to the world of economics, slight national gains can obscure sharp local and regional losses. I would not want to simply flip that over and let the local rule the national, but I think we our imbalanced in the other direction.
3. In the case of China, our cheap prices are subsidized by an oppressive government with an oppressive system of labor. That most free trade supporters simply ignore that in their arguments I find apalling. Free trade without free labor is a lie, even from the free market perspective, because the rational choices of the laborers are too limited.
William Candlish - 11/29/2005
I agree completely with your last statement. I also appreciate your commentary and writing style, a pleasure to behold.
John H. Lederer - 11/29/2005
In a full accounting would not the lack of those safeguards be an economic cost to production in China?
In other words an injured worker is not only a tragedy, but an economic cost, and in the cold gimlet eye of an economist accountable as such.
John H. Lederer - 11/29/2005
I concur with you. It is a black eye for the U.S.
There are several problems with retaliatory protectionism. Aside from cutting off one's nose to spite one's face ("Aha. To teach those rascally Canadians a lesson I am going to make people in the U.S. pay more for their houses. That'll teach'em!"), it is extremely difficult to find a principled way of determining when a retaliatory tariff is warranted.
Those case before the WTO are becoming eerily reminiscent of Jarndyce v. Jarndyce. It is a race to see whether softwood duties end before global warming converts them to duties on British Columbian coconuts.
Ken Walton - 11/28/2005
Labor cost is only one of many reasons why US manufacturers choose to outsource.
As long as the US Government allows Asian component suppliers to:
*have no OSHA standards
*undocumented quality systems
*uncontrolled disposal of industrial waste (check out the cost of a plated metal component in China versus the US)
*subsidizing by the government
*no work place laws governing hours worked,etc...
There will never be a level playing field.
If the US Government were to hold US manufacturing companies responsible for ensuring that their off shore suppliers adhered to the same requirements and standards that they apply to their US supply base, you would see with gread rapidity the small part labor cost plays in the overall outsourcing equation.
Yes, there are ways to accomplish such oversight, with minimal governmetal expenditures to do so.
William Candlish - 11/28/2005
As a Canadian, we see American protectionism all the time. Softwood lumber is a good example. Also, before completely slagging NAFTA, remember that it ensures American access to Canadian natural resources (oil, water etc) even to the detriment of Canadians -- so strategically, for Americans at least, it is a pretty good deal.
By implementing more protectionist measures, America will be only exacerbating the situation it has already entered with some of its trading partners. America's policy of unilateralism (politically) and protectionism (economically) is beginning to foster an (often unfair) international reputation as a country which does not honour the deals it makes (with regards to Free Trade.)I would argue that this reputation could prove to be more damaging in the long-term than any short-term benefit provided by more protectionist measures.
John H. Lederer - 11/28/2005
If, in fact, it is less expensive for Toyota to build cars in Canada and sell them in the U.S., precisely how much more should people pay for their cars so that they can be built here? What other economic opportunities ought we forego here in order to afford this car premium?