08 June 2009

The True Costs Of 'Protected' Trade... (UPDATED)

...Among other things--increased costs for consumers.

This WSJ op-ed by Don Nicolson is focused on the dairy market, but the larger point it makes about the ills of increased protectionism and the decline of free trade is particularly instructive, given the current climate. Subsidies negatively impact consumers everywhere.
In the U.S., DEIP [the dairy subsidy] means American families pay higher taxes to support subsidized dairy farmers, wiping out any savings they might enjoy from lower dairy prices. As in other countries, subsidies effectively shield farmers from true competition. Higher prices always result, and this price increase is passed straight onto consumers. There's nothing inherently "fair" about any form of subsidy.
Beware calls for trade protection. "Buy American," sounds good--who wouldn't want to "support" as it were, their fellow Americans over someone we don't know in some far off country? The reality is, it increases costs for consumers and hurts unrelated industries in the US whose goods are blocked in retaliatory trade protection moves in that far off country.

The Smoot-Hawley Tariff Act deepened the effects of the Great Depression--not only for Americans, but for people around the world. Reject the calls of the protectionists and remember that free trade benefits our exporting industries as well as keeping consumer costs low.

UPDATE 6:00pm BST: Dan K., Cambridge Econ PhD candidate writes:
Here's Robert Lawrence take on why American car manufacturers became embarrassingly uncompetitive: 40 years of Government protectionism
Although we call the big three automobile companies they have basically specialized in building trucks. This left them utterly unable to respond when high gas prices shifted the market towards hybrids and more fuel efficient cars.
One reason is that Americans like to drive SUVs, minivans and small trucks when gasoline costs $1.50 to $2.00 a gallon. But another is that the profit margins have been much higher on trucks and vans because the US protects its domestic market with a twenty-five percent tariff. By contrast, the import tariff on regular automobiles is just 2.5 percent and US duties from tariffs on all imported goods are just one percent of the overall value of merchandise imports. Since many of the inputs used to assemble trucks are not subject to tariffs anywhere near 25 percent -- US tariffs on all goods average only 3.5 percent -- the effective protection and subsidy equivalent of this policy has been huge.

It is no wonder much of the initial foray by Japanese transplants to the US involved setting up trucks assembly plants, no wonder that Automakers only put three doors on SUVs so they can qualify as vans and no wonder that Detroit is so opposed to the US-Korea Free Trade Agreement that would eventually allow trucks built in Korea Duty-Free access to the US market.
Here's the punch line:
If congress wants an explanation for why the big three have been so uncompetitive it should look first at the disguised largess it has been providing them with for years. It has taken a long time -- nearly 47 years -- but it seems that eventually the chickens have finally come home to roost.
47 years of government failure can't just be erased overnight. Sorry Detroit.

There is a certain irony in that US automakers lobbied for the protectionist policies that would ultimately have a large part in their total collapse.

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