Unit
3: The Case for Protection
Part
1: A Brief History of Protectionism in the U.S.
If it’s fine to
say that in theory protectionism doesn’t work, or
that it is less efficient than free trade, it’s also
true that protectionism has been an important part of the
American landscape. Most famously, the Boston Tea Party
acted out the North American colonists’ resistance
to a tax put on the tea Americans bought from then-monopoly
the British East India company. Moreover, one of the underlying
historical sources of tension between the antebellum North
and South was American import tariffs on manufactures, which
protected northern manufacturers and hurt southern plantation
owners. The dispute was so intense that the South insisted
the Constitution be drafted in such a way as to make it
illegal for the newly empowered federal government to collect
revenue through taxing southern cotton and tobacco exports.
Even so, revenues from import tariffs quickly became a significant
(and incredibly regressive) source of revenue for the US
government until the passage of federal income taxes in
the early 1900s.
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 ***TIP
BOX: A regressive tax taxes the poor at a higher rate
than the rich. Because the poor spent nearly all of
their income on subsistence consumption—including
imports which had higher prices due to the tariffs—their
income was essentially being taxed at a higher rate
that the income of the rich, who could avoid such
taxes through their propensity to save. In fact, such
an argument can still be made today over state sales
tax—which explains why most states have low
or no sales taxes on grocery-store-bought food.***
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As
mentioned in Unit 1, the Industrial Revolution (late 1800s
- early 1900s) brought about what is commonly considered
the first wave of globalization, and with it came dramatic
reductions in US protectionist policy. But this did not
last. The onset of World War I and the inter-war Depression
Era that ensued saw dramatic increases in protectionism
with policies like the Smoot-Hawley Tariff Act. FDR’s
“New Deal” and passage of the 1934 Reciprocal
Trade Agreement Act helped to restore some openness to markets
with the introduction of the reciprocal Most Favored Nations
concept, but the outbreak of WWII put further steps toward
liberalization squarely on hold.
Since WWII, the level of protection—as defined by
the Global Agreement on Tariffs and Trade—has been
falling. Today’s import taxes are, on average, a bit
less than a typical American state’s sales tax. However,
this decline of protectionism in the US has not been consistent
across time or industry: it has proceeded in fits and starts
and differs systematically across industries.
For example, just after the formation of GATT in the 1950s,
tariffs fell dramatically as participants sought to avoid
a beggar-thy-neighbor episode such as occurred between the
two world wars. And although Europe sought increased protection
from US competition as they rebuilt in the ’60s, the
developed capitalist nations cooperated more fully late
in the decade, partly out of fear of the expanding Soviet
Empire. In the ’70s, oil shocks and the demise of
the dollar-backed Breton Woods Fixed Exchange Rate System
made protection fashionable again: it wasn’t until
the 1980s Tokyo Round of trade negotiations that GATT changed
to cover non-tariff barriers to trade and paved the way
for deeper integration in world trade zones in the ’90s—through
NAFTA, the EU, and South East Asia. Most recently, the war
on terror, the rise of Chinese manufacturing, and concerns
over the “outsourcing” of American jobs have
lent impetus once again to protectionist feelings, although
such feelings are sometimes inconsistently articulated and
followed.
The Bush administration’s flip-flop on steel tariffs
clearly exemplifies this inconsistency. When the administration
imposed tariffs on steel, they hoped to win battleground
states in the midterm elections in 2002—notably Ohio
and Pennsylvania. But in the last few months the administration
rescinded the tariffs—years before they were set to
expire—in part because they hurt American producers
who use steel as an intermediate good, in part because the
WTO declared them illegal, and in part because the European
Union threatened retaliatory sanctions against goods produced
in states even more important in the presidential election
next year—Florida among them. One lesson from this
episode in US trade policy: industry protection is frequently
proportional to industry political power.
To learn more about the US steel industry tariff case, listen
to the following series of audio clips which aired over
the days following the WTO’s ruling against the US.
AUDIO CLIP: NPR Audio: WTO Panel Rules
U.S. Steel Tariffs Illegal (11/11/2003)
http://www.npr.org/features/feature.php?wfId=1501551
AUDIO CLIP: NPR Audio: U.S. Steel Tariffs
Poised to End 12/1/2003)
http://www.npr.org/features/feature.php?wfId=1528224
AUDIO CLIP: NPR Audio: Steel Industry Faces
Economic Competition (12/01/2003)
http://www.npr.org/features/feature.php?wfId=1528226
AUDIO CLIP: NPR Audio: Steelworkers React
to Tariffs’ Removal (12/04/2004)
http://www.npr.org/features/feature.php?wfId=1532755
Other reasons for protecting industries include their historical
significance, labor intensity, and importance for national
security. Agriculture, which still receives generous subsidies
from the federal government, is an example of an industry
that is both labor intensive and historically significant.
During the ’80s, the “crisis of the American
farmer” was frequently described as the downfall of
a way of life—an appeal to its historical significance
and Americans’ identification with the rugged, earthy
values that it represents. Labor-intensive industries, moreover,
tend to draw protection because they need protection in
international labor markets, and because industry labor
intensity can be proportional to political significance—since
not protecting such industries leads to higher job loss
and more dissatisfied voters than failure to protect less
labor-intensive industries.
At bottom, history has shown protectionist sympathies tend
to grow in times of conflict or recession, and tend to be
associated with labor-intensive, politically, and historically
important industries. On the other hand, during times when
the Bretton Woods and GATT institutions (the IMF, World
Bank, and the WTO) are more or less supported, protectionist
sentiment falls.
