Protectionists Cling to Their Ataris

By Scott Lincicome

There's a fantastic op-ed in today's Korea Times by Cato Institute expert (and co-author) Dan Ikenson and the International Policy Network's Alec van Gelder on the archaic folly that is protectionism in today's globalized economy. In the piece, Ikenson and van Gelder use examples of actual multinational manufacturing processes to inform G20 leaders on why protectionism is nonsensical in an era of global supply chains (read the whole thing here):

... To quell the anger and gain a constructive focus in Pittsburgh, leaders must recognize how outdated it is to view the world in terms of ``us" versus ``them." A crash course on the global economy is in order.

The largest "American" steel producer is the majority-Indian-owned Arcelor-Mittal, which has headquarters in Luxembourg and Hong Kong, and is listed on the New York Stock Exchange and five European stock exchanges.

The largest "German" producer, Thyssen-Krupp, a conglomerate with 670 companies worldwide, is investing $3.7 billion in a carbon and stainless steel factory in Alabama, which will create 2,700 permanent jobs there....

Today, the factory floor is no longer contained within four walls, one roof and national borders. Instead, the factory floor spans the globe, allowing firms to optimize investment and output decisions by matching production, assembly and other functions to the locations best suited for those activities.

Gone are the days when the United States could "punish" another country or "help" an American company by slapping tariffs on foreign imports. To put it simply: now that everything is made everywhere, protectionism just doesn't make sense anymore (although one could reasonably argue that it never made sense, but that's an issue for another time). Such senselessness was certainly evident in the President's recent decision to restrict Chinese tires under "Section 421" of US trade law. Because most US tire producers also made tires in foreign countries (including China), the "protected" actually opposed the "protection." Crazy, huh?

Of course, even though protectionism has become archaic and pointless doesn't mean that it can't still be extremely costly. Today's WSJ has a great piece highlighting these costs and the utter silliness of trade barriers in an age of "global factories." In the article, the author describes the absolutely ridiculous (and expensive) lengths that Ford Motor Company goes through to avoid a decades-old 25% tariff on all imports of trucks and commercial vans entering the United States:

Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled. ...

The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks....

The story is a remarkable, and likely common, example of the perverse business decisions that multinational corporations make in order to provide consumers with the best and most affordable products possible - an absolute necessity in an increasingly competitive and global market for most products. Unfortunately, it's also a prime example of the damage that protectionism inflicts upon US businesses and consumers, as well as the economy as a whole:

* First, while these Ford trucks are no doubt cheaper because of the company's sneaky move to avoid the 25% tariff, they're also undoubtedly more expensive than they would be in the tariff's absence. As such, American businesses must pay more for their (fitted-then-gutted) vans and trucks, and they pass these costs on to the consumer or absorb them, leaving less capital for expansion, investment and hiring. As such, the truck tariff is a large, but mostly hidden, tax on US businesses and consumers.

* Second, the 25% tariffs force a huge misallocation of finite resources, thus making both Ford and the overall US economy worse off. Ford is wasting money, manpower, raw materials and energy in order to equip trucks with seats and windows and then gut them once they clear Customs. It's not difficult to think of ways that Ford could better allocate these resources, to the benefit of the company, its shareholders and employees, and the overall American economy.

So to recap: in today's global economy, protectionism is simplistic, outdated and pointless. It's the functional equivalent of playing Pong on a black-and-white TV (minus the retro-hipster coolness) while everyone else is playing Tiger Woods 10 on their 50" HDTV.

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In 2008, Scott Lincicome served as a senior trade policy adviser for Senator John McCain’s Presidential campaign. He blogs at http://lincicome.blogspot.com/