In 1790, the Tariff Code consisted of a single sheet of paper. Today, there are more than 8,757 tariffs - plus vast numbers of quotas, so-called voluntary import restraints and other import restrictions. All too often these barriers to trade impose their greatest burdens on low-income families. Consider that:
America's tariff makers perceive vast differences between similar products that ordinary mortals miss. The tariff on duck liver is sixteen times higher than the tariff on goose liver. The tariff on wine with low alcoholic content is six times higher than on wine with high alcoholic content.
Every trade barrier undermines the productivity of capital and labor throughout the economy:
Higher Tariffs for Lower-Priced Goods. As Figure I shows, U.S. tariffs and quotas are much less burdensome for families who buy higher-priced products:
Clothing. William Cline of the Institute for International Economics estimates that:13
Vitamins, Drugs and Medical Equipment. Congress apparently believes that not all the malnourished should be treated equally. Vitamin B12, which is necessary to prevent and treat anemia and is no longer produced in the United States, is hit with a 16.2 percent tariff, while vitamin B2, vital for avoiding stunted growth, is tariffed at only 7.8 percent. Vitamin C carries a 3 percent tariff, while vitamin E is hit with a 7 percent levy. Looking at tariffs on medicine and medical equipment, one might think that tariff policy is secretly controlled by Christian Scientists. Aspirin carries a 10.2 percent tariff, which encourages people not to get headaches. The tariff on antidepressants and tranquilizers is 16.6 percent, encouraging people to see therapists. And Congress deters the import of sulfathiazole, an anti-infective agent, with a 15 percent tariff. [See Figure II.]
Death by Tariff. Higher prices caused by tariffs often result in fewer people using lifesaving drugs or equipment. In 1984, a West German company developed a lithotripter that destroys kidney stones with shock waves. This might have been seen as a blessing. More than 250,000 people a year enter hospitals for kidney stone treatment, 1,149 people died of complications resulting from kidney stones in 1985,17 and the German machine was a vast improvement over the surgical removal of kidney stones. Although no American companies were producing competing machines, the U.S. levied a 7.9 percent tariff on the German product. The Saint Joseph Medical Center of Burbank, California, paid a $189,964.32 tariff on a single lithotripter. The high tariff strongly discouraged more American hospitals from purchasing the machine. As a result, thousands of Americans in the mid- to late-1980s had to undergo painful surgery and relatively long recuperation.18 (The recuperation time for shock-wave treatment is less than half that for traditional kidney surgery.) Many deaths from kidney stones and kidney stone surgery could have been avoided if the U.S. tariff code had not discouraged the adoption of this new technology.
Safety. The tariff on a special wool blend fabric used to make firefighters' protective garments is 33 percent.19 When Rep. Robert Roe (D-NJ) proposed in 1988 to reduce this tariff, the American Textile Manufacturers Institute (ATMI) objected. Even though American companies did not produce the fabric, ATMI thought some might do so if the tariff were kept high. A few more singed firemen was apparently a small price to pay for the possibility that a domestic firm might deign to make a fabric already supplied by foreign companies.
Commerce Department officials could not tell the author the precise number of different items covered by import quotas. Some of the items listed as restricted in Commerce's guide to textile import quotas are shown in Table II. Even the plastic net in which oranges are sold is a textile product, subject to quota restrictions.21
The MFA Agreement. In 1973 and 1974, the leading textile exporters and importers gathered in Geneva to hammer out new international rules for textile trade. The Multifiber Arrangement (MFA) was the result. The preamble announced that the MFA sought "the reduction of [textile] trade barriers and the liberalization of world trade."22 Developing nations were enticed to sign the MFA because it promised that exports to developed countries would be allowed to increase "at least 6 percent per year for those imports subject to specified limits."23
Clothing production requires little skill or capital; its main requirement is people who need to work. Since low-wage Third World nations have a natural competitive advantage in labor-intensive activities, the MFA was supposed to be a transitional arrangement to help richer countries phase out of an uncompetitive industry.
Instead, the MFA allowed wealthy importing nations to shackle poorer exporting nations. The MFA was extended in 1978, in 1981 and again in 1986, and each extension further emaciated the 6 percent growth pledge.24 The 1986 extension expanded the types of clothing covered by the arrangement to include silk, ramie and even glass fibers.
Avoiding "Market Disruptions." The MFA allows nations to restrict textile imports if a threat of "market disruption" occurs. Market disruption is defined as a significant increase of imports of particular products from a particular country at prices below those prevailing in the importing nation's market.25 If clothing prices decrease - or if there is any chance that prices could decrease - the market is "disrupted". But if clothing prices increase, the market is judged to be doing just fine. Imports are presumed guilty until proven innocent. Poor countries must prove that their exports are not disrupting the rich nation's economy, while rich nations need not prove the harm.
U.S. Vigilance. In general, the MFA protects Americans only from low-price clothing. Those who purchase expensive clothes are usually permitted to buy duty free.
Luggage and Handbags. In 1984, a U.S. government employee apparently awoke one morning with the realization that the U.S. should be restricting imports of luggage and handbags. Now, because a foreign handbag or piece of luggage has a small amount of cotton or polyester in its cover - perhaps only 10 percent of its total value - it can be banned in order to protect the U.S. textile industry. The United States has practically no companies producing low-priced, relatively low quality luggage and handbags - the types hit hardest by import quotas. Handbag quotas have been an effective recycling policy, encouraging the poor to carry their belongings around in grocery bags.
Tennis Shoes. Importers have also been hammered by constant changes in the textile import classifications. For example, Customs Service officials worked overtime in late 1989 to protect America against foreign shoestrings. Customs prohibited the import of a shipment of 30,000 pairs of tennis shoes from Indonesia because each shoe box contained an extra pair of shoelaces. One Customs official decided the extra laces were a clothing product that required a separate quota license for importing, and his decision set a precedent for the entire Customs Service.33 None of the tennis shoe importers were thinking of the extra laces as anything but part of the tennis shoe and thus were caught without quota rights for shoestrings.34 (Some new tennis shoes have eyelets for more than one set of laces.) Customs proceeded to establish intricate rules for shoelace imports, and the U.S. government judiciously announced that an extra pair of laces would be permitted in a box of tennis shoes as long as they were laced into the shoes and were color-coordinated with the shoes.
But Customs warned importers, "We note that where multiple pairs of laces of like colors and/or designs are imported, ... a presumption is raised" that the shoelaces are not actually part of the shoe.35
Detecting Evasions. MFA quotas force American retailers and importers to rely on island-hopping - jumping from ocean to ocean to stay ahead of U.S. government prohibitions against their suppliers' exports. The U.S. is currently importing trousers and shirts from more than 130 countries, including Oman, Laos and the Tokelau Islands.36 As import sources have proliferated, so too have Customs Service investigations of possible transshipping of products from nations that have exhausted their quota to those which have not. When Customs sent a team to Kuwait in July 1990, it considered the operation a great success because inspectors found a small amount of transshipped clothing. It was regrettable that the U.S. team, "preoccupied with counting sweaters, failed to notice and warn of the impending Iraqi invasion, which occurred a few days later."37 In 1990, Mozambique - a war-torn, dirt-poor southern African nation - made the list of Customs Service textile evasion suspects. One trade expert predicts, "The next thing you know, Customs will be investigating exports from Antarctica - you know you can't trust those penguins."38
Promoting "Fair" Trade. The United States has peculiar notions of injury when it judges our imports from foreign nations and our exports to them. For example, the U.S. government perennially badgers the Thai government about the alleged harm that Thai cotton apparel is inflicting on the U.S. market, imposing one new restriction after another. At the same time, the United States Trade Representative was indignant when Thailand refused to allow U.S. cigarette exports. (The Thai government is running an extensive antismoking campaign and feared that a flood of advertising by American companies would counteract its efforts.) Apparently, a minuscule decrease in shirt prices can harm a nation, while an increase in lung cancer and emphysema cannot.
Cost to Consumers. Quotas transfer money from American consumers to foreign producers and quota-holders and to American textile and clothing companies. They help American textile and clothing companies by restricting their competition and allowing them to charge higher prices. The 1989 Economic Report of the President concluded that tariffs and quota restrictions produce an average effective tariff charge of over 50 percent for apparel imports.39 Tariffs for clothing items vary sharply, and some quota categories are far more restrictive than others. According to the International Trade Commission:40
Dairy Products. The United States allows only minuscule imports of most dairy products. [SeeFigure III.] For example:44
Dry milk is a key ingredient in bakery products, chocolate, cake mixes, dog biscuits and crackers. The dry milk shortage prevented many American companies from purchasing milk at any price, and food production workers were laid off as factories slashed production. The Chocolate Manufacturers Association, American Bakers Association and National Confectioners Association petitioned USDA Secretary Clayton Yeutter to temporarily waive dairy import quotas. The Agriculture Department denied the request. A high-ranking USDA official declared that the agency did not want to "micro-manage" the dairy supply. In other words, it was okay for the government to subsidize the export of dry milk, but allowing the import of unsubsidized dry milk would interfere in the marketplace.45
Dairy quotas originated in the Defense Production Act of 1951, when Congress apparently decided that allowing Americans to consume sufficient amounts of calcium might undermine the national defense. In the late 1940s and early 1950s, the U.S. provided millions of dollars in aid under the Marshall Plan to help Danish, Dutch and other European dairy farmers rebuild. Then a Wisconsin Republican congressman stuck a rider onto an appropriations bill and, with a few sentences, torpedoed thousands of European dairy farmers. A New York Times editorial condemned the new dairy quotas: "We destroy the confidence of our European friends in the consistency - even the sanity - of American trade policy and we violate our own commitments in the GATT."46 President Lyndon Johnson expanded the cheese quotas on January 6, 1969 to include chocolate crumb cheese imports.47 In 1979, the dairy regulatory system imposed quotas on almost all cow's. milk cheeses that had previously entered quota-free. Dairy trade issues have long been a major bone of contention with foreign nations.
Each cheese quota decrees the precise number of pounds of each type of cheese other nations are allowed to sell to Americans. For example:48
Sugar. The U.S. government has been heavily protecting or directly subsidizing the sugar industry since 1816. For almost the entire history of the United States, American sugar prices have been held at double, triple or quadruple the world sugar price. In the 1820s, sugar plantation owners complained that growing sugar in the U.S. was "warring with nature" because the U.S. climate was unsuited to sugar production.53 Naturally, the plantation owners believed that all Americans should be conscripted into the "war." Because the sugar lobby makes generous campaign contributions, politicians seemingly resolved that consumers should pay any price and bear any burden for domestic sugar production.
Since 1980, the sugar program has cost consumers and taxpayers more than $2 million for each American sugar grower. Congress justifies the sugar program as a protection from the "roller-coaster of international sugar prices."54 Unfortunately, Congress protects consumers against the effects of the ride by pegging American sugar prices on a level with the Goodyear blimp. U.S. sugar prices have been as high as or higher than world prices for 39 of the last 41 years.
The sugar program has been a great inflationary success. At one point, sugar sold for 21 cents a pound in the U.S. when the world sugar price was less than 3 cents a pound. In general:
The sugar program has also decreased soybean exports. In the Red River Valley of Minnesota, heavily subsidized sugar growers have bid up the rents on farmland by more than 50 percent. As a result, relatively unsubsidized soybean farmers can no longer obtain enough land for soybeans - America's premier export crop.59 This illustrates how restrictions on imports become restrictions on exports.
Peanuts. Since 1953, Americans have been permitted to buy only 1.7 million pounds of foreign peanuts each year.60 This amounts to two foreign peanuts per year for each American citizen. The peanut import quota helps keep U.S. peanut prices far higher than world prices. The U.S. International Trade Commission estimated that the import quota was the equivalent of a tariff of up to 90 percent on peanut imports in 1988.61 The import quota, along with federal price supports and feudal restrictions on who is allowed to grow peanuts, guarantee peanut farmers generous profits.
The stringent peanut quota is a serious hazard to U.S. food processors. In 1990, a severe drought hit Georgia, where almost half of all U.S. peanuts are grown, causing a severe shortage and a doubling of peanut prices. When the International Trade Commission announced that it was considering investigating the peanut industry, it was besieged by comments from desperate food processors. Ed Goodrich, president of Plantation Peanuts in Wakefield, Virginia, observed, "We are now faced with the possibility of having to shut down."62 King Nut Co. of Solon, Ohio, complained, "We have been [unable to purchase any] Jumbo runner peanuts for three weeks." A Southeast peanut confectionery company saw its sales fall 80 percent. Barcelona Nuts, a Maryland company, was forced to lay off 20 percent of its workers. Even so, the Agriculture Department opposed additional peanut import allowances.63
Beef. The U.S. also imposes quotas on beef and veal imports. Congress first restricted beef imports in 1965, then revised the quota system in 1979. Today, the beef quota is based on the ratio of current beef production to average beef production for the years 1968-1977.64 The restraint on beef exports from Argentina has contributed to that nation's repeated default on interest payments on its $65 billion foreign debt. The USDA estimates that these restraints cost American consumers $873 million in 1987.65
Despite more than ten years of protection, American cars continue to be less reliable than Japanese cars: American cars still have over 50 percent more defects.72 The 1990 Consumer Reports survey of car quality "found that 28 of the 31 best-rated models for quality were Japanese. Likewise, of the 33 worst-rated models, all but one were Big Three products."73 Consumer Reports noted that "for each GM owner who said he liked his car and would buy the same model again, six others said just the opposite."74 J.D. Powers and Associates, a California market research company, found that "Japanese car makers widened their quality advantage over U.S. car makers by 11.4 percent in 1989, based on problems in the first 90 days of new car ownership."75 When Lee Iacocca was asked about Japanese comments about the comparative low quality of American cars in early 1992, Iacocca replied, "We don't have to apologize to anybody. We're the leaders of the world."76
In early 1991, Ford and Chrysler announced demands for new cutbacks in the level of Japanese imports. Rep. Dick Gephardt (D-MO) sent a letter to Japan's Prime Minister Taichi Kaifu urging a "meaningful" restraint on auto exports. Ford and Chrysler even sought restraints on the combined number of cars sold by Japanese auto plants both in Japan and in the U.S. Then Secretary of Commerce Robert Mosbacher, in a speech in Tokyo on April 3, 1991, complained that the U.S. auto market was suffering from "oversupply" and warned that the U.S. "will be enforcing our laws ... concerning anti-dumping."77 Japan's largest financial newspaper reported that Mosbacher asked the Japanese government to further restrain auto exports.78 Officials at Japan's Ministry of International Trade and Industry (MITI) declared last year that they were pressuring Japan's auto makers both to hold back exports to the U.S. and to hold down output at their U.S. auto plants - which meant fewer jobs for American workers.79 MITI again reportedly asked Toyota in late January 1992 to reduce its car exports to the U.S.80
Recently, the U.S. Commerce Department accused Korean and Hong Kong sweater producers of dumping because they sold sweaters more cheaply in the United States than in other countries:81
Because of the Commerce Department's protectionist actions:82
The average U.S. tariff is between 5 and 6 percent, while the average Japanese tariff is between 3 and 4 percent. More importantly, the U.S. has far more products (over 3,600) restricted by import quotas than does Japan. The Japanese impose import quotas on American agricultural products, while the U.S. imposes import quotas on Japanese machine tools, autos, textiles and steel, and on such dairy products as cheese, ice cream and cream.
There is no question that the Japanese have often been as creative with trade barriers as they have been with manufacturing processes. Dutch tulip bulb exports to Japan were long stifled because Japanese customs inspectors insisted on personally opening and inspecting each tulip bulb. Japanese restrictions on foreign investments have justifiably infuriated many American corporations.
Partly because U.S. criticism of Japan increased sharply after President Bush's recent visit to Tokyo, MITI announced in mid-March that it was reducing by 80,000 the number of autos that Japanese companies could ship to the United States (from 1.73 million cars to 1.65 million). The Japanese government reportedly did this to alleviate criticism of Japan in the United States. But, predictably, the tactic backfired. Chrysler Corp. quickly issued an official statement declaring, "We believe that to be meaningful the Voluntary Export Restraint levels should be significantly reduced, perhaps to one million units a year or less, to get back to a level playing field for everybody."84 General Motors criticized the Japanese government for giving "the misleading impression that something meaningful is being done to reduce the U.S. trade deficit with Japan."85 The United Auto Workers denounced the export cutback as "yet another hollow gesture from Japan."86 Yet the cutback in auto exports could have a heavy impact on American consumers. The U.S. International Trade Commission's Walker Pollard estimates that the cutbacks could add up to $1,000 to the cost of a new Japanese car in the United States.87
Listening to current rhetoric, one would think that no U.S. company is selling a single widget in the Land of the Rising Sun. The facts say otherwise. The typical Japanese spends more on American products ($372) than the typical American spends on Japanese products ($357).88 Coke and Pepsi dominate the soft drink market, and Oreos are the most popular cookie in Japan. Schick commands 70 percent of the safety razor blade market.
Many American businesses have blamed the Japanese when the fault lies with their own feeble sales efforts. In Japan, most cars have the steering wheels on the right side. Yet American car makers continue to denounce the Japanese for not buying American-made autos with steering wheels on the left side. Chrysler spends only a million dollars in advertising in Japan - less than one-fourth of Lee Iacocca's salary.
The General Accounting Office reported that American pork exports to Japan are lower than they otherwise could be because American pork packers refuse to cut the pork into the smaller portions that Japanese consumers prefer. Maybe the next trade war will seek to force Japanese consumers to take Texas-size slabs of ham and pork chops at their evening meals.
In 1990, Congress imposed a log export ban primarily to attempt to force Japan to buy more cut lumber instead of logs from the United States. Rep. Peter DeFazio (D-OR) complained, "Unfair trading nations like Japan are buying every American log they can lay their hands on." Apparently, it is not enough for the Japanese to buy American products; they must buy exactly the products that congressmen choose. Seeking to force the Japanese to buy American cut lumber instead of logs is as senseless as trying to force other nations to buy barrels of American wheat flour instead of bushels of American wheat.
Similarly, Sen. Max Baucus (D-MT) complained in 1989, "Invisible barriers that we should define as cultural restrictions, a preference of a Japanese to do business with another Japanese, these take time to bring down." Preferring to do business with people who speak your language is apparently unfair discrimination against all those who have not bothered to learn it.
Many politicians want to pillory Japan because the Japanese had a trade surplus of more than $41 billion with the U.S. last year. But a 1985 Federal Reserve Bank of New York study estimated that only $5 billion to $8 billion of the U.S. - Japan trade deficit is due to Japanese trade barriers.89 A U.S. International Trade Commission study of a proposed free trade zone with Japan noted that if all trade barriers were abolished the U.S. trade deficit with Japan might actually increase.90
The recent auto trade agreement between the United States and Japan vivifies the hypocritical nature of managed trade. Both Ford and General Motors are now receiving financial aid from the Japanese government to build up their operations in Japan.91 If the Japanese provided the same type of aid to Japanese companies, American auto makers would almost certainly file a lawsuit to punish Japanese imports that benefited from the subsidies. But apparently it is okay for American companies to accept handouts from foreign governments.
Many Americans believe that Japan is hopelessly protectionist because of the keiretsu system, a system of interlocking corporate ties, with corporations owning large blocks of one another's shares, and with the same people on their boards of directors. But, as the Boston Globe reported in January, "A survey of American companies operating in Japan found that 74 percent considered that the keiretsu either had a beneficial effect on their own businesses - long-established American businesses have developed strong connections with Japanese counterparts, becoming keiretsu themselves - or no effect at all."92
We should postpone penalizing the Japanese for their trade barriers at least until American companies build equally good products and until American companies work as hard at exporting. Between 1970 and 1985, manufacturing productivity increased almost three times as fast in Japan as in the United States. The Japanese have made a cult of quality control, while U.S. companies have long scorned quality considerations and now offer them lip service only.
Further, the U.S. has difficulty competing with Japan partly because U.S. taxes are much higher. Government spending accounts for over 43 percent of the U.S. gross national product and only 28 percent of Japan's GNP. The Japanese savings rate is more than double the U.S. savings rate, partly because the Japanese government commandeers far less of its workers' paychecks.
U.S. trade policy has been an unending war against abundance. Do we really need tens of thousands of government bureaucrats working to reduce the living standard and buying power of Americans? Do we need federal employees counting each arriving handkerchief from the Third World, weighing each keg of incoming cheese and numbering the shoestrings in each box of tennis shoes? Nothing in the preamble of the U.S. Constitution mentioned forming "a more perfect Union" in order to prevent Americans from eating foreign ice cream.
Restricting Americans' opportunity to buy and sell cannot make America richer. Protectionism is the ultimate "less is more" policy - based on the idea that the U.S. will become richer if the government forces Americans to pay higher prices for fewer goods. Every trade barrier imposes an opportunity cost on the American economy.
The fewer trade barriers the U.S. has, the more competitive American companies will be. The fewer crutches the government provides, the faster American industry will run. Should we hold U.S. productivity hostage to the stubbornness or stupidity of foreign trade policy makers? Should the U.S. wait until it receives a foreign bribe before it follows its own interest? Are the tattered clothes of poor Americans something we should be proud of? Is a federal sugar policy that drives American food manufacturers overseas a national asset?
Trade allows consumers everywhere a chance to benefit from increases in productivity anywhere. As Emerson observed, "If a talent is anywhere born into the world, the community of nations is enriched."93 Trade binds humanity together in laboring for mutual benefits. The expansion of trade between the end of World War II and the 1980s produced the greatest era of prosperity in world history.
The fundamental issue is not whether foreign governments treat American companies fairly, but whether the U.S. government treats American citizens fairly. We should cease punishing American consumers for other nations' alleged sins. The question is not whether trade barriers exist abroad, but whether we should allow them to persist here. The time has come to deregulate our national borders - to end the medieval pursuit of a "just price" for imports - and to cease allowing government officials to have economic life-and-death power over American businesses. Charging low prices to American consumers should not be a federal crime.
NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.
