The Truth About Protectionism in Trade

Often when I speak to people about our growing trade deficit, and the negative implications of unbalanced trade, I get the thousand- yard- stare. I catch the same stare when I talk about the Infield fly rule of Major League Baseball - both are equally confounding. So I thought I’d take a moment to give an explanation, about the Trade Imbalance that is, the infield fly rule is far too difficult to decipher.

We’ll start with the basics - A tariff.

A tariff is a fee or tax on imported goods. There are several types of tariffs. The Ad Valorum tariff is calculated by a percentage of the value of the shipped goods, say 20% of the cargo. A Revenue Tariff is a set of rates designed primarily to raise money for a government. A tariff on banana imports, for example (by a country that does not grow bananas) raises a steady flow of revenue. And finally, a Protective Tariff is intended to artificially inflate prices of imports and "protect" domestic industries from foreign competition. For example, a company in China makes tennis shoes, so does a company in the Unites States. The unit of labor in China for the same shoe is $.10, in the states the unit of labor is .$90. A protective tariff would tax the import by the difference of labor, $.80. The competition between the two companies would be based on quality, not just price.

Why the hullabaloo over tariff’s?

The Protective Tarrif is the most critical to our economy. It protects our industries from direct competition with third world markets and wages. Obviously it is more expensive to live and work in the United States than say, Banglor India; this tariff ensures that our way of live is preserved and that our industries are protected from an influx of cheap imports. Without the Protective Tarrif Americans will be forced to accept wages which may be equilivant to that of India or China. The advancement of this tariff is the only way that American manufactures can remain competitive or they must give Americans pay equal to their overseas competitors, or they must move the manufacturing process offshore. Either option is disastrous for the American worker. The proponents of free trade (buzz words for eliminating Protective Tariffs) call the inevitable wage adjustment of tariff free trade "leveling the playing field". But a worker affected by this inequity would call the wage adjustment a catastrophe and a crisis.

It is the elimination of the Protective Tariff that promotes "dumping” of cheap goods into our economy ( goods made with cheap labor, lower environmental and safety standards), thereby destablizing our consumer markets and facilitating the race to the bottom - a term used to express a significant drop in wages, lifestyle, and economic status. Protective Tariff's have been used as a measure against this race to the bottom. What's more, when a country's major industries lose traction to unfair foreign competition, the loss of jobs and tax revenue can severely impair parts of that country's economy and its ability to sustain a living wage, increase living standards and sustain a tax base necessary for military and social spending.

In addition to the loss of living standard; the elimination of Protective Tariffs has been the major cause of our rising trade deficit, national debt and the loss of manufacturing industries. The cost benefit of moving a factory away from the U.S. and re-importing the goods without the tariff fee far outweighs the cost of the actual move and the cost associated in importing the goods back to the U.S.. The protective tariff protects an industry, its labor, and its ability to pay taxes, and therefore protects the American worker, the American middle-class and the American government from economic failure. In fact, it's elimination is a reverse form of protectionism. The disposal of this tariff protects companies from fair trade policies; policies which for centuries have been a cushion for American industries from cheap overseas labor and product "dumping" into our markets. Eliminating the protective tariff puts profit over principle, it hurts our economy and benefits the a few over the many.
Which is more important, an inexpensive television or a good paying job?


The Solution.

The ultimate goal of a nation should be a positive Balance of Trade. A Balance of Trade, called a Trade Surplus, occurs when a nation has more exports than imports. The excess of traded goods increases the wealth of a nation and boosts the value of currency. However, a negative balance of trade, known as a trade deficit or a trade gap, occurs when a nation imports more than it exports. This is our current direction. The formula for determining a trade deficit is straightforward; simply subtract the amout of exports from the amount of imports - the remainder is the trade deficit; the amount of money that we owe the world for trade. According to the Commerce Department our Trade Deficit for 2005 was $804.9bn.


The continuance of the trade imbalance has resulted in a decline in American manufacturing and export industries and a rise in imported products from countries such as China, as well as foreign investments in property such as our shipping ports. Since the U.S. currency is held in significant quantities by many governments and institutions as part of their foreign exchange reserves it also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc, these inclinations have been working to our advantage, but this could change at any time. The world could lose interest in the dollar, and as our currency devalues due to our deficits, they will. We are running a very delicate balance.

Our economy is growing, but this is in part because there is a high demand for American investment assets and other debt financing mechanisms such as Treasury Securities. In other words, we are selling our hard assets (ports, bridges, toll roads, bonds, etc.) and our currency to maintain our government and our lifestyles. Traditionally the United States has earned revenue with the assets that we are now unloading; we sell these assets to keep our country unanchored from the impending payback of decades of poor asset management. To put this in terms that can be appreciated; imagine a household with an enormous credit card debt. The bank wants a security, not just a promise to pay, so the bank offers to purchase the households front yard, the driveway and the front door. This is why the dollar is stays afloat, we are selling our assets. But this behavior cannot last, our assets are not infinite.

In the case of the UAE ports deal, the people may have been able to stop a foreign company from purchasing a United States asset, albeit for the wrong reason, but we cannot stop every foreign entity from taking this course. Foreign entities flush with U.S. currency have every right to purchase real assets. To solve this problem we must look at the heart of the issue, rather than at the shadows. The only way to improve deteriorating export and financial indebtedness conditions are to rebuild our industrial base. We must start making more products for export, and gradually implement protective tariffs once again to protect all of our industrial assets. The alternative is a to continue to lose our good paying jobs and our middle-class lifestyle for the ability to purchase cheap goods from abroad.