International public opinion has been reacting quite loudly. The EU is protesting because it is an obvious move to erect trade barriers against world producers. This act of protectionism happens at a time when public opinion shows concerns about the benefits of globalization.
A trade war with the EU could become an issue. Will the Europeans slap punitive sanctions against the US? Probably not or they will be minimal because US tariffs will be phased out in 3 years.
What is really obvious is the lack of understanding of the damage protective tariffs cause to local producers and consumers.
Several years ago I was at a meeting of industrialists in Washington where I spoke on the business cycle and its impact on business decisions. The keynote speaker was a well-known senator with presidential aspirations. His message was that the time had come to narrow the trade deficit to protect the future of our children, our workers, and our industries. It was time to impose stiff tariffs, he concluded, hoping to get a rousing applause.
To my surprise, the audience was vehemently opposed to the senator’s ideas. Some said: “If you impose tariffs on machines from Germany, I cannot manufacture parts with the strict tolerances required by my customers.” Others voiced: “If you increase the cost of steel, I have to raise prices to absorb higher costs. Consumers will suffer and my profits will shrink.” Some added: “If you increase the cost and content of local materials, projects that were profitable at lower prices may not be profitable anymore. You are forcing me to cut my investments.” Finally, one said: “If you increase my costs, I have to cut workers.”
The senator was surprised and baffled by the lack of support for his proposal. He realized, by listening to these remarks, that protectionism does not work and does more harm than good.
It may be true that over the near term it protects workers and some industries. The higher productivity sector of the economy, however, will have to carry the brunt of the inefficiencies of the protected industries. Meanwhile higher prices and shoddier products will penalize consumers.
Protectionism does not work, as clearly voiced by the businessmen at the meeting in Washington.
(This Observations appeared in the 3/22/02 issue of The Peter Dag Portfolio).
George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest
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