Yet Another Wave of Protectionism?

By Macharzina, Klaus | Management International Review, July 2002 | Go to article overview

Yet Another Wave of Protectionism?


Macharzina, Klaus, Management International Review


"Behind a tariff wall built by Washington, Hamilton, Clay, Lincoln, and the Republican presidents who followed the United States had gone from an agrarian coastal republic to become the greatest industrial power the world had ever seen--in a single century. Such was the success of the policy called protectionism that is so disparaged today." In retrospec this assessment of protectionist policies by former US presidential candidate Pat Buchanan (1998) may sound like mockery to the steel exporting industry in the European Union. With his March 5th 2002 decision to slap tariffs of up to 30 percent on imported steel products until 2005 George W. Bush risks not only retaliatory measures from the EU, Russia, Japan, and China, but also additional counter strikes resulting in a full-blown trade war at the benefit of temporarily protecting his deadbeat rust belt. Casting into question his original stance as a free-trader, the current US president now resides in good company. In 1976, when Gerald Ford was in the White House, America's steer industry was already calling for import protection to help it back on its feet. 26 years and interim protectionist measures worth well over US$ 30 billion later, the same steel companies are still flat on their backs. Regarding his latest decision to grant subsidies to the agricultural sector as a "safety net for farmers", economists around the globe might be inclined to ask the question whether Mr. Bush has provoked another wave of protectionism.

With his decision to impose a maximum of 30% ad valorem tariffs as opposed to the 40% requested by the steel lobby, the President split the difference between free trade and total protectionism. It is well-known from Economics 101 that the net welfare effects of protection in a big country depend on the ratio of the efficiency loss resulting from the distortion in the incentives facing domestic producers as well as consumers and the gain in terms of trade, which depends on the decline of the imported good's world price, respectively. Even though the international practice has clearly shifted towards non-tariff barriers, tariffs are the oldest form of trade policy and have a long tradition as a source of government income in the United States. Prior to this latest decision, for instance, some 80% of steel imports were already subject to tariffs under previous trade rulings.

Being legally authorized by sections 201-204 of the Trade Act of 1974, George W. Bush directed the United States International Trade Commission (ITC) in June 2001 to perform an investigation seeking to determine whether imported products are a substantial cause or threat of serious injury to the US steel industry. In response to the ITC report released in December 2001 President Bush decided to impose "temporary safeguard measures", i.e. tariffs of 8% to 30% with a validity period of three years starting from March 20th 2002, on an assortment of imported key steel products. These measures do not apply to members of NAFTA, Israel, and developing countries as well as certain steel products that cannot be obtained without imports. Severely affected international companies may also file for exemption. Additionally, he ordered the creation of an import licensing system to facilitate the monitoring of affected imported goods. The importance of the steel industry for national security issues functions as an umbrella rationale regarding the enactment of the policies mentioned above. Further official reasons given are the damage to local production (bankruptcies, unemployment) being brought forward by a surge of imports resulting from subsidized overcapacity of foreign steel production, protective assistance of steel-dependent communities, and the general need for industry restructuring in order to be able to compete on a "level playing field" with other steel exporting nations. President Bush strongly believes that the benefits of ensuring the long-term competitiveness of the American steel industry will by far exceed the costs of protection, i. …

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