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Paper Principles

Posted By Don Boudreaux On March 31, 2007 @ 2:40 pm In Seen and Unseen,Trade | Comments Disabled

The danger to America posed by imports from China apparently has intensified.  Uncle Sam will now force American buyers of allegedly subsidized Chinese paper products to pay higher prices for these products.  (He’ll do so by raising the tariff he imposes on these imports.)

Of course, as this report [1] from today’s New York Times reveals, labor-union leaders applaud this tariff hike because it helps "paper workers throughout the United States."  No doubt it does — that is what is seen.

What is not seen is the harm done by such protectionism, such as–

- Obliged now to fork over more money to buy paper, American consumers have less money to spend on other goods and services.  As demand for these other goods and services necessarily falls, firms and workers in those other industries suffer unnecessarily.

- Foreigners, now earning fewer U.S. dollars, will spend fewer dollars in the U.S.  Demand for U.S. goods, services, and assets will fall.  To the extent that demand falls for U.S.-made goods and services, workers in the industries suffering the largest declines in demand suffer the most.  To the extent that demand falls for dollar-denominated assets, potentially even more workers suffer because such a fall in asset demand means higher real interest rates.  In turn, there will be less investment and, hence, slower growth in worker productivity and real wages.

Of course, some of the fall in demand for dollar-denominated assets might be reflected in lower demand for debt issued by Uncle Sam.  The consequence here, too, will be higher real interest rates and a greater reliance upon Americans to lend to Uncle Sam.

As William Graham Sumner observed in 1881 (in his essay "The Argument Against Protective Taxes"):

Any favor or encouragement which the protective system exerts on one group of its population must be won by an equivalent oppression exerted on some other group.

Protectionism is the freakish poster-child for the failure to see the full range of consequences of a policy action.  This latest episode is no different.  Nothing at all about subsidies — real or imagined — to foreign exporters changes matters.

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