Cafe Hayek patron Mark Camp, after reading this earlier post (“An Open Letter to a Protectionist“), e-mailed me to ask how we know it to be true – as I said in that post – “That [the fact that low-wage] foreign workers can perform this task [of final assembly of the laptops we buy] at a lower cost than can we Americans means that we Americans have better job alternatives than do those foreign workers.”
Here’s the reply that I e-mailed as an answer to Mark’s sensible question:
Because otherwise businesses would find it worthwhile [even absent protectionist measures in the U.S.] to employ Americans to do those tasks.
If American workers’ alternatives were not better than those of foreign workers, they – American workers – would be willing to perform those tasks at wages equal to or lower than are the wages demanded by foreign workers to perform those tasks. The fact that American workers demand wages too high to make it profitable for businesses to employ them to perform those tasks means that American workers’ alternative employment options are superior.
Don
Mark wrote in response – again, quite understandably – a second e-mail, wondering why I apparently believe that protectionism benefits no one. I assured Mark that I hold no such belief, but also that I understand his confusion. My original post and my e-mail were insufficiently clear.
I share below a slightly modified version of my follow-on e-mail to Mark in response to his second e-mail:
Mr. Camp,
I owe you an apology for being unclear – as well as for the length of what follows.
You’re absolutely correct that protectionism yields net benefits to the particular producer groups, including the workers, who are protected. That these benefits are lower than are the costs that protectionism imposes on the citizens of the country as a whole (not to mention on the larger, global economy) does not make the benefits received by protected producers any less real.
The number of workers and other inputs used in an unprotected industry (say, steel) is greater the greater is the volume of output per period of time that that industry has a comparative advantage at producing. Likewise, the number of workers and other inputs used in a protected industry is greater than would be the number of workers and inputs used in that industry without protection. But only in the former case – the case without protection – are all the workers and inputs used in ways that maximize (using language from Adam Smith) the wealth of the nation. In the latter case, some workers and inputs are used inefficiently – that is, not in ways that maximize the their contribution to the value of total output. (From here on in I’ll write only about “workers,” but recognize that workers aren’t the only inputs.)
I’m just making up numbers here for purposes of illustration, but suppose that the U.S. has a comparative advantage at annually producing a maximum of 10 tons of steel. By the nature of the case, for U.S.-based factories to produce 11 tons would be too costly. The reason is that the higher wages that would have to be paid to attract more workers into steel production (in order to produce the additional ton of steel) would not be fully covered by the revenues earned from the sale of that additional ton. So steel producers don’t employ these additional workers.
And the reason those wages would be too high is that those workers can sell their labor services to other producers (say, of farm equipment and lumber) at wages higher than steel producers can afford to pay in order to employ those workers to produce the 11th ton of steel.
If – contrary to fact – the wages paid by other employers were lower, the steel producers could then afford to employ those workers to produce the additional ton of steel. In this case, the U.S. would then have a comparative advantage at producing 11, and not just 10, tons of steel. So the fact that those additional workers aren’t employed to produce steel implies that their opportunity costs of producing other outputs – farm equipment and lumber – are too high. The wages paid to these workers by producers of farm equipment and lumber are greater than are the wages that steel producers are willing to pay in order to employ these workers to produce an 11th ton of steel.
Put another way, these additional workers have a comparative advantage at producing whatever quantities of farm equipment and lumber they are employed to produce and, hence, a comparative disadvantage at producing the extra ton of steel. It is these workers’ comparative advantage at producing farm equipment and lumber that ‘gives’ them a comparative disadvantage at producing the extra ton of steel.
Now let a tariff be imposed on steel imports. As a result, the price of steel sold in the U.S. will rise. (The tariff will achieve its proponents’ goal only if the price of steel rises.) Indeed, the price of steel will probably rise high enough to make it profitable for steel producers to raise the wages they pay in order to entice more workers into steel production – to produce an extra ton of steel – and away from producing farm equipment and lumber. U.S. steel producers will continue to produce 11, rather than just 10, tons of steel annually for as long as this tariff is in place. Owners of U.S.-based steel factories and steel workers obviously benefit from this tariff, even though the costs of this tariff to Americans at large are greater than these benefits.
When the tariff is removed – and assuming that nothing else has changed – the price of steel sold in the U.S. falls; it returns to its previous, lower level. U.S. steel producers would continue to produce 11 tons of steel only if workers agree to work at lower wages – specifically, wages low enough to justify the production and sale of 11 (rather than 10) tons of steel annually. But wages paid by producers of farm equipment and lumber beckon. Workers will refuse to take the pay cut required to keep them employed in steel factories for the production of 11 tons annually. Workers will pursue the higher wages paid by producers of farm equipment and lumber.
The wages paid by producers of farm equipment and lumber are not as high as were the wages paid by protected steel producers – which is why protected steel producers were able to entice these workers away from producing farm equipment and lumber. But the wages paid by producers of farm equipment and lumber are higher than are the wages that the now-unprotected steel producers can afford to pay if these producers were to continue to produce 11 tons annually.
So as steel-worker wages fall, workers will begin to leave their steel-making jobs for these other jobs. Because we’re assuming that nothing has changed other than the removal of the tariff, at the now-lower price of steel, U.S. steel producers will continue, as they did before the imposition of the tariff, to find it profitable to pay wages sufficiently high to attract enough workers to produce 10 tons annually (but not more). The opportunities available in other industries to workers who remain in (unprotected) steel production pay wages lower than are the wages paid by (unprotected) steel producers – so these workers remain in steel production even though their wages are now lower than were their wages when the tariff was in place.
In contrast, the additional workers used to produce the 11th ton during the duration of the tariff find that the wages they can earn elsewhere – by working to produce farm equipment and lumber – are higher than are the wages they’d have to accept in order to entice steel producers to continue to employ them.
In the above account, the workers who were lucky enough to be employed by protected steel producers enjoyed being paid wages higher than they would have earned in the absence of the tariff. They did indeed benefit from the tariff (and they ‘lose’ when the tariff is abolished). But all other Americans were net losers from the tariff, not only because the steel tariff reduced the abundance of steel for use in America, but also because some workers were diverted away from producing other outputs – namely, farm equipment and lumber. Without the tariff, Americans have both more steel and more farm equipment and lumber. With the tariff, Americans have less steel and less farm equipment and lumber.
…..
The above account ignores many additional factors that are often in play in reality – factors such as changes in the scale of production of both protected and non-protected industries, the consequences on wages of team production and of other ways in which workers complement each other rather than substitute for each other, the time required for producers to adjust to changes in trade policy, and the effects of industry or firm-specific human capital. These (and some other ‘additional factors’) are what explain the genuine distress that workers experience when their jobs are threatened by imports. But such distress is not uniquely caused by imports; it is caused by almost all sources of economic change.
I hope against hope that the above explanation is sufficiently clear to answer your question.
Don
