protecting domestic industry

If his inaugural speech is any indication, a principal tool President Trump expects to use to enhance US economic performance is to help expand sunset manufacturing industries by protecting them against imports.   More useful action would be to emphasize improving the skill level of the workforce and to encourage innovation.  There may be a place for preventing foreigners from selling at below production cost (dumping) designed to stamp out competitors.  But by itself, and as a principal strategy, protection usually ends up making the economic situation worse, not better.

That’s because:

it stifles innovation, as we can see from the current parlous state of the Japanese economy, which embarked on a strategy of protection in the early 1990s.  That country still has domestic industry that’s state of the art circa 1980, but little that’s more recent.  The US auto industry, which Washington protected from foreign competition beginning in the late 1970s from the 1970s onward, is another example.

other countries retaliate when the borders are close to their products.  President Obama placed import duties on Chinese truck tires, effectively barring them from the US market.  China responded by taxing agricultural products sold there by US firms.

protection typically raises costs to local consumers, lowering their standard of living.  Mr. Obama’s headscratching move simply redirected the source of imported tires from China to Thailand–at much higher cost.  Economists estimate that this unintended (I hope) effect alone cost several thousand US jobs.

 

Let’s hope the president sticks to corporate tax reform and infrastructure spending.

 

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