America must take a French lesson in trade

US efforts to protect jobs in its troubled steel industry will be bad for economic growth, and millions of workers.

Pascal Lamy, the European trade commissioner, characterises last week's decision by the US to consider restricting steel imports as "not the way to go". The criticism hurts. All the more painful is the fact that it comes from a Frenchman.

These days America tends to think of itself as a beacon of free-market liberalism, exposing the weaknesses of protectionist,dirigiste backwaters such as France. How embarrassing to find things the other way round.

This attitude, though, betrays a short memory. For it was a Frenchman, the economic journalist Frederic Bastiat, who in 1850 published the most damning analysis on record of the sort of action taken by Washington. In his essay "What is Seen and What is Not Seen", Bastiat wrote that it was a poor sort of government that focused exclusively on the visible advantages of sheltering specific industries.

In those days it was iron instead of steel that France was busy seeking to protect. This impulse Bastiat deemed folly. The Second Republic's lawmakers might "pen a law that says: 'Belgian iron shall no longer enter France'". They might portray their step as a wise decision that increased profits for domestic iron concerns and benefited the French populace generally. And yes, Bastiat adds, "the five-franc piece [of fresh profits] thus legislatively rechannelled into the coffers of Mr Protectionist constitutes an advantage for him and those who get jobs because of it".

Still, wrote the author, the authorities and their co-conspirator, the iron industry, were merely "pointing out the effects that are seen, leaving in the shadow those that are not seen". After all, the new profits to be collected by favoured concerns "do not come down from the moon but, rather, from the pocket of a metalworker, a nailmaker, a cartwright, a blacksmith, a ploughman, a builder" who must pay a higher price for the commodity.

Bastiat departed this world 151 years before the decision of Jim Jeffords, the Vermont senator, to leave the Republican party opened the Bush administration's eyes to the charms of protectionism. Still, Bastiat's model clarifies the effects of the administration to take action where even the Clinton one did not.

Consider first of all "what is seen": the advantages of the action. The US imports perhaps 28m tonnes of steel annually. Should America's International Trade Commission rule to restrict imports, some of that custom is likely to fall to US producers. In Bastiat's words, the companies will win a licence to commit "legal plunder".

Small wonder that shares of Corus and Usinor, two European companies, fell after the US decision. And small wonder that the prices of USX-US Steel and Bethlehem Steel jumped upward. The news has also done fine things for the stock of certain individuals - one thinks of Duane Dunham, the chief lobbyist of the American Iron and Steel Institute.

Then there are the steelworkers whom the administration aims to save. These include those employed at Weirton Steel, a struggling firm in West Virginia. These messieurs protectionisteshave made themselves quite dramatically "visible" in Bastiat's sense by collaring Robert Zoellick, the US trade representative, to plead their case this year.

All in all, the US counts about 175,000 such steel workers, a scant fifth of the number that obtained in 1980. The loss of all those jobs is indeed very sad for the workers involved. But Washington's argument that the troubles of Not-So-Big Steel constitute some sort of national crisis would be much stronger if US unemployment overall were not some 3 percentage points lower than it was two decades ago. In other words, most displaced steelworkers have found new jobs and the nation as a whole has not suffered.

And what about Bastiat's "unseen"? In this case, they are a rather large group. Steel workers may gain but America also counts 9.43m workers in steel-consuming sectors. These Americans are likely to suffer because of Washington's intervention. General Motors and Caterpillar workers both belong to this unfortunate group. A study done by the loser lobby in the steel flap, the Consuming Industries Trade Action Coalition, found that two to three times as many workers in the steel-consuming industries would lose their jobs as might find job protection under a quota programme. And the coalition did not count the costs to steel workers in Europe or Japan.

Naturally, the Bush administration has reasons for its action. One is that this post-election period is political payback time and one of the states that backed George W.Bush in his close race last fall was West Virginia. What is more, administration officials are now arguing, their small surrender on steel will allow them to win backing in a much larger battle: the campaign to win congressional approval for fast-track authority to implement trade treaties.

Unfortunately such trade-offs often backfire. By capitulating, governments tend to open the floodgates for the advocates of "the seen", who then demand yet more special breaks. The queue of lobbyists is already forming. Which brings us back to the finger-pointers of the European Union and the fact that Mr Lamy's own country still enforces many of the sort of protectionist measures deplored by Bastiat. Patrick Messerlin, another French economist, has shown that protectionism damages euro-zone prosperity.

As Bastiat says, to raise the cudgel of protectionism is to set in motion a vicious cycle. The more protectionism there is, the more precarious the state of the economy and the greater the appearance of the need for further protectionism. "To use force is not to produce but to destroy. If to use force were to produce, France would be much richer than she is." A truth that, alas, also holds for the France of today.

© Copyright 2001 Financial Times

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