Free Trade vs. Protectionism and Economic Sanctions:
What Are the Issues?
A monograph published July, 1998, by the ACCF Center for Policy Research.
SBN: 1-884032-08-7
Introduction
For more than two decades, the ACCF Center for Policy Research has sponsored
innovative studies on tax, regulatory, and environmental policies to encourage
capital formation. The Center has also underwritten a series of blue-ribbon
forums on tax and international competitiveness issues and their impact
on U.S. living standards, investment, and economic growth.
This volume contains the research and commentary presented at the Center's
September 9, 1997, symposium, Free Trade vs. Protectionism and Economic
Sanctions: What Are the Issues? The Center sponsored the forum because
many policymakers have espoused protectionist views on U.S. trade policy,
as witnessed by Congress's unwillingness to grant President Clinton "fast
track" authority for trade negotiations in 1997. In addition, a number
of policymakers are endorsing the widespread use of unilateral economic
sanctions to promote changes in other countries' domestic and foreign
policies. Perceived violations of religious liberty, human rights abuses,
or the development of weapons of mass destruction are just a few of the
reasons policymakers use to justify imposing sanctions.
The Center's new study, by Dr. Gary Clyde Hufbauer and Mr. Bruce E. Stokes
of the Council on Foreign Relations, focuses on the benefits gained through
trade liberalization, and the inadequacy of economic sanctions as a policy
lever for bringing about change in other countries. The idea that international
trade can facilitate economic growth by expanding the size of the market
is as old as the economics profession itself. It can be traced to Adam
Smith's 1776 discourse on the gains from specialization that trade promotes
and the linkages between specialization, productivity, trade, and market
expansion. One set of gains results from the increased efficiency with
which a nation's capital and labor resources can be used in a more open
market. Additional gains result from the higher rate of growth in a nation's
GDP as well as greater saving and investment. Evidence from numerous empirical
analyses completed over the last quarter-century documents the argument
that free trade promotes economic growth. The Center's new study by Dr.
Hufbauer and Mr. Stokes provides further evidence of the benefits of trade
and the costs of protection and thus reaffirms the work of earlier scholars.
The study shows that at the level of the individual firm, jobs are created
up to 18.5 percent faster in companies that export than in companies that
have never exported or have stopped exporting. Moreover, exporting enterprises
are less likely to go out of business.
In addition, the Hufbauer/Stokes study demonstrates that exposure to
the world market has led to major improvements across a range of U.S.
industries. Productivity in American plants that export is almost 40 percent
higher on average for plants of all sizes, locations, and industries,
than for plants that produce only for the domestic U.S. market.
Tariffs, import quotas, and other forms of protection impose costs on
a range of economic actors throughout the economy. Among those most notably
"taxed" are exporters and domestic consumers-both intermediate
industries and households-who pay higher prices for inputs to production
or for goods and services purchased for consumption.
The United States has a relatively open economy, Dr. Hufbauer and Mr.
Stokes note, but it still maintains many costly trade barriers. U.S. tariffs
and quantitative import restrictions cost American consumers an estimated
$70 billion in 1990, or 1.3 percent of GDP.
Furthermore, in recent years it has become increasingly popular for governments-especially
the U.S. government-to interfere with trade and foreign investment as
a means of punishing other countries for their political views and actions.
Yet despite the high-minded rhetoric that often accompanies the imposition
of sanctions, their history suggests they usually do not work. For example,
Dr. Hufbauer and Mr. Stokes cite a recent study analyzing the effectiveness
and costs of 116 cases of economic sanctions between 1915 and 1990, which
found that only 34 percent of such actions achieved their intended goals.
The forum's keynote address was given by Representative Jim Kolbe (R-AZ),
a prominent advocate of free trade and a senior member of the House Appropriations
Committee.
The Arizona congressman expressed his concern with the significant rise
in calls for economic retrenchment, particularly since the passage of
NAFTA and the Uruguay Round. "Many in Congress are wary of open trade
and international economic competition. When they hear the words 'free
trade', a whole panoply of fears seems to be unleashed...Many members
immediately visualize factories being closed and jobs being shipped to
less-developed countries." But in his view, Representative Kolbe
stressed, "America was never so ready to meet the challenges of the
global economy as it is today."
The ACCF Center for Policy Research is grateful to the forum's presenters
and respondents for their contributions that made this symposium and book
possible.
The Center will continue to focus its attention and resources on economic
growth through sound tax and environmental policies. We look forward to
sharing new information, analyses, and proposals with you, and welcome
your thoughts and inquiries about this and all other ACCF Center for Policy
Research programs.
Charls E. Walker
Chairman
Mark A. Bloomfield
President
Margo Thorning
Senior Vice President and Director of Research
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