Protectionism

March 13, 1961

In his Feb. 6 message to Congress the President pledged that, “Exchange controls over trade and investment will not be invoked. . . . A return to protectionism is not a solution.” Within a few weeks he not only approved the equivalent of exchange controls over trade and investment, but new protectionist measures.

On the exchange-control side, he not only endorsed the prohibitions on Americans’ buying or owning gold at home or abroad, but he proposed discriminations against American and in favor of foreign lenders by offering the latter higher interest rates. He also proposed a scrutiny of American investment abroad to find what part of it was “legitimate.” All this foreshadows increasing government intervention and control of foreign lending and investment.

On the protectionist side, he has advocated a reduction from $500 to $100 of the amount of duty-free goods that American travelers can bring from abroad. This is made on the assumption that it will help the balance of trade by reducing imports. Then on Feb. 25 the President raised the tariff on foreign-made bicycles by 50 percent.

On the same day, the AFL-CIO, which is itself built on protectionist principles, but has hitherto given lip service to free trade, adopted a new formula which continued to pay lip service to free trade but, as one report summarized its conclusions, “with additional safeguards for domestic jobs and wage standards.”

FALSE ASSUMPTIONS

Individual unions announce their own protectionist policies. The Amalgamated Clothing Workers will boycott Japanese imports unless Japan puts a “voluntary” quota on shipments of men’s suits. The Chicago local of the International Brotherhood of Electrical Workers will refuse to handle any Japanese-made electronic parts after May 1.

Behind all these protectionist measures, official and unofficial, there is not only the desire to protect special interests (at the expense of consumers), but false assumptions concerning the cause and cure of the dollar crisis. The outflow of gold and dollars is generally attributed to a “deficit” in the balance of payments. (It is, in fact, just another name for the same thing.) From this it seems an easy step to the assumption that if we cannot induce foreigners to buy more American goods, we can cure the “deficit” by penalizing Americans for buying foreign goods.

This is the protectionist theory. It goes back to the mercantilism of the seventeenth century. What it overlooks is the essentially two-sided nature of all trade. In the long run we can buy only as much as we sell, and sell only as much as we buy. To the extent that we refuse to buy foreign goods, we deprive foreigners of the dollars with which to buy our goods. When we buy their goods, and “lose” dollars, foreigners in the long run have no way of using these dollars except by buying American goods, services, or investments with them.

GOLD AS A BARGAIN

It makes no difference how indirect these transactions are. If our troops spend dollars in Germany, the dollars do not disappear down a well. Even if the Germans use all the dollars to buy goods in Japan, the Japanese (or whoever) must eventually use the dollars to buy American goods. Trade (in the widest sense) must balance. Payments (except for foreign-aid programs) must balance.

But suppose foreigners only want to use their dollars to buy our gold? Then the question we should ask is why they prefer gold (at $35 an ounce) to other goods. They prefer it because it now seems a better bargain than other American goods. It is still at the same dollar price as it was 27 years ago, whereas other prices have more than doubled.

The first remedy is to halt the inflation that is pricing us out of the world market. But practically all Mr. Kennedy’s “must” measures would increase the inflation. His protectionist schemes will have at best a temporary effect. They will be futile in the long run. And none of the measures that would go to the heart of the matter—to reduce spending, to cut foreign giveaway programs, to balance the budget, to restore monetary discipline—are even being considered.