Protect us from protectionists

Imports have played a role in America's success. Bargains from China and other countries directly lower Americans' cost of living. When consumers pay less for clothes, shoes and electronics, they have money to spend elsewhere – to the benefit of local businesses, says Richard W. Fisher, president of the Federal Reserve Bank of Dallas.

In the U.S. corporate sector, cheaper inputs and components have helped producers lower their costs. More important, competing against China and other rivals forces U.S. producers to cut costs and bolster efficiency – a crucial link between imports and surging productivity, says Fisher.

Imports have helped the U.S. control inflation in recent years:

Since 1997, prices for many heavily traded goods have actually fallen: 86 per cent for computers and peripherals, 68 per cent for video equipment, 36 per cent for toys, 20 per cent for women's outerwear, 17 per cent for men's shirts and sweaters.

Prices of goods and services not subject to foreign competition have fared less well: college tuition and fees, up 53 per cent; cable and satellite television, up 41 per cent; dental services, up 38 per cent; prescription drugs and medical supplies, up 37 per cent.

The U.S. couldn't have kept overall inflation in the neighbourhood of 2 per cent in recent years without imports. Protectionism forces consumers and producers to pay more for foreign goods. Domestic firms raise their prices as import competition slackens, says Fisher.

Whatever fuels inflation heightens the need for monetary restraint. With America’s markets open, inflation has been reasonably well contained. If protectionism were to unleash inflationary pressures, the central bank would have no choice but to fight back with tighter monetary policies, resulting in higher interest rates and a likely dampening of growth, says Fisher.

Source: Richard W. Fisher, Protect Us From Protectionists, Wall Street Journal, April 25, 2005.

For text (subscription required): http://online.wsj.com/article/0,,SB111438821786915608,00.html

For more on Trade: Tariffs and Other Trade Barriers: http://www.ncpa.org/iss/tra/

FMF Policy Bulletin/ 10 May 2005