In the spring of 2002, the United States imposed tariffs on imported steel to protect the jobs of American steel workers and protect the production of the American steel industry. Why might this policy not work to increase overall employment in the United States?

This type of trade policy is commonly called protectionism. Protectionism is almost always self-defeating for several reasons. First, nations may retaliate by restricting their own imports (as the European Union has threatened to do by limiting European imports of American farm products) and thus reduce U.S. exports. If the U.S. reduces imports, that will reduce the supply of U.S. dollars in the foreign exchange market and increase the exchange rate of the dollar. This appreciation of the dollar will reduce exports and, thereby, defeat the purpose of the import restrictions. In general, protectionist policies will not improve the trade position of the United States but they will increase prices and reduce the efficiency of the U.S. economy. Thus, although some steel industry jobs may be saved, other American employment will be reduced because of reduced foreign demand for U.S. exports. This reduction in U.S. exports will come about because of protectionist retaliation by foreign governments and the appreciation of the U.S. dollar that makes U.S. exports more expensive to foreigners.