The curbs on steel trade demonstrate the faults of courting special interests.

The New York Times, "Economic Scene" , June 14, 2001

George W. Bush has often declared that free trade brings prosperity. He advocates extending the North American free-trade zone to all democracies in this hemisphere. He appears to have a deep conviction that free trade is right and good.

But President Bush is not just a policy maker. He is also a successful politician. Last week, he jettisoned his antiprotectionist convictions and declared his support for trade barriers against imported steel. He said the administration would start what is known as a Section 201 action, a way of establishing quotas on imports. Under this law, the industry doesn't have to show that foreign producers get any unfair advantages from their governments or even that imports are the main source of its problems. Since any competition makes business tougher, that's an easy case to make.

So the free-trade president has just adopted a blatantly protectionist position. His action will raise prices for everyone who buys or makes anything that uses steel. But it will please two steel-making states: West Virginia, which President Bush won by merely 40,000 votes in last year's election, and Pennsylvania, which he lost by only 200,000 votes.

Economists sometimes talk about market failure -- for instance, when manufacturers impose pollution on the general public. In the steel case, we have an example of democracy failure. Democracy, a good system that is following its normal rules, is producing a perverse result. Citizens are being treated unequally. Steel companies and steel workers who get big benefits from higher prices have more influence than does the general public, each member of which will be hurt only a little.

The late political scientist Mancur Olson examined this dynamic in his 1965 book The Logic of Collective Action. The problem, he said, is that any group that organizes to help all its members has trouble staying together because every member is tempted to be a free rider -- to reap the benefits without putting in the work. So it's easier to keep a small group organized than to rally a large one.

"Since relatively small groups will frequently be able voluntarily to organize and act in support of their common interests, and since large groups normally will not be able to do so, the outcome of the political struggle among the various groups in society will not be symmetrical," Dr. Olson wrote. So small groups with concentrated interests "often triumph over the numerically superior forces because the former are generally organized and active while the latter are normally unorganized and inactive."

Conscious of these small-group pressures, politicians sometimes establish checks on their ability to respond to special interests. The base-closing commission, which gave members of Congress an up-or-down vote on all military bases to be dismantled after the cold war, was one such check. Everyone knew bases needed to close, but if each base were voted on separately, local supporters would rally to save it.

Trade treaties are another check. Elected officials agree to the treaties because they believe trade is good for the general welfare, and the treaties make it harder to give protectionist breaks to organized interests. Harder, but not impossible. Trade treaties aren't backed by force of arms, which means countries can always disregard them. And trade treaties have plenty of loopholes, which tend to grow larger over time.

The exceptions that allow protectionist measures like Section 201 actions and antidumping laws were originally narrow. But they've expanded into popular substitutes for tariffs. "Organization for collective action takes a good deal of time to emerge," Dr. Olson wrote. But emerge it does.

And, in the case of trade, democracy failure is contagious. What the author Jonathan Rauch calls the most serious single challenge to the long-term vitality of democratic government -- "the democratic public's tendency to form ever more groups clamoring for ever more goodies and perks and then defending them to the death" -- has become an international phenomenon. (Mr. Rauch's 1999 book, Government's End, popularizes and expands Dr. Olson's work.) Use a loophole against producers in another country, and they'll rally to use the same loophole against you.

Consider antidumping protection, in which governments levy special duties on imports ruled unfairly cheap. Unlike Section 201 cases, which apply to all imports, antidumping actions are aimed at specific countries. Many antidumping cases are settled by an agreement restricting imports and, thus, raising prices for both domestic and foreign producers.

In an article to be published in The Canadian Journal of Economics, Thomas J. Prusa of Rutgers looks at the spread of antidumping laws. Until the late 1990's, the United States, Europe, Canada and Australia brought nearly all antidumping cases. Now, Professor Prusa writes, "the exclusive club has opened its doors." In the 1990's, those four dropped to about half the cases, and now they're a minority. Developing countries have joined the antidumping club.

"These new guys feel that they have been picked on by the United States," Professor Prusa said in an interview, and antidumping actions give their industries a tool to fight back with. He is analyzing data on antidumping actions to track "tit for tat" retaliation, which appears to account for roughly a third of the antidumping filings by these new users.

Local industries have every incentive to demand antidumping laws. Whether a case is settled or a duty is imposed, Professor Prusa writes, "the value of imports from named countries falls by 50-70 percent over the first three years of protection."

And, he continues, "even if the case is rejected I find that imports fall by 15-20 percent." Simply bringing an antidumping case, even a weak one, blocks competition.

Professor Prusa predicts that the United States and Europe will regret unleashing antidumping protectionism. Leaving out cases brought by our own industries, he says, already "the United States is the world's biggest alleged dumper." And it's going to become worse, as more industries in developing countries clamor for protection.

Countries that adopt antidumping statutes, he writes, "often find it a bit like letting the genie out of the bottle -- it is difficult to give one industry protection without encouraging other sectors to also seek protection." One lobby leads to another. The logic of collective action knows no borders.