Thursday, December 31, 2009

Import quotas

Bowing to pressure from Rep. Sam Rayburn and Sen. Lyndon Johnson, the Eisenhower Administration imposed quotas on the importation of foreign oil during its last year in power. Ostensibly used for national security purposes -- a common justification for trade protectionism -- the actual purpose of such quotas was to protect small domestic producers from foreign competition. As excerpted from The Prize, this use of quotas provides some insight into their insanity and a useful parable of government:
Oil import quotas sounded simple, straightforward. These were not. As time went on, their management became more and more Byzantine. Indeed, under the Mandatory Oil Import Program, as it was then known, there were continuing fights over allocations, struggles over interpretations, searches for loopholes, and the ever-more-intense hunt for exceptions and exemptions. Over the years, the program became increasingly barnacled and distorted. A brisk market developed, not in oil itself, but in oil import "tickets" or rights to bring in oil. Some parts of the refining industry ended up, in effect, subsidizing others.

But there was nothing to compare with what became known variously as the "Mexican-Merry-Go-Round" or the "Brownsville U-Turn." Since memories were fresh of World War II and the U-boat attacks on tankers, and since "national security" was what the quotas were supposed to be all about, oil that came "overland" to the United States from Mexico or Canada was deemed more secure than oil shipped in tankers, and was given certain preference and exemption, which also happened to help political relations with Mexico and Canada. But here was the catch: There were no oil pipelines from Mexico, and oil was certainly not going to be trucked several hundred miles from Mexico's production centers. Therefore, Mexican oil was shipped by tanker to the bordertown of Brownsville, Texas, put into trucks, driven across the bridge into Mexico, around a traffic circle, and then back across the bridge into Brownsville, where it was reloaded into tankers for transhipment to the northeast. Thus shipped "overland," it perfectly legally qualified for an exemption.

By the time of the Johnson Administration, one official was called the entire quotas program "an administrative nightmare." It also had far-reaching effects. It led, as was intended, to higher levels of investment in domestic oil exploration, relative to exploration outside the United States, than would have otherwise been the case. It tilted foreign investment by U.S. companies toward Canada, on account of that country's preferential access to the American market. In resulted in the building of substantial refining capacity in the American Virgin Islands and Puerto Rico because of special exemptions to the quotas that were granted to refineries there on economic development grounds. And, finally, the program gave an important impetus to the global oil trade. If companies could not bring foreign oil into their own systems in the United States, which was the objective of integration, then they would have to find and develop markets elsewhere in the world. 
Welcome to the world of unintended consequences, an almost inevitable byproduct of government action.

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