By all appearances, the sky will soon be falling because
President Trump has decided to impose a 10% tariff on aluminum and a 25% tariff
on steel. [1]
Whether those turn out to be the right percentages on the right items, time
will tell. Your humble servant will abstain from prognostication, since the
success of the plan will depend on a variety of factors to which one hopes the
administration has applied the proper level of analysis.
But much of the objection to the plan is that it will
interfere with the sacrosanct “free trade,” that has become the chief deity of
the neo-classical economics pantheon. “Central to the neoliberal discourse on
globalization is the conviction that free trade, more than free movements of
capital or labor, is the key to global prosperity.” [2]
Alexander Hamilton |
Advocates of this so-called “free trade” insist that “that
history is on their side. After all, the defenders of free trade ask, isn’t
free trade how all the world’s developed countries have become rich?”
But as University of Cambridge economist Ha-Joon Chang
points out, the actual history of capitalism yields a different picture. The
truth is,
“…when they were developing countries themselves, virtually
all of today’s developed countries did not practice free trade (and laissez-faire
industrial policy as its domestic counterpart). Rather, they promoted their
national industries through tariffs, subsidies, and other measures.
Particularly notable is the fact that the gap between ‘real’ and ‘imagined’
histories of trade policy is the greatest in relation to Britain and the United
States, which are conventionally believed to have reached the top of the
world’s economic hierarchy by adopting free trade when other countries were
stuck with outdated mercantilist policies. These two countries were, in fact,
often the pioneers and frequently the most ardent users of interventionist trade
and industrial policy measures in their early stages of development.”
Henry Clay |
The history of the United States in this regard is
particularly instructive. On December 5, 1791, the first U.S. treasury
secretary, Alexander Hamilton, presented his Report on Manufactures [3]
to the House of Representatives, wherein he argued for the development of
manufacturing in the new nation. His recommendations would sound strange to
those of us accustomed to hearing free trade advocated as the only sound way to
prosperity. Specifically, those recommendations were: (1) protective duties on
manufactured goods that could compete with domestic manufactures; (2)
prohibitions on the import of manufactured goods also produced in the United
States, provided there was sufficient domestic competition for the goods in
question; (3) in rare cases, prohibiting the export of materials used in
manufacturing to lessen their demand and keep their prices low; (4) subsidies
to manufacturing concerns; (5) premiums in a small number of cases “to reward
some particular excellence or superiority,” or “some extraordinary exertion or
skill” in manufacturing; (6) exemption of some materials used in manufacturing
from the imposition of duties; (7) imposing duties on the import of certain
materials, for specific reasons, such as the existence of an abundant supply
domestically; (8) extension of the same benefits to those who make improvements
on inventions as to the inventors themselves; (9) inspection regulations to
improve and maintain the quality of manufactured goods; (10) the introduction
of bills of exchange which would be made negotiable throughout the United
States, and (11) facilitation of the transport of commodities by means of
infrastructure improvements. Certainly, Alexander Hamilton was no proponent of
free trade.
While Congress did not adopt Hamilton’s idea of subsidies,
it did adopt most of his proposal for tariffs. [4]
The tariffs themselves were actually moderate. Hamilton didn’t want the tariffs
to be so high that it would adversely impact the revenue to be derived from
them. Thus, certain protectionist interests switched their allegiance from
Hamilton’s Federalists to Jefferson’s Republicans. It seems that free trade
ideology was in short supply during the first years of our republic.
Hamilton’s program “was developed in the next generation by
Henry Clay, under the name of ‘the American System,’ and implemented under
Clay’s disciple and admirer Abraham Lincoln and his successors during the
period between the 1860s and the 1940s, when the US became the planet’s leading
manufacturing economy behind a high wall of tariffs.” [5]
Friedrich List |
“Henry Clay’s ‘American System,’ devised in the burst of
nationalism that followed the War of 1812, remains one of the most historically
significant examples of a government-sponsored program to harmonize and balance
the nation’s agriculture, commerce, and industry. This ‘System’ consisted of
three mutually reenforcing parts: a tariff to protect and promote American
industry; a national bank to foster commerce; and federal subsidies for roads,
canals, and other ‘internal improvements’ to develop profitable markets for
agriculture. Funds for these subsidies would be obtained from tariffs and sales
of public lands. Clay argued that a vigorously maintained system of sectional
economic interdependence would eliminate the chance of renewed subservience to
the free-trade, laissez-faire ‘British System.’” [6]
That free-trade British System came into being only when
Britain’s international edge in technology allowed it. [7]
Still, even with its technological lead, Britain had “policies of industrial
promotion until the mid-nineteenth century,” and “had very high tariffs on
manufacturing products even as late as the 1820s, some two generations after
the start of its Industrial Revolution.” It “was only after 1860 that most
tariffs were abolished.” But this policy couldn’t last for long. Its era of
free trade came to an end “when Britain finally acknowledged that it had lost
its manufacturing eminence and re-introduced tariffs on a large scale in 1932.”
The history of the United States is similar. As Ha-Joon
Chang tells us, “It was only after the Second World War, with its industrial
supremacy unchallenged, that the U.S. liberalized its trade (although not as
unequivocally as Britain did in the mid-nineteenth century) and started championing
the cause of free trade….”
But why would a country champion the cause of free trade,
when it is clear that it achieved its industrial ascendancy by other means? Dr.
Chang quotes the nineteenth century German economist Friedrich List for the
answer:
Adam Smith |
“‘It is a very common clever device that when anyone has
attained the summit of greatness, he kicks away the ladder by which he has
climbed up, in order to deprive others of the means of climbing up after him.
In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of
the cosmopolitical tendencies of his great contemporary William Pitt, and of
all his successors in the British Government administrations.
“‘Any nation which by means of protective duties and
restrictions on navigation has raised her manufacturing power and her
navigation to such a degree of development that no other nation can sustain
free competition with her, can do nothing wiser than to throw away these
ladders of her greatness, to preach to other nations the benefits of free
trade, and to declare in penitent tones that she has hitherto wandered in the
paths of error, and has now for the first time succeeded in discovering the
truth.’”
Of course, instead of hand-wringing about the error of
previous protectionist policies, it is, perhaps, even more effective to simply
engage in revisionist history, and claim that American economic success was
born of a free trade policy from the beginning. The maxim of too many nowadays
is: if the truth doesn’t support your case, lie.
Unfortunately, the United States has lost the industrial
dominance that it had right after World War II, and we have begun to see some
of the ill effects of the free trade dogma. The North American Free Trade
Agreement (NAFTA), for example, according to the Economic Policy Institute, a
think tank affiliated with organized labor, “caused the loss of some 700,000
jobs as production moved to Mexico.” [8]
“Second, NAFTA strengthened the ability of U.S. employers to
force workers to accept lower wages and benefits. As soon as NAFTA became law,
corporate managers began telling their workers that their companies intended to
move to Mexico unless the workers lowered the cost of their labor. In the midst
of collective bargaining negotiations with unions, some companies would even
start loading machinery into trucks that they said were bound for Mexico. The
same threats were used to fight union organizing efforts. The message was: ‘If
you vote in a union, we will move south of the border.’”
Whether the tariffs proposed by Trump will do more harm than
good remains to be seen. Protecting one industry while subjecting others to the
high winds of free trade can make matters worse for the unprotected companies,
particularly those being supplied by the protected companies. The tariffs that
have worked for the United States in the past have reflected a more
across-the-board approach.