June 30, 2016
THE NEED to fight protectionism may well stand as one of America’s clearest and most vital national interests. From the voting booth to the country’s foreign-policy establishment, action is needed to defend free trade and shift away from past, unnecessarily partisan trade policies. Protectionism has destroyed prosperity time and again. The most dramatic illustration emerges from the history of the Smoot-Hawley tariffs of the 1930s. Sen. Reed Smoot and Rep. Willis Hawley, both Republicans, wanted to protect American jobs and industry from the ill effects of the 1929 stock market crash by building a tariff wall around the economy. Their legislation raised duties on some twenty thousand products by an average of 20 percent. Its immediate effect was devastating. The tariffs cut already hard-pressed workers and consumers off from lower-priced imports that had held down living costs and had helped sustain living standards in an already pressured situation. By denying American producers lower-priced imported inputs, the tariffs forced them to cut back even more than they already had, including their payrolls. Then, when the country’s trading partners retaliated with tariffs of their own, America’s global sales collapsed.
There can be little doubt that these effects deepened the Great Depression. World trade dropped 67 percent in the two years following the bill’s passage. Imports fell 40 percent, while exports fell some 75 percent. There is even evidence that the tariffs actually caused the Great Depression. Before they took effect in June 1930, business activity had actually begun to recover from the effects of the 1929 crash. Unemployment, which had hit 9 percent of the workforce early in 1930, had declined by June to 6.3 percent. After Smoot-Hawley passed into law on June 17, unemployment began to climb again, eventually verging on 25 percent. Certainly, the stock market anticipated the damage. It fell 10 percent the day President Herbert Hoover signed the bill into law.
For all this evidence, protectionism seems to retain a perennial appeal. AFL-CIO President George Meany in the 1960s and 1970s was famous for describing free trade as “a joke and a myth.” He consistently demanded “tighter restrictions on imports.” Each of his successors has done the same in one way or another. Presidents John F. Kennedy, Jimmy Carter and George H. W. Bush felt obliged, from time to time, to play to protectionist sentiment. JFK, though he imposed no restraints on trade, voiced concern several times over a “de-industrializing” economy. Countless books and magazine articles in almost every time period have made protectionist pleas. President Bush in the 1980s, no doubt in response to Japan’s great export successes, complained often of “unfair trade practices.” Sen. Lloyd Bentsen, a Texas Democrat, worried that because of trade “American workers [would] end up like the people of the Biblical village who were condemned to be hewers of wood and drawers of water.” Financier Felix Rohatyn also worried about “de-industrialization” and fretted that trade would make the United States “a nation of short-order cooks and saleswomen.”
This century has heard still more strident protectionist rhetoric, while Washington has shown a greater inclination to act on it. Early in his administration, President George W. Bush briefly imposed tariffs on imported steel. President Barack Obama imposed several select tariffs, most dramatically on tires from China. Proposals for more general import duties emerged in 2005 when Sens. Chuck Schumer and Lindsey Graham proposed 27.5 percent tariffs on all Chinese goods, a bipartisan bill that received the backing of sixty-seven senators. Though this bill never became law, both Republican and Democratic Congresses have since advanced over fifty pieces of antitrade legislation.
Matters have become still more intense in this election campaign. According to Donald Trump, “If we want jobs in America, we need to enact my five-part tax policy . . . a 15 percent tax for outsourcing jobs and a 20 percent tax for importing goods.” (That happens to be the same rate as Smoot-Hawley.) Trump would push the duty up to 45 percent on Chinese manufacturers and penalize firms constructing factories abroad, saying in response to Ford’s plans to build an assembly plant in Mexico that a President Trump would make the firm pay a 35 percent duty on every car coming across the southern border. And Trump is far from alone. Other Republicans—Mike Huckabee, Rick Santorum and Ted Cruz—have all sounded protectionist notes, especially in the way they have lambasted the recently negotiated Trans-Pacific Partnership (TPP). It is hardly surprising or troubling that politicians would object to the deal. It has many weaknesses. What is dangerous is the tone they have used.
From the other side of the political spectrum, Bernie Sanders brags that he has voted against every major trade agreement since he entered Congress. When an interviewer asked if he would always resist trade promotion, he responded in the affirmative. Sanders signed the Currency Reform for Fair Trade Act, which would blithely impose tariffs on any country suspected of currency manipulation. Meanwhile, Hillary Clinton has held to the antitrade position she first adopted during the 2008 Democratic primaries, when she and then candidate Barack Obama competed for who could shed more suspicion on international trade. When then Senator Obama said that he would “use the hammer of a potential opt-out as leverage” to push Canada and Mexico for concessions in the North American Free Trade Agreement (NAFTA), Clinton criticized him for not going far enough, calling for a “time-out” on trade deals. Their language was so harsh that Canada and Mexico formally rebuked the candidates and the United States.
Such persistence has roots, no doubt, in the highly asymmetrical effects of trade. The pains of trade fall acutely on easily identifiable groups in society. Pressured firms send operations overseas and in some cases close down their domestic operations altogether. Either way, working men and women lose their jobs. These people, in what only can be described as desperate straits, understandably club together to pressure the authorities to stop the pain that is trade. The media naturally relishes the opportunity to report on their suffering, stoking considerable sympathy in the general public and among politicians like Senator Smoot and Representative Hawley.
In contrast, trade’s benefits go less noticed, largely because they are less acute and more dispersed, certainly much less headline-grabbing than are the pains. Still, they are significant. Every worker and consumer enjoys the improved living standards afforded by flows of lower-priced imports. In the last twenty years, for instance, price comparisons suggest that free trade has held the rise in the cost of living down by half. According to the Peterson Institute for International Economics, the effect cumulatively has given the equivalent of as much as $3,300 per year additional income to every man, woman and child in the country. Such benefits for any one person pale next to another’s job loss, but since the gain occurs across a much larger number of people (all, in fact), the economy as a whole benefits.
Much evidence suggests that trade has brought meaningful employment gains, too. Access to cheaper imported inputs has impelled some domestic firms to expand more aggressively than they otherwise might. It is noteworthy in this regard that, despite foreign competition, the open economy since 1980 has created in excess of thirty million new jobs. Since that average growth rate of 1.5 percent a year is little different then in earlier years when trade was of less concern, it would seem that the benefits of trade to some employers has, at the very least, offset the job losses others suffer from foreign competition. Other indicators suggest that trade may have actually added to payrolls on balance. After all, up until the 2008–9 great recession, a larger proportion of America was employed, 64 percent of the population, than ever before. To be sure, that proportion has dropped in recent years, a reflection of, among other things, the lingering effects of that recession. But this recent decline can hardly be laid at the feet of open trade, while the earlier rise may well reflect it, at least in part.
These asymmetrical effects are clearly evident in the political maneuverings around trade questions. When, for example, the AFL-CIO recently advocated trade restraint, the Carpenters and Teamsters pointedly dissented. The Teamsters, of course, benefit from the shipping involved in trade, moving imports from the ports to the places of sale. Both unions also surely recognized the benefits to their members of lower living costs and were unwilling to give them up, especially since at the same time they could see that their members were less vulnerable to trade’s ill effects. Even more dramatic were the lines drawn when President Bush in 2002 decided to place tariffs on imported steel. Unsurprisingly, domestic steel producers and the steel unions were delighted. But steel users were far from pleased. Makers of machinery, appliances, autos, other steel-using products and their associated unions could clearly see the ill effects of more expensive steel on their businesses and on their jobs. They pressured Bush to rescind the tariff, which he did in less than a year, long before the World Trade Organization (WTO) could even hear the complaints of foreign steel producers.
WASHINGTON HAD the easiest time finessing protectionist sentiment in the 1940s and 1950s, right after the Smoot-Hawley experience had taught its painful lesson. In 1940, the Roosevelt administration even tied free trade to the Lend-Lease Agreement to help Britain against the Nazis. It stipulated that any recipient of the aid must cooperate with the United States in constructing a liberal, global trade system after the war. The Atlantic Charter of 1941 delivered the same message. The founding documents of the United Nations made the need for free trade explicit, establishing the precursor to today’s WTO. After the war, Washington pushed hard to set up the General Agreement on Tariffs and Trade (GATT) specifically to reduce trade barriers of all kinds across the globe. In 1947, when France’s Prime Minister René Pleven resisted tariff cuts, President Harry Truman bluntly told him, “High Tariffs have not worked for the U.S. and they will not for France.” During this time, Washington resisted the urge to retaliate against the tariffs of other nations. Instead it used its diplomatic and economic leverage to reduce trade restrictions everywhere, using a series of negotiations, which largely succeeded.
This powerful protrade drive began to weaken in the 1980s. Protectionist rhetoric intensified. Moreover, it was then that Washington began to give up on efforts to reduce barriers globally. Policy instead began to pursue exclusive bilateral or multilateral trade deals. The first was NAFTA between the United States, Canada and Mexico. U.S. trade efforts have proceeded along these lines since, through the recently negotiated TPP. While such preferential trade agreements (PTAs to trade economists) are far from protectionist, they nonetheless fall far short of promoting a liberal, global trade system. Only their signatories gain the advantages of free trade. Otherwise PTAs pointedly exclude the rest of the world. Now, many running for office and their constituents would exclude the entire world.
If Washington is to promote the nation’s prosperity, a vital national interest if ever there was one, it must combat these trends. It must first reacquaint itself with the benefits of trade and the shortfalls of protectionism, as it learned the hard way in the 1930s. It must argue rigorously against those who call for protection, in political debate and as informed citizens at the ballot box. Meanwhile, politicians must cease the ever more common practice of courting special interests in contradiction to the needs of the commonweal. In this effort, policymakers must turn away from their practices of the last quarter century, cease the pursuit of PTAs and return to earlier efforts that sought to open trade globally.
On this last point, though the United States will effectively return to older policy principles, it will have to use very different tactics than it once did. The old way counted on a hegemonic dominance that the country no longer has. Then, the United States produced more than a third of the entire world’s output, averaged a significant trade surplus of exports over imports, its capital markets dominated more than half the world’s trading in financial assets and the country was the world’s greatest creditor. It could bully other nations into cooperating with its free-trade agenda and did, a point to which Truman’s blunt advice to Prime Minister Pleven speaks. Since then, the world has grown up around this country. Today, the United States produces less than a quarter of the world’s GDP, the economy grows at a halting rate, it runs a deficit of exports over imports, Europe’s capital markets can claim parity with America’s and the country borrows considerably more abroad than it lends. Bullying and direct confrontations to alter the illiberal policies of others will no longer work, at least not as they once did.
Efforts to promote freer trade globally do not, however, need to wait for the country to strengthen its economic and financial situation. Even relatively diminished, as it is, the United States retains enough economic and diplomatic muscle to alter global directions on trade. To do so, it will have to make efforts to marshal allies to the cause of a liberal agenda and work more within international institutions then it has in decades. These bodies—the WTO, the International Monetary Fund (IMF) and the like—have rules and means to discipline nations that pursue unfair trade policies. Washington can rely more on these, something it has done insufficiently in recent decades. By going a step further and rallying other nations within these institutions, it can gain in two additional critical ways. First, by arguing for a group instead of itself, the approach will deflect suspicions that the country is only seeking partisan advantage. Second, its allies, even if their narrow interests lie elsewhere, will gather more diplomatic and economic power to the free-trade agenda than this country can manage alone, making the effort more likely to change illiberal policies where they occur.
Take, for the sake of argument, the efforts this country has made during the last fifteen-some years to move China toward a more open, less manipulative approach to trade. Alone, Washington has had only limited success, even when Senators Schumer and Graham went so far as to threaten hefty tariffs in 2005. For all this relative failure, Washington’s insistence on acting on its own has painted the country in the eyes of the world as a partisan scrapper. Better to take advantage of the fact that other nations and groups of nations also object to China’s illiberal trade policies—including the European Union, India, Indonesia and Japan. Leading such a group of dissatisfied countries at the G-20, for instance, where China feels it has a special place, might meet with more success. Nor does it matter that these allies might harbor their own illiberal trade agendas. In such an alliance, they would nonetheless serve interests of the liberal, global trade order. The United States would look more like a principled leader than a partisan, while Beijing, with its overweening sense of self, might have an easier time accommodating global pressure than it would bowing to the demands of a Washington that it has chronically characterized as a bully.
Such a shift in policy, strategy and tactics will hardly be easy. It will face stiff headwinds in today’s domestic political climate, especially after years of unchallenged protectionist rhetoric and the official pursuit of partisan advantage in PTAs. It would also demand less grandstanding and more serous diplomatic effort on trade matters than this country has made in a long time, neither of which seems to fit with the day’s domestic political practice. But since a liberal, global trade order remains a clear and vital national interest, the country, for its own sake, has little option but to counter protectionist impulses, suppress the short-term satisfaction of securing partisan advantage in preferential trade deals and cease using foreign bodies for domestic parochial political advantage. Otherwise it might learn the lessons of Smoot-Hawley as it did the first time—the hard way.
Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY) and recently retired as Lord, Abbett & Co.’s senior economist and market strategist. His most recent book, Thirty Tomorrows, describes how the world can cope with aging demographics.
Image: Container ship Ever Given. Wikimedia Commons/NOAA’s National Ocean Service.
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