The Realities of Free Trade
Many of our basic freedoms are guaranteed by the Constitution. Speech, press, assembly, religion: these are all accepted as sacrosanct rights by reasonable people across the political spectrum. But should we not have the same freedom when it comes to the economy?
In view of today’s divisive tariff debate, I want to explore economic freedom in as nonpartisan a tone as possible by looking at the two diametrically opposed schools of trade-related economic thought: free trade and its arch nemesis, protectionism. And to help us understand the relationship between free trade and protectionism I will also examine two closely related and time-tested economic principles, comparative advantage and the division of labor.
Free trade has been one of the more contentious and enduring public economic policy issues, from America’s colonial days until today.[1] To most economists and businesspeople it means the possibility of unlimited economic and social opportunity. But to others (like politicians and many of their uninformed constituents) it’s a zero-sum boogeyman that spells trouble in the form of lost jobs, lower wages, higher prices, and an overall decline in our standard of living.
It’s unfortunate that the contemporary debate over free trade is influenced more by the smoke-and-mirrors of left-right partisanship than by objective economic understanding. It’s a debate that too often skitters off the road into a ditch of emotional irrationality, with fear and anger overpowering reason and logic—and we can blame social media for fostering and amplifying our state of manic irrationality. It’s a debate fueled, for example, by the misunderstood effects of the twenty-odd bi- and multi-lateral free trade agreements (FTAs), beginning with Israel in 1985 and Canada in 1988, ratified by the U.S. over the last forty years. The mainstream media regularly feed the public a mixed bag of truth and fallacy about either the benefits or the evil consequences of free trade, and the rhetoric was especially intense on both sides in the years leading up to the passage of the North American Free Trade Agreement (NAFTA) in 1993.[2] But when we cut through all the partisan and emotional blather, it’s empirically clear that FTAs like NAFTA have grown the U.S. economy by opening up new market opportunities for our goods, services and technologies that would otherwise be more difficult to penetrate. U.S. Commerce Department statistics show the aggregate net benefits of free trade. The USMCA is still too new to glean any meaningful statistical insight, but a review of NAFTA data shows that U.S. trade with our NAFTA partners increased almost three-fold over the first fifteen years of NAFTA, from $343.2 billion to $967.8 billion.[3]
Despite the evidence of NAFTA’s benefits, many continue to rail against freer trade as inherently harmful to the American economy.[4] Free trade agreements, they also say, nibble away at America’s sovereignty by placing limits on our ability to self-regulate our economy with trade barriers. Writing in pre-NAFTA 1986, the late economist John Culbertson, who was one of the most vocal critics of free trade, said that “our blind allegiance to free trade threatens our national standard of living” and condemns America to a future of economic despair.[5]
Like Culbertson, some current critics of free trade—most notably President Trump—argue that an open-border trade policy comes at too heavy a price. Labor unions habitually complain that free trade causes high-paying manufacturing jobs to move to lower-cost regions of the world, such as Southeast Asia or Latin America (and yet these same unions fail their membership all too often by insisting on concessions that stunt growth and innovation in favor of a status quo that fails to reflect current economic realities). Many well-known global consumer brands outsource their manufacturing activities to specialized contract manufacturing firms that operate factories in low-cost regions. Indeed, states that traditionally had local economies based primarily on blue-collar industrial jobs, rustbelt states like Ohio and Michigan lost many of these jobs, and trade agreements like NAFTA were denounced as the reason. Ross Perot, arguably the most prominent opponent of NAFTA (until Donald Trump came along), famously warned us during the 1992 presidential campaign of the “giant sucking sound” of jobs leaving America if NAFTA were to become reality.[6] There is absolutely no credible empirical evidence (as opposed to conjecture, cherry-picked outliers, or anecdotal gotchas!) that free trade agreements, or global trade in general, have ever resulted in a net loss of American jobs.[7]
To free trade advocates, the lost-jobs argument is a red herring because it looks at isolated snapshots of our economy to damn free trade, without considering a broader range of potential benefits—benefits that are harder to see unless one makes the effort to look below the surface. All a free trade critic has to do is find an industry (or a town or region) in decline, and name free trade as the villain. Human beings need to find someone or something to blame when bad things happen, so if a factory closure can be blamed on the elephant in the room—hello, NAFTA—then inevitably there will be indignant condemnation of free trade from business leaders, labor unions, and local politicians.[8] But NAFTA must be the culprit! It’s so obvious! This myopic cause-and-effect argument is persuasive to an observer with emotional ties to the affected communities or families, or even to some arm’s-length casual observers. Indignant complaints based on nothing more than phantom speculation (reinforced by preconceived biases against foreigners and aversion to change)[9] become accepted as fact when repeated loudly and often. But when an isolated snapshot appears to show that NAFTA was the cause of a factory closure in Ohio, we need to look at the broader consequences to reveal how the benefits of free trade accrue over time across the entire economic spectrum. In the aggregate, all strata of society benefit when trade barriers are reduced or eliminated, whether in mature economies like the U.S. or in developing economies. Generally speaking, factory workers and CEOs and everyone in between will see improvement in living standards and personal wealth over time in an open market system, unhindered by artificial political borders or excessive regulation (or rampant corruption, as is the case in some countries), in which productive workers in innovative enterprises are allowed the opportunity to succeed or fail.
In a healthy, growing economy, the death of an underperforming company or industry is not an unwelcome outcome when considered in pragmatic economic terms (and by underperforming I mean relative to the current economic environment).[10] Paradoxically, creative destruction of underachieving companies is necessary in a healthy economy because it frees up resources for more efficient redeployment, just as an occasional forest fire cleanses a forest and encourages new growth. But, some may shout, what about the workers who lose their jobs? Clearly the labor aspects of free trade pose major challenges on several levels. Jobs are lost when a company decides to move a factory from the American side of the border to the Mexican side, affecting the families of every worker who loses their job—but the effects are no less injurious to these families than if the factory had moved from Pennsylvania to Arizona. Workers will be temporarily displaced when a factory closes its doors for any reason—this is, after all, the nature of capitalism, regardless of the influences of politically motivated trade policies—but a failed business will be replaced by a new enterprise that, unencumbered by bad habits and calcified management, is hungrier, more nimble, more innovative, more aware of and responsive to the marketplace, and thus in a better position to enrich its workers, its stakeholders, and the broader society. Charles Darwin’s evolutionary theories are at work in business as well as biology.[11] Species must evolve or they stagnate and inevitably die, just as industries must innovate—by optimizing customer experience, by continuously improving both its products and its processes, by rationalizing its costs, by outsmarting the competition, and by adapting to ever-changing market and regulatory forces—or fail. The taxi industry operated under a business model that hadn’t changed all that much in nearly a century, but the industry was forced to deal with the new business paradigm introduced by Uber and Lyft. The innovation and convenience offered by these start-ups has forced the old-school taxi businesses to reexamine—and hopefully improve—their business model. A tech company that was famously slow to adapt is Blackberry. Once the gold standard in the early years of the smartphone industry (under its previous name, Research in Motion, or RIM), Blackberry failed to respond to the innovative products introduced by its larger yet more nimble competitors like Apple and Samsung. Blackberry made the mistake of taking its customers’ brand loyalty for granted and then found itself on the brink of disaster as the iPhone and Android phones gained popularity. Perhaps the most impressive example of a change agent is Amazon, the internet retailer that strikes fear into the hearts of every (remaining) brick-and-mortar retailer.[12]
In a dynamic economy, the loss of jobs in one sector sparks a realignment of the marketplace, resulting in the creation of new jobs in another sector, often a sector that did not exist previously. Propping up inefficient and underperforming industries is counterproductive in the long term because it delays the redeployment of labor into more innovative and profitable enterprises. Workers who linger in dying companies, rather than getting the training they need to be more successful in the next phase of their worklives, are ill-served by postponing the inevitable. Those workers who once made carburetors, walkmans, typewriters and cabbage patch dolls were forced to adjust their careers as technologies and consumer demands evolved.
Creative destruction of jobs is not a new phenomenon. Lee Francis Lybarger wrote in 1914 that:[13]
Transition is not destruction. It usually means growth. Because people have ceased to produce one thing and are producing another in its place, is no evidence that they are losers. They are probably gainers. Look at the men who were “thrown out of work” because the self-binder took the place of the cradle; because the threshing machine took the place of the flail, and the mowing machine “drove out” the scythe. Think of the hundreds of men that every invention throws out of employment. But has labor ceased to produce? Not at all. It has simply changed the direction of its production. Is it less productive because of the transition? On the contrary, it is more productive.
Economic progress is often a one-step-back-two-steps-forward proposition. It’s unfortunate from a public relations perspective that the full cycle of creative destruction is not immediately evident, because the connection between today’s destruction and tomorrow’s creation goes unnoticed. So, while job destruction inexorably leads to job creation, it’s the immediacy of destruction that typically makes the headlines. Bad news always gets more attention than good news, with news consumers’ angst over a backward step overpowering their interest in the successes of the forward steps.[14] An industry may make headlines when it gives pink slips to 10,000 workers in one fell swoop, but the creation of the next generation of jobs is more incremental and thus less newsworthy. Even in an economy driven ever-increasingly by speed—speed of innovation, speed of bringing a product to market—it takes time to build a brick-and-mortar infrastructure and to bring innovation to the marketplace (far less time, of course, than fifty or eighty years ago, but certainly it’s not an instantaneous transformation) with the connection between the destruction and the creation going unnoticed. For workers who struggle from paycheck to paycheck to make ends meet, getting caught in the destruction phase of an economic transition period can be uncomfortable at best and devastating at worst, especially for those with the least education and the fewest marketable skills, but the majority of workers will in the aggregate and over time ultimately find themselves and their families in a better financial position. Protectionists view trade with fear, believing that more for those evil foreigners means less for America. But free traders understand that trade isn’t a zero-sum competition that requires a winner and a loser. The goal of everyone, our politicians included ought to be to grow the economy without regard to artificial political fences, raising the standard of living for all.
Free trade creates access, choices and opportunities—intrinsic conditions that drive an economy to greater success in a free capitalist society. Free trade creates an environment that in many ways is self-correcting. It forces a weak industry to improve or perish, and it propels a shrewd enterprise to achievement that wouldn’t be possible under a restrictive trade regime. It forces an industry to constantly reinvent itself, to reallocate its resources—including its labor force—in order to realize greater efficiencies resulting in lower costs and thus lower prices for consumers. Free trade also rightly places emphasis on the needs of consumers, not the interests of producers, because the ultimate goal always must be consumption rather than production. Production occurs to serve consumption, not vice versa. And free trade encourages a smart business to leverage its absolute and comparative advantages.
Comparative Advantage and Division of Labor
My very first class on my very first day of college forty-nine years ago was Macroeconomics 101. In that early-morning seminar (7:00am!) I was introduced through bleary eyes to the work of the early nineteenth-century British economist David Ricardo, who developed the theory of comparative advantage. On its face, the theory may seem illogical, yet it stands as one of the more enduring principles in the field of international economics. Comparative advantage looks at the differences between those who have the capacity to produce a good. Comparative advantage tells us that two countries (or companies) will mutually benefit from engaging in trade with each other as a consequence of their relative productivity in various industries. In a hypothetical example let’s presume that the United States (clearly a dominant economic power) and the tiny west African nation of Togo (clearly not a power) both produce scissors and paper. If we also presume that the U.S. is undoubtedly better at making both products, is there any benefit to either country to initiate bilateral trade in scissors or paper? The answer is yes, even though the U.S. has an absolute advantage in both industries. If the U.S. is five times more efficient than Togo at making paper, but only twice as efficient at producing scissors, it holds a relatively greater advantage in papermaking. Comparative advantage tells us that a country should sell what it’s more efficient at producing and purchase what it’s less efficient at producing.[15] Hence both Togo and the U.S. will benefit if the U.S. sells paper to Togo and Togo sells scissors to the U.S.—even though the U.S. is the better scissors-making country. In other words, everyone wins when countries produce (export) based on their comparative strengths but buy (import) based on their comparative weaknesses.[16]
Comparative advantages aren’t chiseled in stone but are constantly changing as a country’s economy evolves. A country’s roster of industries is in constant flux, guided by the invisible hand of market forces.[17] Industries constantly innovate, developing new products and services that consumers find attractive while phasing out the older and thus less desirable (and less profitable) offerings. Developed countries (such as the U.S., Canada, South Korea, Japan or the E.U. members) are typically where most innovation occurs, so these countries develop comparative advantages in the cutting-edge industries and technologies that fuel (and are fueled by) more innovation. But as an industry matures, and as the attention and resources of an innovative country are diverted to the next great opportunity, the comparative advantages linked to the mature industry are likely to migrate to less-developed countries where production costs are cheaper. And in many of today’s industries we find, even at the individual product level, that comparative advantages are dispersed over multiple countries, which one could argue is either a cause or a consequence of modern supply chain and serial production practices. We also find that comparative advantages can be enhanced by natural advantages, like a longer growing season or a nearby supply of a particular natural resource, but it can also be the result of man-made advantages, whether existing or created a new, that are available within a local economy. Proficiency in English is a man-made advantage, as is access to specialized universities. So, too, is a government willing to bestow subsidies to a favored industry or company. So comparative advantage is derived from the symbiosis between an entrepreneur’s creativity and the environment in which he or she creates.
Economic activities are commonly categorized based on artificial political borders or industry segmentation, but comparative advantage is applicable to more than just nation-to-nation or industry-to-industry comparisons. Whether we realize it or not, we practice comparative advantage every day in our own lives.[18] In fact, practically every transaction we enter into is based on comparative advantage—and on another of Adam Smith’s time-tested principles: the division of labor, which speaks to the development of specialized skills in individual workers. It is fair to say that we, as individuals, don’t sew our own clothes, build our own homes, grow our own crops, slaughter our own livestock, pull our own teeth, write our own software, or fix our own cars. Most of us wouldn’t have a clue about how to accomplish any of these tasks, so we outsource these activities to specialists (or clusters of specialists that range in size from self-employed individuals to multinational corporations) who have the skills, experience and resources to do these jobs far more efficiently, more cost-effectively, and with greater quality than we could do them ourselves. We may know some of these specialists personally, like our dentist or landscaper, but many, many more of these specialists who improve our lives are strangers to us. Our only connection to these strangers is mutually beneficial trade.[19]
Imagine how different your life would be if you literally had to do everything yourself. Yes, you may feel pride in your self-sufficiency, but being self-sufficient (in the do-it-all-yourself sense rather than the making-your-way-in-the-world sense) doesn’t lead to prosperity, whether individually or as a society. Quite the contrary, self-sufficiency mires an individual in a life of poverty, with few opportunities to achieve even the most rudimentary level of comfort and security. Any pride you may initially feel about your self-sufficiency will be replaced in short order by desperation and hopelessness. Look around your house and take a mental inventory of everything you’ve acquired—using the money you earned from your own specialty—and then identify everything you made with your own two hands. Maybe you dabble in woodworking as a hobby and made a coffee table or kitchen chair, or maybe your walls are hung with seascapes your spouse painted in his or her free time. But virtually everything else in your house (and the house itself!) was made by nameless specialists scattered across the globe, in many cases using technologies that you have no need to understand except to satisfy your curiosity. And even if you are a prolific weekend woodworker or still-life painter, where did your supplies and tools come from? Did you chop down the tree and mill the lumber? Did you mine the iron ore used to produce your tools, or the pigments that make Cerulean Blue? Did you spin the fibers and weave the canvas that you paint on? And, more fundamentally, what forces are at work to afford you the luxury of free time to devote to a hobby?
If we each had to personally mine, grow, or make every necessity and accoutrement in our lives, we’d be so busy wasting our most valuable resource—our time—on a multitude of different chores that we’d never become proficient at anything—and we’d be hopelessly impoverished, no better off than a peasant in the Dark Ages. We would be utterly unable to produce even a tiny fraction of the goods (and services) that we can buy with the click of a mouse, using the money we each earned from our work in our own particular specialties. How could we become doctors or plumbers or artists or engineers or auto mechanics or teachers or trade compliance experts if all our time was spent doing things that we could hire a specialist to do?[20] Life’s necessities would be an existential daily worry, and leisure goods and activities would be unthinkable. We’d waste the minutes and hours of each day trying in vain to keep up with the many tasks necessary for a comfortable and safe life, and we could never do any of them as efficiently and skillfully as a specialist could, no matter how diligent we were, because we couldn’t afford the education, training, technology and capital infrastructure needed to improve production (not to mention quality). Efficiency is impossible without know-how and access to modern technologies. If we each decide it’s a good idea to fix our own cars, could we? Should we? Do we each have a garage with a hydraulic lift and every mechanic’s tool imaginable? Of course not. And so it would take us ninety highly inefficient (and perhaps dangerous) minutes to change our oil in our driveway rather than the ten minutes it would take the pros at Jiffy Lube.
The technology conundrum is one of the major reasons why underdeveloped countries or regions remain underdeveloped. It’s not viable for a farmer who owns only one acre of land in a country with an immature economy (or a restrictive political system) to buy modern farming machinery because the cost would be beyond his reach, and could never be recovered even if he could afford it, so he continues to use outdated methods and equipment, as do all his neighbors. He doesn’t have the economies of scale that would allow him to invest in more efficient technologies. It’s not that the farmer is lazy, nor is he necessarily unaware of the technologies that would improve his productivity; the problem is that he’s stuck, as Luciano Pellicani explained, in a “caged” economy in which his opportunities are severely limited.[21] And thus the farmer and his neighbors remain much poorer when compared against farmers in developed countries that have the laws, infrastructure, technology, education, experience, and political will to encourage economic progress with innovation and the smart allocation of its resources. Society is built on the power of incremental innovation, compounded over time.
Government intervention
Comparative advantage makes sense of the economic relationships between individuals or collections of individuals. If I produce a gizmo better than you, and you produce a widget better than me, the mutually beneficial and logical response would be for you and me to trade the fruits of our comparative strengths. But when there’s an artificial barrier—a border—between you and me, the comparative advantages that arise out of our desire to trade our gizmos and widgets are diluted, if not cancelled outright, by the effects of unnatural trade barriers created by politicians and civil servants who proclaim where and with whom we can spend our money, and by the obstructive and bullying demands of special interest groups like labor unions and industry advocacy groups. This isn’t to say that governmental influence ought to be banished from matters related to global trade, or that special interest group ought to be outlawed. Government certainly plays an essential regulatory role in creating uniform and consistently applied rules and norms in areas such as transaction law, property rights, anti-corruption laws, intellectual property protections (i.e., trademark, copyright, and patent law), fair labor standards, financial and monetary institutions, education, judicial systems, and public health and safety. Inherent to a productive economy is the expectation of consistent and nondiscriminatory rules that everyone understands and relies upon.[22] Whether they take the form of contracts, formal regulations, informal standards (like Incoterms®), or the unwritten “Law Merchant” rules of trade etiquette and commercial transaction governance that evolved over the centuries in parallel with, but separate from, legislated national laws, these rules are the foundation upon which trade can be built because rules eliminate or mitigate risk and uncertainty.[23] The Supreme Court told us long ago that “uncertainty and ambiguity are the bane of commerce.”[24] A century earlier Adam Smith, in An Inquiry into the Nature and Causes of the Wealth of Nations, warned that:
Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice; in which the people do not feel themselves secure in the possession of their property; in which the faith of contracts is not supported by law; and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state, in which there is not a certain degree of confidence in the justice of government.
Douglass North, economic historian and co-recipient in 1993 of the Nobel Prize in Economics, wrote about the influence of organizations and institutions on a country’s economy.[25] He argued that a productive economy will organically arise from a supportive institutional infrastructure; a country perceived as a high risk in any of its political, social, legal or economic institutions—what North called the “institutional matrix”—has more difficulty attracting investors and trading partners than does a stable low-risk country. Thus, as absolutely necessary as certain laws and regulations and institutions are to the growth of a nation’s global trading activities, too much regulation (or more precisely, too much of the wrong regulations) can poison growth. Just as a referee should not dictate the outcome of a sporting event, government shouldn’t unnecessarily stand in the way of legitimate trade between two willing parties who by the circumstances of their lives happen to be on different sides of a political border.
Geography and Politics
The market forces of capitalism are illogically constrained by political geography. Borders are an inherent characteristic of global trade (and are the reason we trade compliance practitioners have a career), but pure capitalism doesn’t give a hoot about political borders. The intrinsic rules of competition are border-blind.[26] Market forces are at work regardless of whether the competition or the customer is across the street or on the other side of the world. In other words, political geography is a poor—destructive!—basis for the justification of trade restraints.
Let’s say ABC Gizmo Company, a small manufacturer in Calais, Maine, competes in the U.S. market with several small foreign gizmo makers and one very large gizmo manufacturer in San Diego, California. What advantage does ABC Gizmo get from politically driven trade restraints on imports of the foreign-made gizmotchotchkes when the greatest threat to ABC is its domestic competition? Put another way, why should it matter to ABC where its competition is in terms of political or physical geography? Whether they’re in competition with a company in California or Kazakhstan—or a mile away across the border in St. Stephen, New Brunswick—what’s the difference? In the event that ABC Gizmos must layoff workers, will its unemployed workers in Maine find patriotic comfort in the fact that they lost their jobs because of a stronger competitor in California?[27] And why does the Goliath in California need regulatory protection from the foreign Davids?
To drive this point home even more emphatically, let’s imagine a United States in which each state is allowed to create its own trade barriers against the other states. A trucker picks up a load of goods from a factory in Mobile, Alabama, and heads west on I-10. He has to pay a tariff and satisfy various bureaucratic requirements when he crosses into Mississippi, and then again a few miles down the highway when he enters Louisiana, and then still again in Texas, and New Mexico, before he reaches his destination in Albuquerque. Would such a system benefit anyone? Every manufacturer in every state would find its marketplace severely curtailed, with limited prospects for growth. The supposedly protective measures mandated by each state would do nothing but isolate the state from its neighbors, forcing each caged state to allocate its limited resources towards the internal production of goods that otherwise could be obtained far more efficiently through external trade. All the goods and services we enjoy in our modern standard of living would evaporate if each state had to produce everything consumed within its borders. Each state would necessarily have its own washing machine factory, its own automobile factory, and its own oil refinery, but none of these factories could achieve anywhere near the productivity or quality of a national or global manufacturer. Innovation would be stunted. Prices would soar. Ricardo’s lessons of comparative advantage would be ignored, and the efficiencies that arise from specialization (Smith’s division of labor) would never be realized. Workers in each state’s jack-of-all-trades-but-master-of-none economy would earn lower wages and consumers would pay higher prices for inferior goods. Living standards would plummet; poverty would increase. Hey, wait a minute!—isn’t this the same unsuccessful model we tried two hundred and forty-odd years ago under the Articles of Confederation, our first attempt at a federal constitution? Isn’t this exactly what happens in global trade when countries erect artificial tariff barriers based on political expediency rather than economic foresight? If it makes no sense to erect trade barriers between towns or counties or states, why does it make sense at the national level? What are we trying to protect?
As individuals and as a society, we tend to frame our opinions about economic and social policies based on our personal political orientation, which is the portal through which most of us view our society and government. But the opinions of most Americans are not nearly as informed or well-formed as they could be (and I include myself in this group). Even though the economy is apolitical at its core, it is manipulated by economic policies—often half-baked—driven by our obfuscating and partisan ideologues in Washington. Issues are typically addressed superficially, incoherently, emotionally, and dishonestly, and are often simplistically portrayed using a good-versus-evil dichotomy—”taxes are bad!” or “taxes are good!”—rather than with any attempt to reach a nuanced, rational, and fact-based middle ground, the result being that many people believe that their strongly held opinions are their own, when in fact they haven’t given any thought to understanding what they really believe and, more important, why they believe it. They’ve simply adopted an opinion that fits their political affiliation, or that has become “fact” because it’s been commonly accepted over time. But unlike dog crap, insight doesn’t just happen. And so with our politicians, whether on the right or the left, constantly playing to the nearest microphone, pontificating on economic policy as if they knew what the heck they were talking about, we blithely accept as dictum that our economic borders necessarily must mimic our political borders.[28]
Too few of us engage in the introspection it takes to understand that the privilege of governing a democracy (or a constitutional republic like the United States) does not confer upon the government the right to unreasonably constrain the economic opportunities of citizens to within that sphere of governance. Our federal government bears the constitutional mandate to protect, both physically and economically, Americans, our freedoms, and American interests—and this includes the obligation to maximize economic growth and long-term prosperity. This obligation is largely satisfied by simply standing aside and letting innovation and free market competition lead the way.[29] At too many turns in our history this obligation either has been abdicated or bungled (as, for example, Congress and President Hoover bungled the Smoot-Hawley Tariff Act of 1930[30]). Our Constitution mandates a government that promotes the general welfare, not one that provides welfare to a narrow constituency of the well-connected.
Protect me, please
Political influence over trade policy has been a fact of life for millennia, just as it always will be regardless of the political face of a government. A contemporary of Sumner, Jacob Schoenhof, of the New York Free-Trade Club, said it well in a propaganda pamphlet, also from 1883:[31]
Commerce is the twin sister of industry. Equal development of both is necessary to the healthful existence of nations. Why commerce is the Cinderella of our government may be a conundrum to some. The reason is, however, a very plain one. We all know that the “fostering of our home industries” uses up all the energies of our statesmen, so that no time is left to inquire into the real causes of the decline of our commerce.
These sentences from our distant past lead us neatly into our discussion of protectionism. Protectionism is governmental intervention intended to protect domestic economic interests. Protectionist policies can be implemented in a number of ways, some obvious (direct) and some subtle (indirect); essentially, though, it is the practice of assessing import tariffs or employing other restrictive trade measures, traditional measures like quotas, or antidumping and countervailing duties, or newer restrictions such as those based on labor or environmental concerns (or national emergencies under IEEPA), or by providing economic incentives to protect domestic industries—ostensibly the “infant industry” argument—from foreign competition, whether “fair” or “unfair”. Milton and Rose Friedman disputed in Free to Choose the supposition that young industries must be given tariff protection, calling it a smokescreen because “the so-called infants never grow up.”[32] Most protection, they argued, is for the benefit of mature, politically connected industries—precisely the entities least in need of protection. Protection becomes a perversion of its original intent, a permanent diet of prime rib rather than a merely short-term boost of baby formula.
William Graham Sumner, a professor of sociology at Yale and steadfast free-trader, wrote in an 1881 essay, An Argument Against Protective Taxes, that:[33]
A restricted trade lowers the physical well-being of the population, and, with that, all chance of intellectual and moral well-being, below what it would be under free trade, with the same conditions of labor, capital, and land. … If there is any industry which really depends upon the tariff, it cannot too soon begin to learn to do without it.
In 1883, Sumner wrote:[34]
If there be any such thing as an “American system”—a system which we can claim to illustrate and advocate before the civilized world, it must be that of absolute free trade, each state or nation providing for its own needs and expenses, each state freely open to all comers, securing peace and safety to persons and property while within its borders.
Frank Taussig, the preeminent tariff policy historian of the late nineteenth and early twentieth centuries, noted that “Where … competition is not effective and the domestic producers have a monopoly or quasi-monopoly, [tariffs] do substantial harm in aiding the favored producers to get abnormal profits.”[35]
The essayist H.L Mencken, in Minority Report, a collection of random notes published upon his death in 1956, said:[36]
The idea that customs barriers are necessary in order to protect weak and incompetent nations against strong ones is probably false. It is disproved by American experience[.] … The divisions between nations are not natural, and the common people seldom of their own motion cherish national animosities. They are promoted by professional politicians, the eternal enemies of human peace and security. It is always to the interest of such politicians to arouse fears. They make their living doing so, and then promising to get rid of the bugaboo by quack devices. One of the worst of these quack devices is the customs barrier. It may have some use in the early days of a rapidly developing nation, but as between nations that have pretty well reached their growth, it is an intolerable evil. What is universally good should be obtainable everywhere, and at substantially the same price.
The Friedmans’ and Mencken’s cynicism is well founded. But let’s for a moment indulge in fantasy and assume that protection is implemented altruistically, without any trace of bias or self-interest. If a gizmo industry takes root in the United States that is superior, in terms of quality and market share, to all foreign gizmo manufacturers, then the U.S. may assess a relatively low “Column 1” duty rate (perhaps even 0%) against imports of foreign-made gizmos because of the minimal threat to the U.S. industry. But, if the reverse were true—if the domestic gizmo industry is weak relative to the foreign competitors, whether as a consequence of youth, lesser competency, a technology gap or some other defect—then a relatively higher duty rate (or perhaps a quota) may be imposed to offer a protective buffer to the domestic industry. Protection can also take the form of direct or indirect government subsidies granted to a domestic industry at the federal or local level, such as reductions in certain taxes or in the cost of essential services like energy or water.[37] But there is great disparity between how protectionism ought to be administered (to the extent one thinks it’s necessary) and how it really is, and in many cases protectionist measures are rescinded with less enthusiasm than they when they were implemented.
For much of the nineteenth century and early twentieth century, the U.S. operated under a series of broadly protective tariff laws primarily driven by myopic political influences. In contrast, the GATT-based trade policies practiced today by America and its industrialized trading partners, which are largely the legacy of the Reciprocal Trade Agreements Act (RTAA)[38] implemented under FDR’s first administration, were created much more in the spirit of free trade than protectionism. So does this policy shift mean that free trade is unequivocally preferable to protectionism? The answer is yes, but a one-word answer doesn’t begin to tell the whole story. It’s not a binary choice between wide-open borders and an impenetrable tariff wall. Even the most ardent free traders will agree that some forms of limited trade barriers are necessary, as when interests not directly driven by market forces like public safety or national security are legitimately at risk, just as reasonable protectionists will stop short of advocating isolationism.[39] Nor is the choice a zero-sum equation in which more for “them” necessarily means less for “us.” Nor is it a referendum on our national sovereignty, as some would argue. American trade policy, always a muddy puddle of competing interests, has generally fallen somewhere in the middle depending on the prevailing political, social and economic imperatives and attitudes of the day. But as each year passes—and as our economy became more global in recent decades, not from a simple buying-selling perspective but from a business integration point of view—the puddle grows muddier.
***
Ida Tarbell was an investigative journalist—a muckraker—at the turn of the last century, a time when hard investigative journalism aimed at uncovering corruption and injustice was primarily a male profession. Although perhaps best known for her serialized magazine exposé of the Standard Oil Company’s antitrust woes, The History of the Standard Oil Company, Tarbell also covered American tariff-making policy with dogged passion. In what might be the most entertaining book ever written on U.S. tariff policy (for those of us who are entertained by such things), Tarbell paints an unflattering picture in The Tariff in Our Times of how tariffs were negotiated from the time of the Civil War to the first decade of the twentieth century:[40]
Difficult as it would be for one to realize it who took up for the first time the present tariffs of the United States, they rest on a formula which as it always has been understood by the majority of the people of the country is not especially intricate or confusing. Put yourself back a hundred years or so, when the country was busy with agriculture and commerce and mining. We had an enormous advantage in these pursuits. We were at a disadvantage in manufacturing. To be sure, from the start we did a little. In the nature of things we would gradually do more, and what we did would be on a solid basis. But, obviously, only the born iron-master, potter, weaver, was going to practice his trade in the new country with the foreigner importing goods cheaper than he as a rule could make them. And so we decided to encourage manufacturing by taxing ourselves.
That last sentence summarizes in ten words the inherent absurdity of protectionism, which is that the tariffs assessed against imports into the U.S. are paid almost exclusively by Americans. America punishing Americans. (And it’s not just a punishment isolated to the obvious effect of increased duties on each import transaction, but also a punishment that artificially reduces choices resulting in higher prices across the board, even for domestic alternatives.) Tarbell didn’t hide her antipathy toward protectionism. At times you could almost imagine the smoke coming from her ears as she pounded out the words on her typewriter. But her disdain wasn’t merely based on empirical economic evidence; she believed that protectionist tariffs were highly immoral, and in fact she devoted the last chapter of the book to a moralistic attack on the tariff-making process:[41]
Let us admit that reasonable people must not expect in a popular government to arrive at results save by a series of compromises. As long as men disagree as to what is desirable to accomplish, as well as on the methods which are to be employed in getting what they all agree to be desirable, each successive step comes by one side agreeing to take less than it believes should be given, and the other yielding more than it believes wise. No reasonable person can expect the protective system to be handled without compromises, backsets, and errors of judgment, but he can expect it to be handled as a principle and not as a commodity. The shock and disgust come in the discovery that our tariffs are not good and bad applications of the principles of protection, but that they are good or bad bargains. Dip into the story of the tariff at any point since the Civil War and you will find wholesale proofs of this bargaining in duties; rates fixed with no more relation to the doctrine of protection than they have to the law of precession of the equinoxes. The actual work of carrying out these bargains is of a nature that would revolt any legislator whose sensitiveness to the moral quality of his acts has not been blunted—who had not entirely eliminated ethical considerations from the business of fixing duties. And this is what the high protectionist lawgiver has come to—a complete repudiation of the idea that right and wrong are involved in tariff bills. There is no man more dangerous, in a position of power, than he who refuses to accept as a working truth the idea that all a man does should make for rightness and soundness, that even the fixing of a tariff rate must be moral. But this is the man the doctrine of protection, as we know it, produces, and therein lies the final case against it,—men are worse, not better, for its practice.
Tarbell’s writings show us that passionate rhetoric (on both sides of the free trade debate) isn’t a contemporary phenomenon that took root only in the forty years since the U.S.–Israel FTA was implemented. Indeed, tariff policy before 1913 was a far more contentious public policy issue than today because tariffs were far and away the primary source of federal revenue, and tariff rates were generally much higher despite the fact that many items were afforded duty-free status.[42] The extreme disparity between tariff rates fostered passionate debate. A number of nineteenth-century grass-roots special interest groups, some local and some larger, like the International Free Trade Alliance, the American Free Trade League, and the previously mentioned New York Free-Trade Club, sang the virtues of free trade. There were groups that straddled the fence, like the Chicago-based American Reciprocal Tariff League, which generally supported protectionism but advocated for tariff concessions with countries willing to reciprocate. And the staunch protectionists had their own organizations, like the Young Men’s Republican Tariff Club in Pittsburgh and the influential American Protective Tariff League.[43] The propaganda machines on both sides were relentless and often shameless, employing talented shills who cleverly twisted facts to support their group’s positions (not unlike today). In one of the APTL’s propaganda pieces published in 1888, the welfare of the working-class family was melodramatically depicted by contrasting life in America under highly protective tariffs against the “indescribably wretched” life of workers in Europe under less-protective policies:[44]
Both men and women, and their children, in Europe, are literally slaves of toil and hunger, working hopelessly and aimlessly, looking forward to the grave as their first and only resting-place. The family bonds and relations barely exist, and that motive which in this land inspires the hours of toil—the hope of advancement, if not for parents, at least for the children—has little if any force. Here, then, do we find the pre-eminent advantage of our American protective policy. It protects the workingman and his family. It saves them from degradation and distress. It makes the family relation, in all its attractive qualities, possible. It elevates the wives and children of the workingman. It relieves them, or most of them, from the need of working for their daily bread. It makes home-life possible. It affords to children leisure for early education, and thus opens up to them endless opportunities. The rich and the middle class get some of the benefits of Protection. As compared with the poor and the working people, they get but little, and they would be nearly as well off under free trade, while the condition of the poor would become indescribably wretched. Our American workingmen who have never contrasted their condition with that of their competitors under low wages and insufficient work abroad, cannot, and do not, realize the perils of free trade. Let them read about their fellow-workmen on the other side of the water, or talk with one who has been forced to leave his native land by starvation wages and the hopeless destitution of his family, and they will comprehend the danger which now threatens them. … Workingmen have, then the greatest interest in the pending discussion [the debate over the legislation that became the McKinley Tariff Act of 1890] between Protection and Free Trade. Let them watch it, and see to it that no party and no combination of men or circumstances are permitted to overthrow or lower the barrier of Protection, which is the safeguard of their happiness for the present and of their hopes for the future.
Farmers and manufacturers have always been at odds over tariff policy. More than a century before social media made it easy to share an opinion with anyone willing to listen, individual citizens would sometimes print pamphlets in order to get their views heard. Albert Thayer, an opinionated farmer from Kansas, published in 1888 a 16-page pamphlet that included this:[45]
Tariff is a tax that takes hold of everything from the crown of your head to the soles of your feet; it taxes your hat, your coat, your vest, your breeches, your boots, your shoes, the tools you use, the food you eat, and to say that taxing a man from the top of his head to the sole of his boot is a benefit to him, is nothing else than absurdity.
Protection against what? Against injustice? No. Against fraud? No. Against violence? No. Against what then? Competition? Yes. Why competition is the life of trade and a public blessing while protection fosters monopoly, and monopoly is a public curse. So you want to use the Government to destroy a public blessing and create a public curse.
If Thayer were still alive to read the November 1915 issue of The Protectionist, what would he have thought about this report on a Home Market Club shindig?[46]
With fine music, stirring singing, contagious enthusiasm and excellent speeches, five hundred members of the Home Market Club thoroughly enjoyed the twentieth dinner of the Club which was given at the Copley-Plaza on the evening of September 29. It was a striking demonstration of the devotion to a club by men [What? No women!] whose aim is to build up home industries and the prosperity of this country rather than the prosperity of rival foreign manufacturers, foreign countries and foreign governments, and it was an encouraging indication that the issue of protection, which when properly presented to the people of this country has always been upheld, will again be one of the dominant issues of next year’s campaign and will be pressed home to the electorate by convincing arguments. [bracketed comment added]
The American Chemical Society, which has represented the interests of the U.S. chemical industry since 1876, published a “Washington Letter” editorial in the September 1920 edition of its monthly journal that excoriated certain politicians, most notably Senator George Moses of New Hampshire, who supported legislation intended to lower tariffs on dyes. The editorial—published only months after the end of the First World War—used extreme emotional rhetoric to argue that America’s national security was at risk because the legislation would aid Germany’s rebuilding of its chemical industries:[47]
Opposition of [Senator Moses’ special interest supporters] to a measure is rather a peculiar explanation for a member of the United States Senate to give for his efforts to defeat a measure so important in the national defense. … Just what an American dye industry means to the ordinary person can best be told by the mothers, wives and sweethearts of those immortal hero Americans who fell victims to the creeping, hideous gases which shriveled their very souls before it killed. These gases were the product of the German dye factories. Against the German chemical industry the only protection is a greater American industry.
The editorial board of the protectionist American Economist wrote in 1921 in a review of a book that advocated free trade that “concentrating on Free-Trade and developing anything industrial would be like telling a boob to concentrate on a leather shoe string to develop a tannery, or on a toothpick and watch it blossom forth into a lumber yard.”[48]
The economist James Laurence Laughlin wrote against protectionism in 1923:[49]
There are, of course, persons who honestly believe that without heavy protection our industries would be ruined, employment greatly reduced, and prosperity impossible. Those directly dependent on a duty for their very existence are protectionists by self-interest, and think the country owes them support whether or not the rest of the nation has to be bled that they may live.
In Tarifa: A Story of the Enthrallment and Robbery of a Great People, and a Suggested Method of Rescue, an opusculum published in 1925, a fellow named George Hall made his case against protectionism, and against tariffs in general:[50]
The tax is not on property accumulated, but on merchandise coming in. It is added cost on what we have to pay to satisfy our needs—the clothing, hats, shoes, household goods, glass and china tableware, tools of trade—whatever we need and cannot obtain in our Country, or find it in our interest to procure elsewhere. It is not a tax on what we have and has been protected by our Government, but on what we are getting because we are without it.
The tariff devised by Hamilton and his associates is an abuse that must be corrected. The plan is all wrong. It is the very opposite of what it should be.
It is a tax on hunger and want and misfortune and pain, and it should be on affluence and ease and comfort.
The laboring man’s coat is faded and threadbare and a new one is necessary. It is hard enough to find the means to pay the real value of the new garment, but he must add to the cost the tariff of about sixty-five per cent.
His tools of trade have grown dull and must be replaced by new ones; and he must add to their cost a tax of twenty to sixty per cent.
His limbs are crushed in the machinery of the factory where he works; the device that holds his broken bones in place, and every surgical appliance that is used in his healing are taxed at fifty-five per cent.
His wife breaks beneath her burden, and the plaster that soothes her aching back is taxed at twenty per cent.
George B. Roorbach, in an essay published in a 1932 edition of Foreign Affairs just as the Great Depression was worsening, argued that “national self-sufficiency is an idle dream.”[51] Evidently an optimistic man, Roorbach found it “impossible to visualize American business interests failing to participate in a large way in the future development of a dynamic world.”[52] But, he also warned of significant barriers to a successful global trading system “in a world gone tariff mad”—namely protectionist policies and the significant unpaid WWI war debts still owed to the United States.[53]
In Tariff in Government Policy, a speech published as a booklet by the American Tariff League in the weeks following the end of the Second World War, Harold Wickliffe Rose offered nothing but obfuscatory twaddle when he said:[54]
Evidently when it is argued that tariffs lead to economic warfare, one is thinking not of equitable tariffs. By an equitable tariff, we mean one that enables the domestic manufacture [sic] to compete at least on an equal basis in our market. Such a tariff is a stimulus to production, and, by making competition possible, is a stimulus to foreign trade. So much is said about tariff barriers that one might overlook the fact that the absence of tariff can be a definite barrier to our domestic producers. How little attention has been given to the position of our domestic producers in all this wave of interest in foreign trade! While talking lowering tariffs to prevent waging economic warfare, how much economic warfare of a more serious nature is being waged at home right now through strikes? What is being done to consider the producers and the public in this warfare?
Contemporaneously with Rose’s speech, Bidwell wrote against protectionism in Foreign Affairs, lamenting that “instead of reaching out for the useful, appetizing and beautiful things which foreigners are so eager to supply, we put up tariff walls to protect ourselves against prosperity and abundance.”[55]
These excerpts provide a taste of the decades-long tariff debate. Many more snapshots of similar rhetoric could have been included here, but these examples are sufficient to show how contentious and pervasive the debate was. Emotionally charged commentaries far outnumber practical solutions in this unending debate.[56]
Free Trade in a 21st Century Global Economy
There’s a time and a place when the conditions are favorable for certain social and economic policies to take root, and certainly protective policies played an important role (whether as weeds or flowers, we will never know) in America’s economic development until about 1930. Alternative policies might have shaped our history differently. Less emphasis on protection might have taken us down a more prosperous road—or it might not have. One may be willing, grudgingly, to give protectionism the benefit of the doubt in the eighteenth and nineteenth centuries; national economies were much more insular before 1900, which made it much easier, both morally and logically, to justify tariff walls. And because every action has repercussions, there’s no denying that the state of our twenty-first-century economy must be attributed to some degree to the butterfly effect of the historical protection of our infant industries.
But the body of empirical evidence we now have from duty reduction programs (like the thirty-plus years of NAFTA|USMCA data presented at the beginning of this article) offers incontrovertible vindication of free trade policies. Extreme protectionism is simply not a viable option—practically or politically—in the twenty-first century.[57] But those who support free trade can’t fall victim to hubris and flatly dismiss the concerns of those who advocate for moderate, targeted, short-term, politically neutral (if such an animal exists), and sensible protectionism intended to benefit the economy as a whole rather than just a handful of politically connected industries. As with most things in life, the best results usually come from the middle rather than the extremes.
Fallacies have been perpetuated on either side of the argument. One misunderstanding adopted by free trade advocates is that protectionism necessarily reduces employment; protection may, in fact, artificially redistribute jobs from productive enterprises—enterprises that live or die on the merits of their own innovation and business acumen—to less-productive enterprises that survive only with the beneficent assistance of governmental handouts, whether in the form of tariffs, quotas, subsidies, or any other public welfare. Artificial redistribution of labor (and all other resources) as a result of protection is wasteful and inefficient—and fails to honor the time-tested insights of Smith and Ricardo (and the more recent proponents of free markets like Joseph Schumpeter, Friedrich Hayek, and Milton Friedman). And yet protectionism endures, generally gaining more traction during times of lackluster economic growth; it is, therefore, important to encourage healthy and fact-based debate on both sides regardless of where the evidence predominantly seems to point. In a 2015 report on the protectionist measures adopted by countries that trade with the European Union, the European Commission found that from 2008–2015 there were 1,059 new protectionist measures implemented, while only 180 measures were eliminated.[58] In addition to increased general duty rates on certain products, these measures included antidumping and antisubsidy (countervailing) determinations, import-based fees, increased subsidies and other “export support measures” for domestic manufacturers, import minimum pricing requirements, import licensing regulations, local content requirements (including tighter origin thresholds for government procurement activities), and “behind-the-border” barriers like prohibitive tax policies or technical regulations (like recycling fees) tagged to certain products or activities. The report noted as a disturbing trend that the greatest number of restrictive trade measures were adopted by developing countries like the BRICs, Argentina, Indonesia, South Africa and Ukraine. Just as children learn bad habits from their parents, these developing countries have learned bad trade habits from the U.S., Canada, the EU, and the other developed countries.
What is a “foreign” company, anyway?
The paradigm for success in a global economy is clearly changing. A half century ago, back in the days of the Fab Four and the Space Race, or even as recently as the dissolution of the Soviet Union in the early 1990s, it was much easier to build effective trade barriers because the targets were clear and the effects could be reasonably anticipated and more easily segregated, but now the bright line that once stood between American economic interests and the interests of the rest of the world is less bright. But as a practical matter today, the policies of a sovereign nation like the United States are inherently at odds with globalization. Our domestic and foreign policy mindsets have always been—and, of course, will continue to be—to protect and to further American interests. There can be no question that this is a proper and necessary role of our government. But our policies must be implemented in a way that recognizes American economic interests are irrevocably married to the economic interests of all other countries, both friends and foes.
Today it’s nearly impossible to erect a trade barrier that doesn’t to some degree have a negative boomerang effect on workers and consumers.[59] Trade barriers have become increasingly anachronistic, created by nations with clear political and physical borders for a world in which businesses, even small businesses, now operate essentially as transnational borderless entities. Another intrinsic problem with trade barriers is that they’re typically implemented to address a precise moment in the transactional timeline—that is, the day when goods are granted entry into a country’s commerce. They’re not constructed with any foresight to their impact on downstream activities or with any consideration of contemporary supply chain practices. This is especially problematic for imports of intermediary goods that domestic manufacturers will use to produce further-advanced or finished goods. Take U.S. antidumping laws. For all the effort the goes into investigations of alleged dumping, antidumping measures don’t look beyond the first sale of goods into the U.S., the result being that we hit, say, Chinese steel with antidumping duties without concern for the extra costs a downstream U.S. manufacturer, wholesaler, retailer and ultimate consumer will be forced to bear. Once the steel enters the U.S. and is used to produce new goods, its origin becomes essentially invisible, as do the dumping duties—yet these duties remain forever baked into the cost of all ensuing activities using the steel, with the extra cost passed from one party to the next until the finished goods get to the ultimate consumer, who has no one else to pass the cost to. Antidumping remedies are frustratingly myopic, intended to protect so-called “injured” industries while ignoring any impact of dumping duties on the broader domestic economy.[60] The interests of the broader economy—in a word, consumers, whether the family next door or a company that buys intermediate inputs to support its business—would be better served by letting market forces decide an injured company’s fate. When a doctor treats a patient’s disease, he carefully considers how the cure will affect the patient—but far too frequently our trade policies are conceived only to satisfy superficial political interests, without any concern for the underlying damages inflicted on the economy.
A robust economy is dependent to a large extent upon the ability of a country (that is, its industries and entrepreneurs) to stay ahead of the competition in technology and scientific innovation.[61] In this century an increasing percentage of technology is developed offshore by both foreign-owned companies and by U.S. When the United States was unquestionably the leader in many fields of technological innovation, it was relatively easy to justify the building of tariff and export control walls. Not only did the rest of the world need us more than we needed them, but the economic distinction between “us” and “them” was much clearer than it is today. But the world of 2025 is not the same as the world of 1918 or 1945 or even 1991. Today, Toyota, Honda, BMW and other non-U.S. auto companies make cars in the U.S., employing tens of thousands of American workers in well-paying skilled jobs. Apple, the current face of American technological brilliance, makes iPhones in China and India (while their marketing campaign touts that iPhones are “designed in California”). According to a 2016 report in MIT Technology Review about Apple’s supply chain, Apple’s suppliers were spread out over 28 countries.[62] (This example calls into question our trade deficit statistics regarding U.S.-China trade because the data are based on finished-goods values aggregated from CF-7501s, even though the costs tied to most components don’t actually accrue to the Chinese economy.[63]) Korean tech giant Samsung is building a new chip fab in Texas while Idaho-based Micron has multiple facilities in Taiwan—but there’s a good chance that any chips, regardless of who makes them or where the factories are, are made using machines manufactured in the U.S. from U.S. technology. Why should our trade policies (both import and export) pick winners and losers by encouraging the success of some but seeking to punish others?[64] Your 401K portfolio probably includes several mutual funds, each of which includes dozens of global firms. Every trade barrier to which one of those firms has to devote time and money has a negative cumulative ripple effect on its stock price, which directly affects your personal bottom line. How is that good policy?
BMW, the German automaker, invested several billion dollars to build a state-of-the-art factory in the Spartanburg, South Carolina, area back in the mid-1990s. They employ thousands of American workers, and presumedly pay millions of dollars in taxes at the federal and local levels and in utilities and other essential services to run the factory. BMW’s investment significantly raised the standard of living in the Spartanburg region by pumping millions of dollars of wages and consumer spending into the local, state and national economy—and yet we force automakers like BMW to pay duty on many of the goods and raw materials it needs to support its operations in Spartanburg.
Airbus, the European aircraft consortium, employs more than 5,000 employees in production facilities in Alabama, Mississippi, and Florida. With more than one third of its feeder suppliers already in the United States, Airbus is reaping the benefits of supply chain efficiencies—and the U.S. communities and residents are stronger economically. The decision by Airbus to construct a U.S. plants was more than a little ironic because Airbus was the target of a complaint filed in 2004 (but still ongoing) with the WTO by Boeing and the U.S. government alleging that Airbus has been receiving illegal European subsidies since the 1960s.[65] Given the financial incentives Alabama, for example, offered to Airbus, it would have been interesting if the EU had complained to the WTO that Airbus was receiving illegal subsidies from the U.S. And it was reported by The Wall Street Journal that the idea for a U.S. factory was precipitated by the facts Airbus learned about the U.S. business environment during its defense of the subsidy allegations.[66] Airbus evidently saw an opportunity to take advantage of the same benefits that state governments like Alabama were giving to Boeing.
It’s become a cliché to say that the world is growing smaller, but this is certainly true from a trade integration perspective. Fifty years ago, an American small business typically focused its purchasing and sales efforts within its local, regional, or perhaps national marketplaces. But today the success of that same small business may be equally, if not more, reliant on building a global footprint that will allow it to maximize its offshore opportunities (remember: choices and access).[67] It can no longer be disputed that free trade forces an enterprise to operate at the top of its game, as efficiently and effectively as possible. It stimulates innovation and creates competition, and it wards off the laziness, inefficiency and complacency that can creep into our domestic industries if they’re insulated from the energy generated by global competition. But innovation and competition is obstructed when a country feeds its industries a diet of trade restrictions—although a moderate level of success might still be achieved, that success is nowhere near the heights that could be attained in an unfettered economy. Tariff barriers (and outdated export controls) that prevent the relatively free two-way flow of commerce, investment and technology discourage, if not smother, economic growth.
The U.S. was at the forefront of technological innovation during the twentieth century, but we can’t maintain our preeminent influence and leadership in this century from behind a wall of trade restrictions.[68] Were the U.S. to adopt a fear-driven, build-a-moat-around-the-castle mindset (as with America’s withdrawal from the Trans-Pacific Partnership) our economy will surely suffer while we watched the rest of the world reap the benefits of global opportunities. Policies that support isolationism and unwise protectionism are, today more than ever, antithetical to innovation and economic growth for any enterprise, and therefore ought to have no place in an increasingly intertwined global economy. Protectionism can take hold through direct action, like legislation or executive fiat (like the avalanche of executive orders issued since January 20), or by taking advantage of loopholes in existing laws or international obligations, or through the lost opportunities of inaction, like America’s failure of leadership at the Doha trade talks. But once implemented, trade restrictions invite retaliation and strangle investment opportunities—and they become so entrenched that the effort required to eliminate them typically is far greater than the effort to resist them in the first place.[69]
Government plays a critical, but all too often counter-productive, role in the promotion of economic growth. No matter how many laws a government implements to control or restrict global trade, its efforts will always cause disruption, will always lead to unintended consequences, or (at best) simply will be ineffective because a government—any government—cannot change the fundamental laws of capitalism, any more than it can change the laws of physics. Laws and regulations that unreasonably restrict trade will ultimately not succeed to an extent that serves the general good—but because the economy is by its very nature shrouded in a fog of complexity that prevents an immediately identifiable cause-and-effect event, we never realize that these supposedly well-intended trade restrictions really do far more harm than good. It is a sad but simple truth: a government addicted to trade restraints cannot imagine—cannot tolerate—a world without them. The political pressures to slide backward into protectionism, especially in difficult economic times, can be persuasive but must be resisted. The “ghosts of protectionism” is a term coined several years ago to remind us of the historical evidence of protectionist failures, and we must be smart enough to not allow these ghosts to haunt our twenty-first-century economy.
[1] Free trade refers not only to formal negotiated trade agreements but also in a generic sense to the general global environment of lower tariffs and the reduction of non-tariff restrictions.
[2] NAFTA was a controversial issue during the 1992 U.S. presidential campaign. Ross Perot’s outspoken opposition to NAFTA was one of the major planks in the platform of the Texas businessman’s unsuccessful presidential bid, and was largely responsible for the impressive one-fifth of the popular vote that Perot earned as a third-party “Reform” candidate.
[3] Data Source: U.S. Census Bureau, Foreign Trade Division, Data Dissemination Branch, Washington, DC. See: http://www.census.gov/foreign-trade/balance/index.html.
[4] An intrinsic incentive under NAFTA (and USMCA) that its advocates ought to bring out of the shadows is that FTAs implicitly encourage domestic sourcing in order to achieve stringent regional content thresholds for duty-free qualification.
[5] John M. Culbertson, The Folly of Free Trade, Harvard Business Review (Sept|Oct 1986), 122–128. Culbertson, who died in 2001, was Emeritus Professor of Economics at the University of Wisconsin at Madison.
[6] But we were still listening for this sound more than twenty years into NAFTA. The first ten years of NAFTA saw our trade with Mexico triple to over $230 billion, with nearly twenty million new jobs added to the U.S. workforce. While it cannot be disputed that some manufacturing jobs have been lost, the total number of jobs has undisputedly risen. This is a necessary and unavoidable consequence of any strong economy, regardless of the influence of an FTA.
[7] Andrew B. Bernard and J. Bradford Jensen, Firm Structure, Multinationals, and Manufacturing Plant Deaths, The Review of Economics and Statistics, Vol. LXXXIX, No. 2 (May 2007), 194. This empirical analysis of plant closures concluded that “domestic plants owned by U.S. multinationals [i.e., U.S.-based companies that have greater than ten percent of their assets outside of the U.S.] are far less likely to close than plants in purely domestic firms.” The authors also found that plants that produced goods for export were 6.8% less likely to close than plants that produced only for domestic consumption (but these findings did not specifically address the effect of FTAs on plant closures).
[8] According to Robert A. Pastor in The Future of North America: Replacing a Bad Neighbor Policy, Foreign Affairs, Vol. 87, No. 4 (July|August 2008), 93, the U.S. and Canada added, respectively, 27 million and 3 million new jobs between 1993 and 2007. Despite this, and a nearly two-thirds increase in American industrial output during the same period, “exit polls of Democrats voting in the Ohio primary on March 4, 2008, showed that 80 percent blamed trade for job losses.”
[9] Two works that probe the reasons we act the way we act are: Gordon W. Allport, The Nature of Prejudice, (Cambridge MA: Addison-Wesley Pub. Co., 1954); and Bryan Caplan, The Myth of the Rational Voter: Why Democracies Choose Bad Policies, (Princeton NJ: Princeton University Press, 2007).
[10] In the twenty-first century neither free trade, protectionism, nor isolationism would save an obsolete industry, like the manual typewriter industry.
[11] “The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. … The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1975), 81–86. Chapter VII is Schumpeter’s seminal essay, first published in 1942, on the evolutionary nature of creative destruction.
[12] If you can’t afford the time or tuition for an MBA, the next best option for business education is to read the annual shareholder letters of Amazon’s founder, Jeff Bezos. All of these letters (1997-2020) are collected here: https://quartr.com/insights/business-philosophy/collection-jeff-bezos-shareholder-letters.
[13] Lee Francis Lybarger, The Tariff: What It Is. How It Works. Whom It Benefits (The Platform, The Lyceum and Chautauqua Magazine, Chicago, 1914), 127–128.
[14] As Daniel Kahneman noted in Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), 301, the “brains of humans and other animals contain a mechanism that is designed to give priority to bad news.” Kahneman explains how people are hardwired with a survival instinct to heed negative data more than positive data. Thus, a life-enhancing opportunity can be ignored without serious consequences but an ignored threat can be deadly.
[15] A caveat to the theory is that the theoretical benefits of comparative advantage exist only when the parties’ production costs are different (which is almost always the case), but cost equality would not be a reason to avoid trade.
[16] For an insightful, if a bit dated and technical, study of the interplay between tariffs and comparative advantage, see: Ronald W. Jones, Comparative Advantage and the Theory of Tariffs: A Multi-Country, Multi-Commodity Model, The Review of Economic Studies, Vol. 28, No. 3 (June 1961), 161–175.
[17] Adam Smith wrote in 1776, in An Inquiry into the Nature and Causes of the Wealth of Nations, of “the invisible hand” that naturally steers economic activity toward efficiency and productivity, without the meddlesome diktats of central planning.
[18] I would even suggest that comparative advantage is instinctual. We humans are always looking for the most efficient use of our limited resources. Our ancestors from fifty thousand years ago knew, as a matter of survival, who in their clan were the better hunters and who were the better tool makers.
[19] There are few limits to the degree of specialization in a given profession. A medical doctor may be an endocrinologist; an auto repair shop may specialize in transmissions, or maybe in transmissions specifically for British sports cars from the 1960s; or a homebuilder might specialize in treehouses, like that treehouse guy on Animal Planet.
[20] The insights of Smith and Ricardo tell us that a specialist may not always be better at a given task than you are, but you may hire him anyway because the cost of hiring him is less than the cost of doing it yourself. A frequently cited example is a lawyer who’s a better typist than her secretary, but her time is better spent on providing legal advice to clients than typing briefs. Hiring a specialist could even mean something as simple as paying your kid an allowance to take out the garbage so that you can spend those five minutes on more productive (or more enjoyable) activities. You may be the best garbage-taker-outer in your family, but it’s a better economic decision to subcontract the job to your ten-year-old.
[21] In The Genesis of Capitalism and the Origins of Modernity (translated by James G. Colbert; New York: Telos Press, 1994), 86, Luciano Pellicani speaks of the inherent struggles between capitalism and the political elite. He discusses how some national economies are “imprisoned in the “cage” of immutable tradition and of the bureaucratic state.” [italics in original]
[22] Innovation is just as important here as it is when developing a new product or service. Take, for example, the concept called blockchain, the next step in the evolution of incorruptible electronic transaction recordation intended to ensure the validity of title and ownership claims for any type of property.
[23] Many papers on The Law Merchant, or Lex Mercatoria, are available, e.g., Peter T Leeson and Daniel J. Smith, The Law Merchant and International Trade, Foundation for Economic Freedom (April 21, 2011); Gralf-Peter Calliess, Lex mercatoria, Center for Transnational Studies (ZenTra), No. 52 (2015); or Emily Kadens, The Myth of the Customary Law Merchant, Texas Law Review, Vol. 90, No. 5 (2012).
[24] Merritt v. Welsh, 104 U.S. 694 (1882).
[25] Douglass C. North, Economic Performance Through Time, The American Economic Review, Vol. 84, No. 3. (June 1994), 361, which is a reprint of the lecture North delivered on December 9, 1993, when he received the Nobel Prize in Economics.
[26] But, physical borders can present unique cost and efficiency challenges. For example, landlocked countries like Mongolia or Nepal or Paraguay that cannot easily partake in ocean transportation are burdened with generally higher transportation costs.
[27] This isn’t a new argument: “Commerce between nations has the same essential character, as commerce between individuals, or between parts of the same nation. … And with regard to the internal trade of a country, in which the same rule would apply as between nations, do we ever speak of such an intercourse being prejudicial to one side because it is useful to the other? Do we ever hear that, because the intercourse between New York and Albany is advantageous to one of those places, it must therefore be ruinous to the other?” Daniel Webster, Speech of Mr. Webster upon the Tariff; delivered in the House of Representatives of the United States, April, 1824 (Washington, DC: Gales & Seaton, 1824), 22–23. Or: “Why are all these government regulations insisted upon merely for foreign trade and foreign importation, and not also for New York trade with New Orleans or Oregon?” Francis Lieber, Notes on Fallacies Peculiar to American Protectionists, or Chiefly Resorted to In America (New York: American Free Trade League, 1860), 19. Or yet another: “When driving bargains, do we not find the New Yorker as keen and as exacting with the Vermonter as he is with the Hollander? What cares he, in his personal gains, for political faith or nationality? Not a straw!” John H. Allen, The Tariff and Its Evils, or Protection Which Does Not Protect (New York: G.P. Putnam’s Sons, 1888), 17.
[28] Someone once said that politicians are like diapers because they both need changing regularly and for the same reason.
[29] Yes, certain standards, restrictions and guardrails are necessary to preserve our national security and economic health, but that’s a discussion for another article.
[30] See my recent article on the Smoot–Hawley Tariff Act of 1930.
[31] J. Schoenhof, The Destructive Influence of the Tariff upon Manufacture and Commerce and the Figures and Facts Relating Thereto (New York: G.P. Putnam’s Sons, 1883), 11-12. Published for the New York Free Trade Club. Schoenhof, who died in 1903, was a tariff and trade advisor in the administration of President Grover Cleveland, and later sat on the Board of General Appraisers. From Textile America, Vol. 1, No. 17 (August 7, 1897), 32: “Any one who knows Jacob Schoenhof must also know that in administering a tariff law he is not the man to be influenced by any consideration apart from the facts in the case.”
[32] Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement (New York: Harcourt, Inc., 1990), 49.
[33] William Graham Sumner, The Argument Against Protective Taxes in Collected Essays in Political and Social Science (New York: Henry Holt and Company, 1885), 66, 76.
[34] W.G. Sumner, Lectures on the History of Protection in the United States: the National Idea and the American System (New York: G.P. Putnam’s Sons, 1883), 9–10; published for the New York Free-Trade Club. Sumner was a pioneer in the nascent field of sociology.
[35] F.W. Taussig, The Tariff Debate of 1909, The Quarterly Journal of Economics, Vol. 24, No. 1 (November 1909), 6–7.
[36] H.L. Mencken, Minority Report (Baltimore: The Johns Hopkins University Press, 1997), 210 (Note 303).
[37] Any way we look at it, all forms of protectionism are at their core indirect subsidies to domestic companies. Subsidies are a tool used not only by one country against another; states or smaller political districts also use subsidies to attract jobs and investment. A recent study found that the annual subsidy expenditures by states, counties and cities are more than $80B. See: Ralph Ossa, A Quantitative Analysis of Subsidy Competition in the U.S., NBER Working Paper No. 20975 (Cambridge MA: Nat’l Bureau of Economic Research, February 2015), 2.
[38] Reciprocal Trade Agreements Act of 1934, Pub. L. 73–316, 48 Stat. 943 (June 12, 1934).
[39] If one thinks “the protectionist is apt to be simply an ignorant[,] apathetic and unintelligent person, one would be sadly mistaken.” MIT researchers Ithiel de Sola Pool and Raymond A. Bauer, Domestic and International Influences on Attitudes Toward Foreign Economic Policy (April 15, 1955). This paper, which explored the post-WWII attitudes of Americans regarding free trade and protectionism, was delivered at a meeting of the American Association for Public Opinion Research.
[40] Ida M. Tarbell, The Tariff in Our Times (New York: The Macmillan Company, 1911), 331. Tarbell lived from 1857 to 1944. In my view, this book, written with the emotional intensity common to muckraker journalism, and Frank Taussig’s The Tariff History of the United States, which in contrast was written in the matter-of-fact style of a Harvard professor and former government bureaucrat, are two of the three essential books of their era (Henry George’s Protection or Free Trade is the other) that one should read to understand the ethos and history of American tariff policy. While I find much to nitpick in Tarbell’s opinions—notably her demonization of John D. Rockefeller’s character, in The History of the Standard Oil Company and then in John D. Rockefeller: A Character Study, both published in McClure’s Magazine between 1902 and 1905—her ability to engage a reader cannot be questioned. In A Character Study (Vol. XXV, No. 4, August 1905, 397), for example, she wrote: “He is not a great man, not a human man. He is a machine—a money machine—stripped by his overwhelming passion of greed of every quality which makes a man worthy of citizenship. He has not made good. He cannot make good. It is not in him. He has nothing the aspiring world needs. On the contrary, that for which he does stand is a menace to our free development not only or chiefly our free development in commerce, but, vastly more important, our free development in citizenship and in morals.”
[41] Ibid, 363–364.
[42] Today’s income tax disagreements were yesterday’s tariff debates.
[43] The APTL was founded in 1885, but “protective” was later dropped from the name in an effort to broaden its base. By the way, the reader must avoid falling into the trap of equating the ideologies of the Republican and Democratic parties of the 21st century to those of their 19th century and early 20th century namesakes. Back then, the Republicans generally favored subsidies and higher taxes while the Democrats were free-traders. Same names but fundamentally different animals.
[44] Workingmen and the Tariff (Pamphlet No. 17) (New York: The American Protective Tariff League, 1888).
[45] Albert F. Thayer, Tariff Truths (Maple Hill, KS: self-published, 1888). Pamphlets were the nineteenth-century version of blogs.
[46] Twentieth Dinner of the Home Market Club a Rousing Success, The Protectionist, Vol. XXVII, No. 319 (November, 1915), 1. The Protectionist billed itself as “A Monthly Magazine of Political Science and Industrial Progress”.
[47] J.B. McDonnell, “Washington Letter” column, The Journal of Industrial and Engineering Chemistry (Vol. 12, No. 9, September 1, 1920), 927.
[48] American Economist, Vol. LXVII, No. 16 (April 22, 1921), 7. As its masthead proclaimed—“Devoted to the Protection of American Labor and Industries”—the aim of this weekly publication of the APTL was to discredit free trade principles.
[49] J. Laurence Laughlin, The Tariff of Exaggerations, The North American Review, Vol. 217, No. 807 (February 1923), 10.
[50] Geo. W. Hall, Tarifa: A Story of the Enthrallment and Robbery of a Great People, and a Suggested Method of Rescue (Baltimore: Waverly Press, 1925), 13–15.
[51] G.B. Roorbach, Foreign Trade or Isolation?, Foreign Affairs (Vol. 11, No. 1, October 1932), 49. Prof. Roorbach taught foreign trade at Harvard University. (Foreign Affairs continues to be a preeminent journal of insightful commentaries on various global issues, including trade. See www.foreignaffairs.com.)
[52] Ibid.
[53] Ibid.
[54] H. Wickliffe Rose, Tariff In Government Policy (Publication No. 115) (New York: The American Tariff League, October 1945). Rose served a term as president of the League. This publication is apparently a transcript of a speech he gave to a League gathering at the Commodore Hotel in New York on October 18, 1945.
[55] Percy W. Bidwell, Imports in the American Economy, Foreign Affairs (Vol. 24, No. 1, October 1945), 98.
[56] More evidence that this is not a new debate. Nearly a century ago, George Crompton, in The Tariff: An Interpretation of a Bewildering Problem (New York: MacMillan, 1927), gave us a feel for the longevity of the debate when he wrote “among the [continuing controversies] is the discussion concerning the relative merits of free trade and protection. Now several hundred years old, this question is still debated very much as it has always been …”
[57] Were Culbertson and other long-dead protectionists able to see our twenty-first-century economy, it’s interesting to ponder what they’d think about the state of globalization.
[58] Report from the Commission to the Council and the European Parliament on Trade and Investment Barriers and Protectionist Trends, 1 July 2014–31 December 2015, (European Commission Directorate-General for Trade), 4. See https://www.ipex.eu/IPEXL-WEB/document/COM-2016-0406.
[59] For many industries, non-tariff regulatory barriers can be just as onerous as a tariff obligation. It’s difficult for American automakers, for example, to sell cars and trucks into some markets because of differing safety and environmental regulations. Food and beverage makers, as well as drug and medicine manufacturers, also must deal with a plethora of inconsistent product safety rules that add enormous costs to transnational trade—costs that inevitably find their way into consumers’ wallets.
[60] Even if a U.S. manufacturer buys its steel from a U.S. source rather than from China, the ripple effect of the dumping duties on the Chinese steel will cause higher prices and will reduce choices across the entire steel industry.
[61] Although his insights were published a half-century ago, Raymond Vernon wrote that in free-market developed countries “the search for knowledge is an inseparable part of the [entrepreneurial] decision-making process and that relative ease of access to knowledge can profoundly affect the outcome” of production decisions. Raymond Vernon, International Investment and International Trade in the Product Cycle, The Quarterly Journal of Economics, Vol. 80, No. 2 (May, 1966), 192.
[62] Konstantin Kakaes, The All-American iPhone, MIT Technology Review (July-August 2016). See https://www.technologyreview.com/2016/06/09/159456/the-all-american-iphone/. The efficiencies of modern supply chain infrastructures (like Apple’s) simply aren’t compatible with protectionist policies. If we were to look at any successful twenty-first century supply chain, whether for a small- or medium-sized manufacturer or for global giants like Volkswagen or Samsung, we’d find that a typical product contains raw materials, semi-finished components, technology, labor and financial investment that originated in multiple countries (and which, by the way, helps to keep trade compliance professionals gainfully employed).
[63] See my recent article, America’s Misundertood Trade Deficit.
[64] To be fair, the WTO’s Information Technology Agreement (ITA), which was implemented in 1997, has caused import tariffs to be reduced on certain high-tech products, but complex export control restrictions remain a significant barrier to open trade.
[65] See WTO Summary of Dispute DS316, updated 6 June 2012, at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm. See also DS347.
[66] Daniel Michaels, Jon Ostrower and David Pearson, Airbus’s New Push: Made in The U.S.A., The Wall Street Journal (July 3, 2012).
[67] On a personal note, my daughter started a successful small business that relies heavily on her relationships with vendors in India.
[68] Beyond the dangers of unwise trade restrictions, the U.S. also needs to address the anti-business structure of corporate tax laws. Billions of dollars of profits earned in foreign markets by U.S. companies is parked offshore, unable to be reinvested into the American economy. These companies have little incentive to bring these profits home because doing so would trigger a massive tax bill from the IRS. As well, the practice of inversion (moving a U.S. company’s headquarters offshore to avoid onerous corporate taxes) has recently been in the public eye. Walgreens announced in 2014 that it planned to relocate its headquarters to Switzerland but then changed its mind, forgoing to its shareholders dismay the several billion dollars in tax savings the move would have generated. Shortly afterwards, Burger King announced it was buying Tim Hortons, the Canadian coffeeshop chain, and would be moving its headquarters to Canada. A company that chooses inversion is painted by the media as dastardly and un-American, but a company’s fiduciary obligation to its shareholders (or ownership, if privately held) must take priority. If you or I own stock in Burger King (whether directly or in a mutual fund), and Burger King can earn greater profits through the legal practice of inversion, why is it un-American?
[69] One long-entrenched barrier to trade is the Merchant Marine Act of 1920 (more commonly known as the Jones Act), Pub. L. 66–261, 41 Stat. 988 (June 5, 1920), which protects American cabotage by requiring that cargo shipments between two U.S. ports must be carried on U.S.-owned and -operated vessels, regardless of whether it inflicts harm on U.S. interests in the form of higher transportation costs and logistical inefficiencies. (And no, the “regardless” clause is not part of the law.) See specifically 46 U.S.C. § 55102:
… a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel—
(1) is wholly owned by citizens of the United States for purposes of engaging in the coastwise trade ….
