A neon bridge light near Trenton, N.J., boasts, “Trenton Makes, the World Takes.” Ironically, Trenton’s industrial glory is long gone, and as N.J.’s capitol, Trenton’s biggest employer is the industry of government.
American manufacturers have responded to foreign competition by automating and by offshoring plants to find cheaper labor. Protectionism and tariffs haven’t been on the table in decades.
But American workers are losing patience. Many welcome the new protectionism proposed by President-elect Donald Trump, exemplified by his choice for trade negotiator.
Before income taxes, tariffs paid the bills
So called Liberal Republicans in the 1870s, for example, President Ulysses Grant, believed in small government, ending Reconstruction and keeping protective tariffs. “Liberal” had a very different meaning at that time.
Income taxes were still decades away. Small government was possible because selling public land was a major source of federal revenue.
In the age of big business, a.k.a. the Gilded Age, to be Republican was to support protective tariffs. Before income tax began in 1913, the federal government supported itself mainly from excise taxes on alcohol and other luxuries and also from trade tariffs.
Trade tariffs were connected to patriotism and national pride. Americans’ former oppressor, Great Britain, was pro free trade, and the her former colonies opposed it. Tariffs protected farmers and ranchers from Argentinian competition, and American lumber and coal from Canadian products.
Democrats, on the other hand, argued that the wealthy business class was the most helped by the tariffs, and they raised prices for the general public.
Two Republicans in the late 19th century became president on pro-tariff platforms. In 1888, Benjamin Harrison took the White House from Democrat Grover Cleveland by running a pro-tariff campaign, although Cleveland won the popular vote. Republican William McKinley had a tariff named after him in 1890, the McKinley Tariff.
Tariffs divided Democrats in the Midwest from Republican protectionists in the Northeast and Mid-Atlantic. Today we see a similar split between factory workers in the Upper Midwest and free-traders on the coasts who work in global corporations.
Smoot-Hawley Tariff blamed for length of Great Depression
Former businessman President Herbert Hoover had a soft spot for suffering farmers, hurting after the collapse of crop prices of the Great Depression. Hoover signed the Smoot-Hawley Tariff Act of 1930, raising tariffs an average of 25-50 percent to bolster agricultural markets. Industry and labor sought and got protections too.
When other countries retaliated with their own trade barriers, U.S. exports lost billions of dollars over a four-year span, according to Commerce Department statistics. That decade gave us the Dust Bowl and 25 percent unemployment. By 1938 unemployment was worse than 1931.
History shows that trade wars have painful outcomes.
Will protectionism lead to a repeat of 1929?
What’s the problem with protectionism? It comes back to basic macroeconomics. Nations cannot produce everything they need cheaply. They want to sell their products at the highest rates they can and buy things for the lowest cost. It makes financial sense to buy from established producers instead.
Protectionism forces people to buy inefficiently produced, ie expensive, goods.
More than 1,000 economists had petitioned Hoover to not raise tariffs. Similar protestations are coming in to Donald Trump, who is suggesting a 35 percent tariff against Chinese goods.
Everyone benefits from the lower prices of cheap foreign imports but workers in highly competitive industries often lose. Industries can relocate, their workers cannot.
“America First” loses out to free trade and globalization
Republicans in the 20th century gradually came to support free trade, global markets and an interventionist foreign policy. Ultra conservative Barry Goldwater, a free-trader and the Republican nominee in 1964, exemplified this trend.
Populist Pat Buchanan and his “America First” campaign was a throwback to Charles Lindbergh’s populism. The former McLaughlin Group commentator’s short-lived presidential campaigns were also a precursor of Trump’s populist message on trade and immigration. Buchanan made two unsuccessful presidential bids in 1992 and 1996.
Bloomberg News astutely reported that: “Trump sensed that the time was ripe for a revival of the Old Right, despite its many liabilities. He understood that the bipartisan consensus behind free trade, open-door immigration and global institutions and treaties had left many voters resentful and disaffected.”
Are there alternatives?
Workers being displaced by globalization and computer automation isn’t unique to the US. In Germany, manufacturers develop public/private partnerships that maximize innovation. The Obama administration set up Manufacturing.gov to emulate the German model. Retraining displaced workers is also a solution, though this is easier to declare than to accomplish.
Those who feel they are getting a raw (trade) deal with agreements such as NAFTA, signed by President H.W. Bush, helped elect Trump.
Now we’ll see if Trump can a) get protectionism through a Republican Congress, and b) make it work for America.
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