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The Rise of American Protectionism
The wedge issue of the 2016 primary campaign is the rising hostility to free trade—and, specifically, to the Trans-Pacific Partnership. On the Republican side, establishment candidates like Jeb Bush, Scott Walker, and Marco Rubio have failed or fallen behind, while Donald Trump maintains a commanding lead going into Florida and Ohio thanks, in large part, to his protectionist rhetoric. On the Democratic side, Hillary Clinton has been veering leftward to fight off a determined challenge from Vermont’s democratic socialist Bernie Sanders, another unapologetic protectionist.
There are of course major difference between the insidious Trump and buffoonish Sanders. The former, for example, favors low taxes and the latter confiscatory ones. Still, the real selling point of each boils down to one issue: In the indecorous language of the pollster, Pat Caddell, Americans feel “they have been screwed” by free trade. Caddell writes as if this virulent falsehood is an undisputed fact. What is undisputed, however, is that Adam Smith’s defense of free trade is in retreat as protectionism becomes the common thread across the both political parties. It is as though the economic unwisdom of the 1930 Smoot-Hawley Tariff Act is back. The question is why protectionism is having a political moment.
One answer is that things have not gone well in the United States. Standards of living have been static at best, and people feel economically insecure. In this environment, it is easy to blame the obvious culprits, like the tide of imports and the systematic movement of American jobs overseas to locations where the regulatory environment is more favorable and where the cost of labor is cheaper.
But putting the story in this fashion conceals the key benefit of free trade. Free trade offers an uncompromising indictment of, and a powerful corrective for, America’s unsound economic policies. Private investors have been voting with their feet in response to such policies. Simply put, the reason that local businesses outsource from the United States is the same reason why foreign businesses are reluctant to expand operations here. Our regulatory and labor environment is hostile to economic growth and there are no signs of that abating anytime soon. The United States has slipped to eleventh place on the Heritage Organization’s 2016 Index of Economic Freedom. And it is not just because other nations have moved up. It is also because the steady decline in freedom and productivity inside the United States has continued apace. Ironically, the strong likelihood that the next American president will expand protectionist practices will only make matters worse: firms, both foreign and domestic, are more reluctant to invest in the United States, and the risk of a trade war by other countries such as Mexico is a live possibility, especially if Trump imposes high tariffs on automobiles made there for the American market.
The great advantage of a free trade policy is that it both reduces these political risks and makes it impossible to conceal these glaring structural defects from the world. And once they are recognized at home, free trade gives the federal government and the individual states strong incentives to clean up their act so that they can once again be attractive to foreign investment. There is, moreover, only one way for that cleanup to proceed. The United States must reduce the drag that its regulations impose on all businesses that operate within its borders, which means rooting out the various forms of monopoly power, like unions, that can only survive if protected by state law.
This point explains why the American labor movement has historically opposed free trade. The essence of unionism is, and always will be, the acquisition of monopoly power. There is no way for a union to obtain that monopoly power in the marketplace. It can only secure it through legislation. The first step in that process was the exemption of unions from the antitrust laws under Section 6 of the Clayton Act of 1914. The second major step was the legitimation of collective bargaining under the National Labor Relations Act of 1935, which gave the union the exclusive bargaining rights against the firm once it was successful in a union election. These major statutory benefits strengthened private sector unions and imposed inefficiencies on unionized firms. This, in turn, opened the field for new firms, like the Japanese automobile companies, to organize outside the union envelope. In response, labor’s strategy went one step further. It pushed hard on trade and tariff barriers to keep out foreign imports, and exerted political influence to encourage local zoning boards to exclude new businesses that do not use union labor. Add to these issues the aggressive rise of minimum wage laws and other mandates like Obamacare and family leave statutes, and you construct a regulatory fortress that defeats the corrective forces of free trade and renders the nation less economically resilient and productive than before.
It is easy to say that people are “screwed” by free trade if you only look at the stories of those individuals who lose their jobs. It is much more difficult to make that case after taking into account the simple but powerful truth that overall levels of profitability and wealth increase under free trade. The short-term relief that targeted groups get from protectionist measures mask the larger inefficiencies that slow down the rate of growth. Despite what the Democrats think, transfer programs are no substitute for growth. Indeed, the imposition of new taxes without return benefits on the firms taxed only depresses the rate of return on investment further, which will necessarily compound the problem.
There is, however, a powerful way to see that free trade in international markets is not the villain. It is to look at trade and the competition for business between states. This point was missed by Time’s trade writer Rana Foroohar. She starts off correctly by noting that globalization and free trade do increase global wealth and prosperity. But she then adds this unwise caveat: “But they have also increased the wealth divide within countries, in part because these forces created concentrated groups of economic losers in specific parts of our country,” including the Midwestern Rust Belt, which gave Trump and Sanders the opening to power themselves to their recent victories in Michigan.
On this last point, Foroohar’s narrative goes badly astray. The Rust Belt states have been hit hard because they have been badly governed. They lose much of their business to other states that are better governed. Just look at the internal migration of people and businesses across state lines within the United States—changes that cannot be attributed to the supposedly malevolent influence of foreign trade on domestic trade. It can, however, be attributed to differences in the business climate across the states. The careful study by the Small Business Enterprise Council reveals a marked difference between low-ranking states like California (50), New Jersey (49), and New York (45) and high-ranking ones like South Dakota (1), Nevada (2), and Texas (3). It is wrong to dismiss these key differences, and to think that the decline in badly governed states is but a foretaste of what will happen across the board if free trade is allowed to run its course.
These population shifts matter. Before California turned leftward, it was a magnet that drew huge numbers of people from New York into its borders. Now, it is places like Texas that are experiencing population growth. States like Illinois, New Jersey, and New York, all of which are under fierce financial pressure, are also the victims of outward migration. When it comes to the loss of manufacturing jobs—a big symbolic issue for people like Trump and Sanders—it is states like Illinois, as the Illinois Policy Center reminds us, that consistently lose out to Indiana, Michigan, and Wisconsin, which have recently repealed their right-to-work laws, and which have sharply lower workers’ compensation rates. Strong union pressures block intelligent internal reform as the economic bleeding continues.
At this point, it is necessary to clarify once again the economic case for competition: The interplay of market forces tends to lead to the most efficient allocation of scarce resources. The creation of a monopoly raises prices over marginal costs by blocking beneficial trades, reducing firm formation, and diminishing innovation. The forces of competition are relentless in that they let no individual keep a lock on their current economic position. But that is exactly as it should be. American agriculture has long suffered on the view that farmers are entitled to guaranteed prices for their crops no matter what the conditions of supply and demand may be. The imposition of rent control and rent stabilization in certain key real estate markets like New York City drives up the costs of housing, including for people from outside the city who have no voice in local politics. The parties whose rights are vested celebrate the stability that government regulation brings into their lives. But they blissfully ignore the higher rates of uncertainty that their actions place on others who have fewer market opportunities for housing and jobs now that the incumbents have sewn up their protected positions.
The great challenge in this area is to ask whether there is some way to cushion the blow when the various legal protections are no longer made available to groups that have come to rely on them. Some people argue that displaced workers should receive job training programs or cash payments to ease their transition. But the former never work, and there is sensible resistance to the latter. And we never engage in these programs for loss of jobs from one state to another. There is, indeed, a third way to deal with this problem, which is not to assume that low rates of growth are a fixed fact of nature when they need not be. The best protection for the displaced tenant and worker is an open economy that offers multiple options for new housing and new jobs. But that won’t happen so long as we have national, state, and local policies that are protectionist to the core.
There you have it. The great bipartisan tragedy of the 2016 election is that Trump and Sanders want to double-down on the failed policies that have brought us to our current impasse. So long as economic discourse is controlled by economic know-nothings, prospects for economic improvement will remain bleak.
© 2016 by the Board of Trustees of Leland Stanford Junior University
Published in Economics, Law
Only quibble: One does not have to be hostile to free trade in order to be skeptical about the Trans-Pacific Partnership. There are free trade advocates who aren’t yet sold on the TPP.
Opposing the TPP is not necessarily the equivalent of supporting a new Smoot-Hawtley.
Agreed.
To elaborate, there is free trade and then there is unfree trade sold as “free trade” but largely one-way sets of restrictions against US producers in high productivity/profit industries.
As pointed out above, having seen effects of bogus free trade, people are skeptical about any new “free trade” proposal.
It’s like border enforcement/amnesty: fool me once, shame on you; fool me twice, shame on me; try to fool me the third time, go perform an act on yourself that should be illegal if not for Justice Kennedy!
Thus, here’s another situation where the establishment is being both disingenuous and stupid.
Trump’s arguments have holes. The US does not have a comparative advantage in mobile phone production, so any policy aiming to bring that to the US will fail. Plus, the production is a low productivity component of the overall chain.
The US has advantages in motor vehicle design and production, aircraft design and production, film/TV production, medicine, etc. These have been high productivity/profit industries and countries like China have trade barriers in order to capture these industries.
Most of Trump’s voters do not know of “comparative advantage” and “productivity”, but hey have an intuitive feel that something is not right. Disingenuous lecturing of them on behalf of bogus “free trade” will do you no good and will only harm prospects of achieving truer free trade.
Presumably, free trade does result in more rapid creative destruction in less globally competitive firms and industries. In theory, the same economic freedoms that apply to trade would allow for new growth in more competitive sectors. But I suspect we instead maintained a regulatory and tax structure designed for a static, 1950s economy that made that creative response harder to effect.
In the late 1800s, when farm machines began pushing workers out of agriculture, it was not a systemic employment problem because the displaced could find work in the cities that made the machines and many more products.
We did not have an alternative in place when traditional assembly line and other blue collar jobs disappeared at the end of the 20th century. I am not sure what that Plan B policy should have been.
Now how do we get that into a sound bite and bumper sticker. One point however, there is a difference between growth on the one hand and adjustment on the other. They are tightly related but different. When the disruptive trade, whether domestic or foreign is driven by new and challenging technologies, the displaced may not be retrainable for the growing edge of the economy. While our trade adjustment assistance and retraining programs never work for the same reasons most government programs don’t work, there is one other reason. those first to be let go are not the most likely to be retrained for new business, new technologies. Those who are most trainable are the last to go or go early because they pay attention. They’re younger or repositories of technique. These people need to be pulled out of dying industries and moved to growing ones. The problem is that the government cannot know who they are nor where there will be growth. Individuals running new companies and young individuals working in dying industries know some of whats going on, but most just emerge and we know it only after the fact when it has succeeded. It’s called market adjustment and it happens if it’s easy to move, easy to get retrained, easy to start a new business, and all have access to new types of training and young people come into the work force prepared to engage in life long learning.
There is a pretty interesting NYT article on this very topic today.
http://www.nytimes.com/2016/03/16/business/economy/on-trade-angry-voters-have-a-point.html?_r=0
Judging by the history of economic policy Plan Bs, the plan B should have been not to have one. One advantage of having a ponderous, fumble-witted bureaucracy: we are not current supplying an ungrateful world with below-cost steel. Or struggling mightily to get into tomorrow’s low-margin endeavors. Straying beyond the usual Whig prescriptions (education, U-Hauls, sparing and lubricated regulation) just don’t pay.
No, no, no. If that 10 year Chinese girl sewing tee shirts in a sweatshop hadn’t stolen my job, I would be making a nice middle class living right now!
As I understand Trump’s policies, he and Sanders both seem to be steering us to a vengeance-based economy. Just two different flavors.
I’ve been a long time free trader but have been having doubts about it the last couple of years. Can someone show me the statistics where (a) America has had a net plus by free trade and (b) if so how much of the that net plus has filtered down to working level people.
In theory, if all the manufacturing is being done over seas, then we are left with high paying white collar jobs and low paying service jobs. How have the white collar jobs have we gained with their real dollar take home increase and how many low collar jobs have been gained with their real dollar net losses. Someone is losing out. I just don’t know if the net is positive or not.
I’m not being cynical. I really want to explore this issue. If free trade were so wonderful, then how come Americans haven’t increased in real dollars since about 2000?
What about the worker in a Chinese car factory making copies of US cars that sell for more than the real thing does in the US? Clearly this has deprived actual and potential US auto workers of nice middle class livings.
Same with movies.
Free trade, open immigration, weaker unions, business tax-cuts and “reforming” entitlements like Social Security and Medicare.
Now there’s an obvious winning political formula for Republicans, Professor.
Throw in more war in the Middle East and you can even put a name on it:
Bush.
That was excellent. I’m becoming convinced that free trade is not a net plus.
I’ll never support a protectionist party.
What could possibly be wrong with the policy that gave us this?
Why, think of how cheap plastic clogs and cargo shorts are at Target these days. And that Iphone – couldn’t live without that, could you?
Now get back to driving your truck or making coffee for people who are good with words and figures, you bigoted xenophobic Neanderthal.
“But Freesmith, that trade deficit stuff is misleading. After all, I have a trade deficit every year with my grocer and my dry cleaner, but that’s no problem.”
Sure, that’s no problem – as long as you have a larger trade surplus with your employer or with the customers of your business. If you don’t, if instead you are spending more at the grocer, the dry cleaner’s and the bank for your mortgage than you are taking in from selling your labor, then it won’t be long before you don’t have a house, clothes or food.
That’s what a trade deficit does.
When it comes to election time, tales of sob stories of real humans losing their jobs is pretty powerful. Especially when the counter is academics or rich people talking about how free trade is good for everyone. They frame it in much the same way as they say open borders is good for everyone. Too many people see examples in their own lives where it is not good for someone they know. Then they tune out the distant voices that say it’s all sweetness and light.
That main problem is that the politicians tell people that the economy is recovering and growing. The people don’t feel it. Obama says we are at peace. The people don’t feel it. Obama says the Iran Nuclear deal is awesome. The people don’t feel it. Everyone says open borders and mass immigrationand diversity and multiculturalism is good. The people don’t feel it when they go to their clogged ER in an increasingly “Press 2 for english” world. So is it any wonder that lots of people think that the ruling class is constantly lying to them and want something different?
All the manufacturing is not being done overseas. Manufacturing output in the US is at an all time high. Look it up. It’s just that it has become so highly automated that the manufacturing sector doesn’t employ as many workers.
Yeah, the roads around here are just jammed with Chinese cars. Let’s slap a tariff on those things and keep them out of the country. That ought to work.
You and me both.
You are suffering delusions.
The roads in China are jammed with Chinese cars, including various degrees of knockoffs of American and other civilized world cars. In an actual free trade world, they would be jammed with American and European cars. It is delusional to continue to ignore this.
Your next delusion is the obsession that when someone bans one of our products, we can only retaliate by banning that same product. That is error. The general principle under GATT is that we can impose a retaliatory tariff on different goods of like effect.
Linking these two, consider the example of Japan. For decades they barred American cars and built their own auto industry. Eventually they were in a position to compete/outcompete us in the US and in third countries, all while enjoying a protected home market. By that time, imposing retaliatory barriers was too late.
It may be almost too late with China. We are seeing a number of Chinese made cars coming into the US. The majority Chinese-owned GM joint venture is sending Chinese made Buicks to the US. They are doing this because there is only enough worldwide demand for one plant and Chinese barriers require that to be in China.
I have addressed this all before and you seem to ignore it.
ctlaw,
I see nothing wrong in Chinese companies selling Chinese cars to Chinese people in their own country. If they are violating American or European patents, then I’m fine with taking action to address that specific problem, but that is not what any of the protectionist politicians are talking about. But let’s just say that we had some kind of moral or legal right to force China to buy all their cars from American companies. How, exactly, would you do that?
One of his most important points is that free trade lets nations know when their governments are seriously harming their economies. Mancur Olsen puts it at the forefront of avoiding decline in “The Rise and Decline of Nations”. The decline that both Epstein and Olsen address are products of rent seekers, special interests, all the modern guilds. Protectionism is a way for the rent seekers to extend their strangle hold on the economy. But there are other matters of fundamental importance not addressed in the article or the debate. The US provide’s the world’s intervention and trading currency so it cannot devalue, it must be passive. Other countries suffer balance of payments deterioration when they spend too much, extract too many rents, centralize and they suffer international financial crises if they don’t stop harmful policies. The US didn’t face this constraint so rent seekers enjoyed an unlimited overdraft facility called Keynesian economics, social spending or progressive policies in general and an expansive foreign policy. This enabled the dollar to remain overvalued, opened us to predatory trade practices which by another name was export led growth. All of Asia, (Singapore and Hong Kong exceptions) followed export led growth. It is not a free trade policy and we have never figured out how to deal with it. It’s time we did, but it’s not to be undertaken lightly nor by people who have no understanding of all of the issues involved nor of the desirable goals.
Can some one correct me here if I am wrong but this is how I have been seeing trade deals lately.
First, our blue collar labor market became artificially cost prohibitive sometime during the late 80s (that’s my rough estimate considering the geopolitical realities of the Cold War affecting labor markets in more serious ways). So companies and the politicians who need big time campaign donations cooked up a plan that would allow US companies to manufacture goods that could otherwise be manufactured here, but at a tremendously low cost, and then have those goods shipped here to the States without threat of a tariff.
I can recall as a kid things being made in Taiwan and in Japan causing a huge kurfuffle among the labor unions. Toward the late 90s that seemed to change to China and Thailand. I shop at Jos. A. Bank frequently now and their clothes have made in Bangladesh or made in Haiti. So either Jos A. Bank either “owns” the labor in these countries and is able to bring the clothes into the States duty free or Jos A. Bank purchases the textiles at a tremendously discounted price because of low labor costs and zero tariffs. Either way there is something to this supposes “populist” outcry over free trade being bad for American workers.
Finally, if we predominantly agree that college isn’t for everyone, yet we continue to advocate free trade policies, what are the otherwise blue collar workers to do?
Robert, you don’t need a plan, or politicians, or campaign contributions, or anything, in order for cheap labor to underbid expensive labor. That happens all by itself. The government can step in and override the market – pick winners and losers, and protect the jobs of certain workers. If you believe in markets at all, you have to recognize that such government intervention is a bad thing. First, the government’s picks are always wrong. Second, the benefit to the winners (in this case, workers in inefficient industries) are always outweighed by the costs on the losers (in this case to consumers and workers in more efficient industries).
Sweatshop jobs are just going to migrate to places where people will work for sweatshop wages. They just are. Tariffs won’t stop it. Centrally planned economies won’t stop it.
That issue has nothing to do with free trade. There are lots of blue collar jobs – well paying jobs – going begging. We have a shortage of mechanics, technicians, construction tradesmen, health care workers, plumbers for God’s sake. Lots of service jobs. Ask any employer of blue collar workers, and they will tell you that their biggest headache is trying to find reliable, qualified workers.
Learn a trade. There is a severe shortage of plumbers, electricians, mechanics, technicians, equipment operators, etc. Bring back the trade schools.
I stopped reading here. By stomping on state law at the federal level we’re just going to make the problem worse, even if the state laws getting stomped on are bad ones. Substituting monopoly power at the federal level for monopoly power at the state level is not an improvement.
Where do you get that? I question whether there are such shortages.
Why?
And by American car do you mean:
.
The thing is, given free trade an American worker producing goods in direct competition with imports from China needs to be 50 times as productive as a Chinese worker to earn a salary that was 50 times as much. And there’s nothing intrinsic about that efficiency.
I can see the value for a society in subsidising domestic production through tarrif or non-tarrif barriers, but that’s what it boils down to.
I acknowledge that. That is part of the equation. But there is still a dramatic trade inbalance, as Freesmith points out in #14 above. If we’re so highly automated, then why have free trade at all?