The Rise of American Protectionism

 

shutterstock_82455109The 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
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  1. ctlaw Coolidge
    ctlaw
    @ctlaw

    Larry3435:

    ctlaw: But you also need to consider that SAIC leveraged the JVs to then produce even more cars under its own name. Absent the barriers, all those sales, not just those of the JV would have gone to foreign companies.

    You just make these pronouncements, without a shred of support.

    You have crossed my line by saying my citing of statistics and examples constitutes “without a shred of support”. I resent your ill-mannered trolling and your deranged cultist fervor.

    How do you know that absent the barriers, China wouldn’t have built its own cars for domestic consumption, just as they always have, and just as the Soviets did?

    If a Chinese consumer is right now paying more than a US-made car would cost for a copy, what would he do if offered the opportunity to buy the real thing for less? That’s how I know.

    BTW, wasn’t the Lada based on a Fiat?

    You speak as if American companies had some sort of divine right to monopoly control over markets in foreign countries.

    American companies should have had a right to compete. The main people asserting divine rights are the Chinese whether in trade or in the South China Sea.

    Sure, if China built its own cars on its own, they would be lousy cars for quite a while. I don’t think that would bother the People’s Politburo a bit if the alternative was surrendering their entire market to foreign companies.

    Now you are contradicting yourself. This would require trade barriers. Why is it a bad thing for them to surrender their markets but a good thing for us to surrender ours (particularly without quid pro quo)?

    • #61
  2. ctlaw Coolidge
    ctlaw
    @ctlaw

    Larry3435: What we need is a trade deal with China, getting them to open up their markets. Instead, we get reflexive opposition to trade deals in this country, and support for starting a trade war that will put the world’s largest consumer market even further out of our reach.

    Unless you are willing to go to trade war, you will not get such a deal.

    Wasn’t GATT supposed to prevent this? The problem is that our leadership is willing to either cut bad deals or not enforce them whether trade or arms control or whatever. By such failures, they have given free trade a bad name.

    • #62
  3. Larry3435 Inactive
    Larry3435
    @Larry3435

    ctlaw:

    Larry3435:

    ctlaw: But you also need to consider that SAIC leveraged the JVs to then produce even more cars under its own name. Absent the barriers, all those sales, not just those of the JV would have gone to foreign companies.

    You just make these pronouncements, without a shred of support.

    You have crossed my line by saying my citing of statistics and examples constitutes “without a shred of support”. I resent your ill-mannered trolling and your deranged cultist fervor.

    Since you obviously can’t understand the CoC, it is unreasonable of me to expect you to understand economics.  Bye.

    • #63
  4. ctlaw Coolidge
    ctlaw
    @ctlaw

    Larry3435:

    ctlaw:

    Larry3435:

    ctlaw: But you also need to consider that SAIC leveraged the JVs to then produce even more cars under its own name. Absent the barriers, all those sales, not just those of the JV would have gone to foreign companies.

    You just make these pronouncements, without a shred of support.

    You have crossed my line by saying my citing of statistics and examples constitutes “without a shred of support”. I resent your ill-mannered trolling and your deranged cultist fervor.

    Since you obviously can’t understand the CoC, it is unreasonable of me to expect you to understand economics. Bye.

    My knowledge of economics and my capacity for good faith discourse likely exceed yours. The CoC is not a shield to protect posting in bad faith.

    • #64
  5. The Reticulator Member
    The Reticulator
    @TheReticulator

    Larry3435: Third, it does not account for transfer payments.

    Yay! Capitalism is successful because we have Socialism!

    • #65
  6. Larry3435 Inactive
    Larry3435
    @Larry3435

    The Reticulator:

    Larry3435: Third, it does not account for transfer payments.

    Yay! Capitalism is successful because we have Socialism!

    Not my point.  My point is that if you are going to measure things, you should measure them accurately.  I don’t support these transfer payments, but I’m not going to analyze the economy while pretending that they don’t exist.

    Especially on this issue.  The left constantly wants higher taxes and more handouts, based on “income inequality.”  But when they measure “income inequality” they don’t take these transfer payments into account.  Therefore, no matter how high you raise the taxes, and no matter how many goodies you hand out, it will never have an effect on the “income inequality” as measured by the leftists.  That should bother you.

    • #66
  7. The Reticulator Member
    The Reticulator
    @TheReticulator

    Larry3435: Especially on this issue. The left constantly wants higher taxes and more handouts, based on “income inequality.” But when they measure “income inequality” they don’t take these transfer payments into account. Therefore, no matter how high you raise the taxes, and no matter how many goodies you hand out, it will never have an effect on the “income inequality” as measured by the leftists. That should bother you.

    That’s true.  In their case, the slogan should be: “We need more socialism, because the socialism we’ve had so far hasn’t worked!”

    • #67
  8. Larry3435 Inactive
    Larry3435
    @Larry3435

    The Reticulator:

    Larry3435: Especially on this issue. The left constantly wants higher taxes and more handouts, based on “income inequality.” But when they measure “income inequality” they don’t take these transfer payments into account. Therefore, no matter how high you raise the taxes, and no matter how many goodies you hand out, it will never have an effect on the “income inequality” as measured by the leftists. That should bother you.

    That’s true. In their case, the slogan should be: “We need more socialism, because the socialism we’ve had so far hasn’t worked!”

    I thought that was their slogan.  So they try more socialism, and more.  And when it reaches the point where it’s all socialist and the government controls everything, then their slogan becomes “Well, Stalin was just the wrong guy to put in charge.”

    • #68
  9. erazoner Coolidge
    erazoner
    @erazoner

    The Reticulator: Where do you get that? I question whether there are such shortages.

    Google “skilled tradesmen”. The company I work for has a very hard time filling positions for electronics technicians, equipment operators, mechanics, and network specialists. Of course, they also have to be drug-free, be a U.S. citizen, and pass a background check, which disqualifies far too many interested candidates.

    • #69
  10. erazoner Coolidge
    erazoner
    @erazoner

    Larry3435: Here’s what’s wrong with looking at the median wage. First, it does not account for low skill, low income people (especially illegal aliens) entering the population. That brings down the median dramatically. Second, it does not account for individuals raising their standard of living over time. People do climb the ladder, even if the ladder itself doesn’t move. Third, it does not account for transfer payments. A lot of the purchasing power in this country derives from government hand outs, but government benefits are not counted in calculating median wage. Nor are the taxes imposed on those who are above the median counted as a reduction in their income.

    Nor does it account for employee benefits. Even with stagnating wages, labor costs have been climbing steadily. Costs associated with CBAs, health care, and state and federally mandated benefits are another part of the equation.

    • #70
  11. skipsul Inactive
    skipsul
    @skipsul

    ctlaw: BTW, wasn’t the Lada based on a Fiat?

    The Lada WAS a Fiat.  In a time when the Italian government was run by socialists, they got real cozy with the Soviets.  At the behest of Brezhnev, Fiat built a factory in the Soviet Union to build the Fiat 125 (then their predominant sedan).  Of course the Soviets nationalized it and adapted the design to their own unique needs (namely, poor roads and awful winters), but the Lada was always a Fiat at heart.

    • #71
  12. skipsul Inactive
    skipsul
    @skipsul

    ctlaw: American companies should have had a right to compete. The main people asserting divine rights are the Chinese whether in trade or in the South China Sea.

    I can’t help getting the impression that you and Larry are arguing at cross purposes here, and that you actually agree on far more than you can see.

    • #72
  13. Ed G. Member
    Ed G.
    @EdG

    skipsul:

    ctlaw: American companies should have had a right to compete. The main people asserting divine rights are the Chinese whether in trade or in the South China Sea.

    I can’t help getting the impression that you and Larry are arguing at cross purposes here, and that you actually agree on far more than you can see.

    Agreed. Which is why I don’t understand why there’s the attempt to paint fairer trade as textbook central planning. Is that part and parcel to the free trade movement, or is that being driven by Trump hatred and the fact that he’s the only one on our side occupying that territory?

    • #73
  14. Larry3435 Inactive
    Larry3435
    @Larry3435

    Ed G.:

    skipsul:

    ctlaw: American companies should have had a right to compete. The main people asserting divine rights are the Chinese whether in trade or in the South China Sea.

    I can’t help getting the impression that you and Larry are arguing at cross purposes here, and that you actually agree on far more than you can see.

    Agreed. Which is why I don’t understand why there’s the attempt to paint fairer trade as textbook central planning. Is that part and parcel to the free trade movement, or is that being driven by Trump hatred and the fact that he’s the only one on our side occupying that territory?

    Ed, I guess I’m not making myself clear.  I don’t object to the use of trade barriers as bargaining chips, to get a fair trade deal (and fair doesn’t always mean “perfect”).  But I do object to a policy of long term protectionism, used not as a bargaining chip for negotiations, but as a way to preserve certain people’s jobs (obviously, those would be people with political clout) at the expense of the economy as a whole.  And I do disagree with those who have expressed the opinion that we should not have much trade – that trade itself is bad because it costs jobs.

    If ctlaw, or anyone, wants to propose a particular trade deal that they think is fair, and a strategy to get there, I’m all ears.

    • #74
  15. Ed G. Member
    Ed G.
    @EdG

    Larry3435:

    […..]

    Ed, I guess I’m not making myself clear. I don’t object to the use of trade barriers as bargaining chips, to get a fair trade deal (and fair doesn’t always mean “perfect”). But I do object to a policy of long term protectionism, used not as a bargaining chip for negotiations, but as a way to preserve certain people’s jobs (obviously, those would be people with political clout) at the expense of the economy as a whole. And I do disagree with those who have expressed the opinion that we should not have much trade – that trade itself is bad because it costs jobs.

    If ctlaw, or anyone, wants to propose a particular trade deal that they think is fair, and a strategy to get there, I’m all ears.

    This is part of my point Larry. I don’t see too many people on Ricochet (I won’t account for the outlanders) taking the position that trade itself is a net bad. I think the more prevalent position is that US trade policy has been bad for decades, has been a cause of domestic problems, and to be fixed we probably will need to brave some trade disruption and pain – perhaps even for longer than we’d like.

    • #75
  16. Larry3435 Inactive
    Larry3435
    @Larry3435

    Ed G.:

    Larry3435:

    If ctlaw, or anyone, wants to propose a particular trade deal that they think is fair, and a strategy to get there, I’m all ears.

    This is part of my point Larry. I don’t see too many people on Ricochet (I won’t account for the outlanders) taking the position that trade itself is a net bad. I think the more prevalent position is that US trade policy has been bad for decades, has been a cause of domestic problems, and to be fixed we probably will need to brave some trade disruption and pain – perhaps even for longer than we’d like.

    That’s an argument I can respect, but it has to be presented with specifics.  That’s an argument for trade deals.  Good trade deals.  If there are problems in our current trade relationships, or if there are better deals to be made, then we should be talking about the details and the tactics that can get us there.  But what I usually hear is just a blanket condemnation of trade and trade deals.

    Also, the fact that there are still closed markets in some countries is not proof that every trade deal the US has made is bad.  The world isn’t perfect.  There are bad actors out there, and a lot of them are in China.

    • #76
  17. Larry3435 Inactive
    Larry3435
    @Larry3435

    To give a specific example, NAFTA opened Mexican markets to American goods and services.  It reduced Mexico’s trade barriers.  Not ours, because at that time we didn’t have any.  It was a 100% win for us.  A very good trade deal.  And yet Ross Perot ran for President based almost entirely on opposition to NAFTA and the “giant sucking sound” he predicted.

    Trump reminds me a lot of Perot.  Simplistic attacks on trade, with no understanding of the specifics.

    • #77
  18. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Whether or not those manufacturing jobs could have been saved, they aren’t coming back, at least not most of them. How do we know? Because in recent years, factories have been coming back, but the jobs haven’t. Because of rising wages in China, the need for shorter supply chains and other factors, a small but growing group of companies are shifting production back to the U.S. But the factories they build here are heavily automated, employing a small fraction of the workers they would have a generation ago.

    Source.

    • #78
  19. ctlaw Coolidge
    ctlaw
    @ctlaw

    Misthiocracy:

    Whether or not those manufacturing jobs could have been saved, they aren’t coming back, at least not most of them. How do we know? Because in recent years, factories have been coming back, but the jobs haven’t. Because of rising wages in China, the need for shorter supply chains and other factors, a small but growing group of companies are shifting production back to the U.S. But the factories they build here are heavily automated, employing a small fraction of the workers they would have a generation ago.

    Source.

    Here’s Bloomberg reporting on the myth of lower Chinese costs.

    The problem is the reporting is incomplete. They may correctly say that this shows that currency manipulation does not have a big effect on manufacturing costs. But they then stop the analysis and act as if all is ok or all problems must be in the US. What they need to be then addressing is that this shows the significance of trade barriers. China is not dominating certain industries (like the Chinese share of the Chinese car market) due to greater productivity but due to trade barriers.

    One problem is it is PC to blame “currency manipulation”. It’s so vague that the charge does not target/offend any particular group. OTOH, each Chinese trade barrier is supported by a very particular group in China. The benefit of the trade barrier is concentrated to them. Pointing out these will draw concentrated ire.

    • #79
  20. skipsul Inactive
    skipsul
    @skipsul

    ctlaw: One problem is it is PC to blame “currency manipulation”. It’s so vague that the charge does not target/offend any particular group. OTOH, each Chinese trade barrier is supported by a very particular group in China. The benefit of the trade barrier is concentrated to them. Pointing out these will draw concentrated ire.

    In other words, with China, we don’t actually have free trade, just a one way street.  They can sell freely to use, but not the other way around.

    • #80
  21. ctlaw Coolidge
    ctlaw
    @ctlaw

    skipsul:

    ctlaw: One problem is it is PC to blame “currency manipulation”. It’s so vague that the charge does not target/offend any particular group. OTOH, each Chinese trade barrier is supported by a very particular group in China. The benefit of the trade barrier is concentrated to them. Pointing out these will draw concentrated ire.

    In other words, with China, we don’t actually have free trade, just a one way street. They can sell freely to use, but not the other way around.

    Your conclusion is correct but not what I was getting at.

    Imagine Trump pointed out the specific barriers on autos. The benefits of those barriers are sufficiently concentrated that the beneficiaries (e.g., Chinese auto workers) know their entire livelihoods depend on the barriers. They would riot and burn down the US embassy.

    Instead, Trump talks about something nebulous like currency manipulation. Few people in China believe their entire livelihoods depend on this vague concept.

    • #81
  22. Ed G. Member
    Ed G.
    @EdG

    ctlaw:

    […..]

    Your conclusion is correct but not what I was getting at.

    Imagine Trump pointed out the specific barriers on autos. The benefits of those barriers are sufficiently concentrated that the beneficiaries (e.g., Chinese auto workers) know their entire livelihoods depend on the barriers. They would riot and burn down the US embassy.

    Instead, Trump talks about something nebulous like currency manipulation. Few people in China believe their entire livelihoods depend on this vague concept.

    I find that plausible because I don’t buy the idea that Trump is simply a moron or craven. I’ve had similar thoughts on foreign policy: if he’s preaching a return to realpolitik (more or less, and in other words) then there will need to be some amount of working with ugly characters like Putin and the Chicoms. Truthful personal characterizations, while perhaps true, are on a different order than generalized criticisms like Evil Empire or Axis of Evil, and they would necessarily put the project at a disadvantage. Of course, I don’t agree with realpolitik as an approach, but I do think it’s coherent and compatible with conservatism.

    • #82
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