The Specter of Protectionism in America

Tough campaign talk on trade is a danger to the U.S. economy's future.

This wild campaign season has raised any number of concerns. Standing high on that list is the widespread popularity of protectionism. This is a dangerous turn in the country’s conversation. History has shown conclusively that the nation’s prosperity depends on a liberal, global trade order. Sustaining it must count as one of America’s clearest and most compelling national interests. Today’s rhetoric and the applause it has received threaten this need. Whether Donald Trump or Bernie Sanders or Ted Cruz or Hillary Clinton carries the banner, an experiment now with protectionism will turn an already disappointing economy into a disastrous one.

Whether from the left of right, too many of today’s candidates are singing a protectionist tune. Here is Donald Trump, “If we want jobs in America, we need to enact my 5-point tax policy […] a 15 percent tax for outsourcing jobs and a 20 percent tax for imported goods. . . .” He would push duties up to 45 percent on Chinese manufactures and prohibit American firms from constructing factories abroad, threatening Ford that if it goes ahead with plans to build a factory in Mexico, a President Trump would impose a 35 percent tax on every car coming across the southern border. Nor is he alone in the Republican field. Huckabee, Santorum and Cruz have all used protectionist language to lambast the Trans-Pacific Partnership (TPP) trade deal. It is hardly upsetting that politicians would criticize the deal. It has many weaknesses. What is upsetting is the language of their critiques.

From the Democratic side, Bernie Sanders brags that he has voted against every single trade deal since he entered Congress. When asked by a journalist if he rejects all efforts to promote trade, he responded, “That’s correct.” He has also signed the Currency Reform Fair Trade Act that would blithely impose tariffs on any country even suspected of currency manipulation. Meanwhile Hillary Clinton has held to the anti-trade position she first adopted during the 2008 Democratic primary campaign. Then, she and candidate Barack Obama competed for who could show more suspicion of international trade. When Obama said that he would “use the hammer of an opt-out to push Canada and Mexico for concessions within the North American Free Trade Agreement (NAFTA), Clinton criticized him for not going far enough, calling for a “time out” on all trade deals. The language was so strident that Canada and Mexico formally rebuked the candidates and the United States.

History makes clear why such talk should terrify. Though from time to time trade protection can help specific groups, it always hurts the broad mass of workers and most firms. All consumers pay for the protection given some by losing access to less-expensive imports and suffering a consequent reduction in their living standards. Unprotected firms pay as well by having to spend more on inputs to their processes. They lose business by failing to deliver products to American consumers at lower prices and seeing their competitive edge in global markets weaken. Their growth slows accordingly, including their ability to create more jobs.

A most dramatic, though hardly the only illustration of protectionism’s ills emerges in the history of the Smoot-Hawley tariffs of 1930. Senator Reed Smoot (R-UT) and Congressman Willis Hawley (R-OR) decided to protect American jobs and American industry from the ill effects of the 1929 stock market crash by building a tariff wall around the economy. Their bill raised duties on 20,000 items by an average of 20 percent (just the number Trump has proposed.) They effectively cut American consumers off from lower-priced imports just when their wages, their job security, and their living standards were already suffering. At the same time, already beleaguered American producers, denied lower-priced imported inputs, cut back still more on their operations than they already had. Redoubling to the pressure, this country’s trading partners retaliated with tariffs of their own, some general and some directed at the United States.

The net effect was devastating. World trade dropped 67 percent in the two years following the bill’s passage. Imports to this country fell 40 percent, which might have helped those sectors competing with foreign products, but U.S. exports fell more, 75 percent, in fact. The tariffs without doubt contributed to the severity and duration of the Great Depression. There is even evidence that they caused it. Before Smoot-Hawley went into effect, the economy seemed to be on the mend from the effects of the 1929 crash. Unemployment, which had peaked at 9 percent of the workforce, declined by June of 1930 to 6.5 percent. After the bill became law, unemployment rose again, eventually verging on 25 percent. Certainly the stock market saw the disaster coming. It fell 10 percent in a single day, on June 17, 1930, the day President Hoover signed the bill into law.

Pages