As machinations over the fiscal cliff make headlines, they have pushed worries about the U.S. trade deficit out of the public consciousness. That’s too bad because much of our current economic woe stems from the loss of whole manufacturing industries to Asia. Interestingly, there are a rising number of trade experts who feel the root cause of this exodus has little to do with the U.S. educational system, labor costs, the price of health care, or any of the usual scapegoats. They say the real problem is that the U.S. embraces free trade while other nations protect their industries with tariffs and subsidies. And the economic gains of the nonfree traders have come at the expense of U.S. workers.
One of the chief promoters of this view is Clyde Prestowitz, a former trade negotiator during the Reagan administration. Prestowitz says that many people have a misconception that free trade is what made the U.S. an industrial power, and that to move away from such policies would be harmful if not disastrous. But Prestowitz points out such views don’t jibe with American history.
Even Thomas Jefferson could see the down side of free trade. He asked his fellow citizens to “keep pace with me in purchasing nothing foreign where an equivalent of domestic fabric can be obtained without regard to difference in price.” In fact, the U.S. began emerging as an industrial power during the 1800s thanks in no small part to tariffs on industrial imports and subsidies for American manufacturers.
As Prestowitz relates, a consensus formed in the 1800s that called for free trade only when there was “perfect reciprocity” between trading partners. President James Monroe figured the idea of free trade was impractical because “that doctrine rests on two conditions — international peace and general reciprocity — which have never occurred and cannot be expected.”
In 1816, Congress imposed a 30% duty on iron imports and 25% on cotton and woolens. It further boosted tariffs in 1824 and 1828 to levels higher than those later imposed under the 1930 Smoot-Hawley Tariff Act which was blamed (wrongly, Prestowitz claims) for the Great Depression. Through World War I, U.S. tariffs never fell below 40%.
Meanwhile, the economy boomed. Between 1820 and 1870, U.S. GDP rose tenfold, prompting Theodore Roosevelt to exclaim in 1895, “Thank God I am not a free trader.”
While the U.S. protected its industries, Britain began dropping its import tariffs. They were almost completely gone by the early 1860s. At the time, Britain was an industrial powerhouse. The Brits reasoned that they would automatically be the cheapest worldwide suppliers, so free trade would benefit their industries.
The result was tough sledding for the British economy. In 1870, Britain accounted for about 32% of total world manufacturing while the U. S. hosted 23%. By 1913, the U. S. accounted for 36%, Britain 14%. “America had become the richest country in the world. And importantly, it had reached this height by using high tariffs…that resulted in 4%-plus annual rate of GDP growth while free trade, laissez-faire Britain could not maintain even a 2% annual economic growth rate,” says Prestowitz.
Some commentators claim that those who criticize free trade are ignorant of economics. It might be more correct to say those who blindly cling to free trade principles are ignorant of history.
— Leland Teschler, Editor