Keating: Concerning the United States’ Protectionist Tilt
by Maryann O. Keating, Ph.D.
President Biden, Ex-President Trump and their advisors view international trade as a national
security threat. They indicate that unfettered international trade has hollowed out the U.S.
industrial base, harmed American workers and allowed China to dominate important
industries.
History repeats itself. In a 1791 Report on Manufacturers, Alexander Hamilton argued for a
national economic policy fostering domestic industry. Later, Henry Clay advocated a protective
tariff as the centerpiece of what he called “the American System.” Presently, Oren Cass, a public
policy advisor, objects to the bipartisan post-Cold War consensus of economists who held that
free trade and accelerated globalization lead to increased domestic growth and prosperity
(“Free Trade’s Origin Myth,” Law and Liberty, January 7, 2024. https://lawliberty.org/forum/
free-trades-origin-myth/).
Cass maintains that under some of the world’s highest tariff and trade barriers the United States
transformed itself from a colonial backwater to an industrial colossus, as have Japan, South
Korea and Israel in recent times. Therefore, he maintains that post-WWII policies in the U.S.
have diminished the manufacturing sector resulting in, for example, computer chips, pioneered
in the U.S., presently being produced abroad. Cass admits that domestic consumers benefit in
the short run from lower import prices. However, low-cost imports are presently being traded
for assets held by foreigners in the form of U.S. real estate and government bonds with long-run
interest rate obligations.
In 1992, U.S. exports were roughly balanced but by 2022 the trade deficit exceeded $900
billion. U.S. economic growth and business investment slowed during the same period. In
manufacturing, productivity growth turned negative. Cass argues that Americans are rightly
confused and frustrated by these failures and should turn away from the excesses of
globalization.
The Post-World War II Consensus on Trade
To some extent, Cass’s argument accurately portrays bipartisan trade policy in the U.S. during
and after the Cold War. However, trade liberalization was viewed not merely as a tool of
economic policy but as a pathway to international peace. As an analyst in the U.S. Department
of Commerce in the late sixties, I can attest that freeing international trade was a top U.S. policy
priority. Much of our efforts were spent compiling lists of products U.S. negotiators could bring
to the General Agreement on Tariffs and Trade (GATT) in Geneva. If a country succeeded in
negotiating duty-free entry for one of its products with a major trading partner, all GATT
signatories would be given the same benefit. When the World Trade Organization (WTO)
assumed hard-won GATT’s concessions, it expanded membership and offered additional
preferences to less economically developed countries.
The European Union went further in integrating member nations’ economies. The EU eliminated
trade barriers and issued a common currency, the Euro. It also permitted labor and capital to
move freely between countries.
In time, historians will decide if U.S. post-WWII trade policies were, on net, an important factor
in maintaining Pax Americana. However, market economists remain committed to the idea that
freer trade increases absolute standards of living around the world, including the United States.
Not that free trade should be used as an excuse for indifference to national security or domestic
economic distress.
The Case for Free Trade
The principle of comparative advantage is the basis of the economist’s case for free trade.
There is a potential consumption bonus shared by two countries even when a country produces
two products more efficiently than its trading partner. The size of the bonus depends on
different opportunity costs for producing each product. Given free trade, a country will
specialize in the product in which it has the greatest comparative advantage. Or, if it does not
excel in either product, it will specialize in the product in which it has the least disadvantage.
Comparative advantage is often introduced by demonstrating how specialization benefits both
an attorney and her word-processing assistant, even when the attorney has a greater skill in
both tasks than her assistant. Specialization may result in increased production, a bonus
benefitting both the attorney and her assistant. Similarly, international trade creates a non-
trivial higher level of consumption in both nations
Cass is correct in saying that some economists argued that, given free trade, exports tend to
equal imports. The justification for this is that competition and exchange rate flexibility operate
to balance exports and imports predictably. For example, if a country consistently runs a trade
balance deficit (imports exceed exports), its currency will depreciate in world markets. This
results in making imports more expensive; therefore, domestic products become more
attractive at home and abroad.
It soon became evident to U.S. policymakers that tariffs alone are neither the only nor chief
barrier to trade. Countries can manipulate exchange rates and regulations to advantage of their
own products. In response, the U.S. entered into more detailed regional trade pacts such as the
North Atlantic Free Trade Association (NAFTA). Some economists have argued that these
regional trade pacts created a spaghetti bowl of separate agreements diverting and reducing
world trade.
In addition, the U.S. trade balance is adversely affected by the status of the dollar as a dominant
reserve currency. Dollar dominance existed from the Bretton Woods fixed exchange rate regime,
initiated after WWII, through the present more flexible exchange rate regime. Given the dollar’s
reserve status, the U.S. can finance a chronic excess of imports over exports by the willingness
of foreigners to hold dollars. Unfortunately, such foreign “investments” have not been
employed in building U.S. infrastructure and industry. Rather, a large portion of these inflows
are used to finance government debt.
Any discussion concerning comparative advantage should recognize that the costs of
transitioning to international free trade are borne by certain domestic industries and workers.
Consider the hypothetical case of New Jersey and Florida, previously producing and selling in
state, suddenly initiating free trade. In this case, firms and workers in the tomato industry in
Florida would be adversely affected, as would New Jersey’s citrus firms and workers.
Thus, the hubris of economists in over-selling free trade underestimates the trust needed
between countries to cooperate on free trade as well as the difficulty of workers transitioning
into other industries. However, recent policy attempts to restrict free trade are often focused on
holding trading partners to significant progress on human rights, rather than the post WWII
policy focus on national security considerations and world peace. How successful these
measures might be in alleviating human distress abroad or rebalancing U.S. trade relationships
is an open question. In any case, trade protection comes with real costs to domestic producers
dependent on imported inputs as well as domestic consumers.
Gains from international trade based on comparative advantage are a fact; check it out. U.S.
productivity and living standards steadily increased from the end of WWII until 2012 due to
increased world trade. Post-WWII trade policy does not fully account for a decline in U.S.
manufacturing or middle-class despair. Low rates of domestic household savings, large federal
government deficits, and the lack of effective apprenticeships are contributing factors, along
with the unfair trade practices of trading partners.
Countering the political rhetoric assaulting international trade will require considerable effort,
but the stakes are high. If the volume of international trade declines, living standards at home
and abroad will decline. Reduced global imports from developing countries will incentivize
more emigration, and present U.S. income earned from exporting is not insignificant. In 2022,
the U.S. was the world’s biggest exporter of refined petroleum, medical instruments, gas
turbines, aeronautical equipment and corn. Given the potential for retaliation, a tilt toward
U.S. trade restrictions is a serious threat.
Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.
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