Protectionism key to economy
January 13, 2005
The economic power of the United States was historically built on free trade. True or false? What do you think?
By financing its economic growth through the use of tariffs (duties put on imported goods by government), America was able to develop into the economic and industrial giant it is today. In fact, after the colonists got fed up with being forced to trade their raw materials in exchange for the mother country’s manufactured products, which was a trading relationship of comparative disadvantage for early America, they rebelled and, as a result, gave rise to the revolution. Most importantly, after the revolution, early America financed its industrial growth not with free trade, but with tariffs, to protect the critical growth of its nascent industries. So, the answer is false. America’s economic strength was built on protectionism.
Protectionism is rooted in our nation’s history. George Washington, James Madison, Alexander Hamilton were protectionists, as well as Thomas Jefferson and John Adams (both changed from being free traders to protectionists after the war), and many others. The tariff is purely an American invention. The second bill ever in America’s history to become law, in fact, was a tariff; Washington signed the Tariff Act of 1789 on July 4 of that year, its aim being “the encouragement and protection of manufactures.” Thus, a long history of tariff legislation began.
Protectionism pays off. It was protectionism that won 14 out of 18 presidential victories for Republicans between 1860 and 1932. And protectionism created the greatest economic expansion in this nation’s history from 1865 to 1913. Republican free traders today forget that the Republican platform used to be protectionist from 1884 to 1944. That’s right. Republicans used to be protectionists!
In any event, free traders today evoke the ghost of David Ricardo via his 1817 law of comparative advantage in their arguments on the overwhelming benefits of free trade to people of the world. Free traders have made comparative advantage the core principle of their economic religion or dogma. What it means is simply this: Each nation should produce what it is best and cheapest at producing and trade accordingly with others that which others produce best, which establishes each nation in a particular specialization within the global marketplace. Sounds wonderful, doesn’t it? Each nation freely trading what it produces best, and everyone contributing to a common good.
But according to Wayne Ellwood in “The No-Nonsense Guide to Globalization,” Ricardo’s economic law works only if two conditions are satisfied. First, trade between countries should be balanced so one doesn’t become dependent and in debt with the other (e.g., the North American Free Trade Agreement). And second, comparative advantage can exist when investment capital is locally “grounded,” not able to go from a high-wage country to a low-wage country. These two conditions from Ricardo don’t exist today. So, comparative advantage doesn’t exist today, no matter how much free traders resurrect Ricardo.
According to today’s free traders, it would appear that developed countries like the U.S. should give up their more efficient industries to industrially retarded countries, even at the economic disadvantage of developed countries, in the holy name of profit maximization. But let’s be honest: It pays to exploit developing countries. After all, the main reason for American companies to move their operations abroad and/or to outsource is to exploit foreign cheap labor. Why shell out high wages to American workers when companies can just pack up, relocate easily abroad and pay low wages to their foreign workers, export back to America and rake in enormous profits? Thus, low-cost countries are a corporate nirvana for many American companies that get to operate freely without concern for the health and safety of its foreign workers, environmental pollution, and workers’ rights and benefits like they had to in the U.S.
But that’s the nature of the beast. The transnational corporation, as conservative pundit Patrick Buchanan described in “The Great Betrayal,” really “has no home. Like the great white shark that calls the entire ocean home, it must swim ceaselessly or sink and die. A transnational has no heart or soul. It is an amoral institution that exists to maximize profits, executive compensation and stock dividends. If the bottom line commands the cashiering of loyal workers after years of service, it will be done with the same ruthless efficiency with which obsolete equipment is junked.” Basically, don’t expect a transnational company to guarantee your personal job security.
Protectionism has benefited America economically and politically in the past – and will most likely in the future.
David Briceno lives in Grass Valley.
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