We’ve Always Had Free Trade with Eastasia

There’s nothing like trade to provoke full-throated defenses of economic orthodoxy. How many other topics are there where people would even use the phrase to mean what is correct, obvious, not to be questioned? For example,  Binyamin Applebaum in yesterday’s Times: On Trade, Trump Breaks with 200 Years of Economic Orthodoxy.

Donald J. Trump’s blistering critique of American trade policy boils down to a simple equation: Foreigners are “killing us on trade” because Americans spend much more on imports than the rest of the world spends on American exports. …

Add a few “whereins” and “whences” and that sentiment would conform nicely to the worldview of the first Queen Elizabeth of 16th-century England, to the 17th-century court of Louis XIV, or to Prussia’s Iron Chancellor, Otto von Bismarck, in the 19th century. The great powers of bygone centuries subscribed to the economic theory of mercantilism…

Etc. Restrictions on trade aren’t just mistaken, they’re  exotic, primitive, un-American, part of a dusty storybook world of kings and queens and whences.

I admit, this is an issue where I’m a bit of a heterodox bubble. I’ve been reading people like Ha-Joon Chang  so long, I forget how pervasive is the idea that the US has always practiced free trade (except for one terrible mistake in the 1930s.) I forget how unquestioned the myth of free trade is in the larger economic conversation. Because of course it is a myth. Here is Chang:

Between 1816 and the end of the Second World War, the U.S. had one of the highest average tariff rates on manufacturing imports in the world… The Smoot-Hawley Tariff of 1930, which Bhagwati portrays as a radical departure from a historic free-trade stance, only marginally (if at all) increased the degree of protectionism in the U.S. economy…

The following quote from Ulysses Grant, the Civil War hero and president of the United States from 1868 to 1876 clearly shows how the Americans had no illusions about [free trade]. “For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”

Or here’s Paul Bairoch, whose book remains the esential reference on trade policy historically:

One should not forget that modern protectionism was born in the United States. In 1791, Alexander Hamilton, the first Secretaary of the Treasury, drew up his famous Report on Manufactures, which is considered to be the first formulation of modern protectionist theory. … The major contribution of Hamilton is the idea that industrialization is not possible wothout tariff protection. He was apparently the first to have used the term ‘infant industries.’ …

from 1861 to the end of World War II was [a period] of strict protectionism … the tariff in force from 1866 to 1883 provided for import duties averaging 45% for manufactured goods… When the United States caught up with European industry, … [that] rendered obsolete the ‘infant industries’ agument… The Republican party based its case for introducing the Mckinley Tariff of 1890 on the need to safeguard the wage levels of American workers

The McKinley Tariff, which raised duties to an average of 50 percent, became law, and its sponsor went on to be elected president. Applebaum might have mentioned McKinley. He might have mentioned Grant. He might have mentioned Abraham Lincoln, who as Chang points out, built his early campaigns as much on support for tariffs as on opposition to slavery. He might have mentioned Hamilton — I hear he’s really hot right now. But of course he didn’t: In America we’ve always practiced free trade. So instead we get Queen Elizabeth and Chancellor Bismarck.

11 thoughts on “We’ve Always Had Free Trade with Eastasia”

  1. Yes but… we’ve already industrialized. And even if the infant industry argument is applicable in the modern setting, it would justify tariffs on Europe or Canada, not China or Mexico.

  2. Hi Notsneaky.

    On your first point, absolutely agreed. My point here was just that it’s false historically to suggest that the US industrialized under free trade. Not suggesting that high tariffs would be a good idea for the US today, and certainly not endorsing anti-Mexico & anti-China Trumpism!

    On your second point. I don’t claim to be an expert in this area, but what I have read is generally supportive of the Chang/Bairoch story. I’d be interested in seeing a serious academic cite claiming otherwise — something more than an unsourced figure from the Cato institute.

    But in fact, I don’t think that figure really challenges their narrative. “Dutiable” in this context means manufactured goods, and that’s what is relevant here. A combination of high duties on manufactured goods and low duties on imported raw materials is actually more supportive of domestic industry than high duties across the board. That’s why people used to compute “effective rates of protection” for different industries taking into account the relative duties on their inputs and outputs.

    Also there’s what you don’t see in the figure — that high tariffs in the 19th century were explicitly justified as measures to support American industry and keep wages here high relative to Europe — not just as revenue measures. (There was a “revenue tariff” position in 19th C. American politics, but it didn’t generally win.) You should check out Hamilton’s Report on Manufactures sometime — its a fascinating document.

    1. If you look at the figure, for dutiable (i.e. manufactured) goods, the tariff between 1821 and WWII is always above 20% and usually above 40%. That’s not free trade.

    2. Really quickly, just to defend my posting a “Cato figure”, that figure is pretty standard. IIRC Paul Krugman used it in some blog post. It’s in pretty much any textbook that talks about tariffs. So me posting that particular figure was just out of convenience and not in any way endorsing Cato I.

  3. Someone should ask him his position on (the still being negotiated) GATS and (almost done, plurilateral) TiSA which together would likely lead to the loss of tens of millions of US service sector jobs, (services are 70% of all jobs, basically everything you cannot drop on your foot) especially in what is now the public sector, jobs which people currently performing them think are secure- to low-wage foreign service providers/subcontractors right here in the homeland via their ‘movement of natural persons’ (also known as Mode Four) provisions. This has been cooking for 20 years, millions of man hours has gone into the proposals and its unlikely that common sense would stop it, but maybe Trump could or would? The alternative is a huge pushing down of wages because US firms will find it hard to even get jobs here because of competitive bidding based on the lowest qualified bid winning. A great many countries in the developing world are gearing up for significant access to US services markets through systems like the WTO GPA e-portal (e-tendering system) which appears have been promised them as the carrot for participating in two decades of globalization. The use of the e-portal would gradually be required, eventually making using any domestic spending (because it would be required to use the portal, a competitive process US companies might find hard to win compared to African, South American or Asian firms with substantially lower wages, or perhaps paying minimum wage, which would be difficult to characterize as ‘slave wages’ because its what we pay our own people) into job stimulus difficult without a substantial shift to automation.

    For a peek at how this likely would be framed, except in a services context, see the recent WTO decision in the India solar power case and especially USTR Froman’s statement on it which is in a very real sense, a message on progressive liberalisation and its progress, (despite Bernie Sanders’s talk of returning to pre-WTO ‘New Deal’ policies.

  4. Oak,

    I’m afraid I don’t agree with you here. In my opinion, free trade and what is somewhat misleadingly called capital mobility are quite destructive for developing countries. But I don’t think they are a major obstacle to full employment and high wages in the US. The large majority of dollars spent in the US go to US-based production and I don’t think that is likely to change in any plausible scenario.

    More generally, I don’t think that, historically, the US government has been constrained much in practice by international agreements. I don’t find these lists of treaty provisions very persuasive.

  5. >I’m afraid I don’t agree with you here. In my opinion, free trade and what is somewhat misleadingly called capital mobility are quite destructive for developing countries.

    I am talking about the FTA’s ‘labour mobility’ provisions. The so called “Mode Four” (‘movement of natural persons’ is the “fourth mode of supply” in GATS, and now TiSA which has the potential to be far more disruptive because of its ‘negative list’ everything in by default architecture. That and the inclusion of government procurement with no bottom limit on size of the contract (as was previously) could mean huge changes in the US, opening a significant portion of the US public sector (see GATS Article I:3 (b) and (c) which defines both its and the other agreements scope on services) which is I think many developing countries hope and expectation. Here is that section:

    “For the purposes of this Agreement…

    (b) ‘services’ includes any service in any sector except services supplied in the exercise of governmental authority;

    (c) ‘a service supplied in the exercise of governmental authority’ means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers.”

    >But I don’t think they are a major obstacle to full employment and high wages in the US.

    There is the problem, people associate statements like that as meaning jobs would go to Americans, but employment “in the US” might well be performed by the lowest qualified bidding subcontractor which likely would become an international company which specialized in say, staffing schools or hospitals or IT centers or green energy (in response to LNG price increases due to TTIP mandate to deregulate export and subsequent irreversible price jump.)

    >The large majority of dollars spent in the US

    Significant amounts may suddenly be sent back to workers home countries in remittances. Replacing money previously paid in much larger amounts to middle class workers in numerous public and quasi-public sector jobs.

    Research on the scope of the GATS definition – its extremely narrow definition- you could start with this controversial passage “‘a service supplied in the exercise of governmental authority’ means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers.” For example, the EUA and a number of US education industry organizations have raised the point repeatedly that use of that definition for scope threatens the very existence of public education. The huge amount of controversy in India over the last year about their joining GATS also brought this agenda into the spotlight. Developing countries are not giving up these public services for nothing, they expect something valuable in return. Do you understand what I mean. Just because its not in the newspaper does not mean its not still moving forward.

    >go to US-based production and I don’t think that is likely to change in any plausible scenario.

    Why would the US’s national, state or local procurement of services not be bound by the ‘disiplines on domestic regulations’ being drawn up for exactly that purpose?

    >More generally, I don’t think that, historically, the US government has been constrained much in practice by international agreements.

    An informed reading of the news will show that at least a third of all news stories where something which is being done economically does not make sense is explained by hidden trade policy. It explains the health care mess in every possible way. I think your focus on pre-WTO ways of looking at the trade deals – (basically you’re overloooking services and the huge impact they have) Keep in mind however that a core aspect of neoliberalism is the idea of maximizing the value in the supply chains.

    >I don’t find these lists of treaty provisions very persuasive.

    This is a portion of a larger explanation from a graduate school thesis which is several years old but it seems to sum up in economics terms the idea of liberalising labor migration. However, keep i mind that the treaties do not allow free migration of labor, just intra comany transfers to perform work on a temporary basis, open ended length of time but with the stipulation it be temporary. So I think that perhaps three to five years might be a soft maximum on an L1 visa holder.

    For a deeper understanding of how migration could equalize the price of labour in two trading
    countries, consider figure one (from Senior Nello, 2005:145): There are two countries, Home
    and Foreign. The total quantity of labour in the two countries is shown by the distance OhOf.
    Before a fully free migration is allowed the distribution of labor is OhL in Home and OfL in
    Foreign. The marginal product of labour is higher in Home than in foreign because the
    capital/labor ratio is higher in Home. This is shown in the figure by the higher position of the
    MPLh curve compared to the MPLf curve. Because of this the wage is higher in Home, at Wh
    compared with the wage in Foreign at Wf. In short: Home symbolizes a developed country with
    high automatization and high wages and Foreign a less developed country with abundant supply
    of labour, low automatization and low wages. If migration is fully free between the two
    countries and the workers are identical workers will migrate from Foreign to Home in pursuit of
    higher wages. The migration will finally result in an equalized capital/labor ratio in the two
    countries and thus equal marginal products of labor and equal wages, illustrated in the figure by
    the wage level W’ which could be seen as the world market price of labor as the world only
    consists of the two countries Home and Foreign. The migration is illustrated in the figure by the
    distance LL’ which is the amount of workers that will move from Foreign to Home so that the
    new distribution of labour becomes OhL’ in Home and L’Of in Foreign.
    Wages will thus decrease in Home and increase in Foreign resulting in a loss for the indigenous
    workers in Home illustrated in the figure by the area a but a gain for the capital owners of the
    areas a+b. In Foreign the workers get an increased income of areas c+d+e while the capital owners lose areas d+e. The result in total is a net gain for the two countries by areas b+c which
    is a gain resulting from higher efficiency in the use of the total resources of the two countries.


    One argument both for and against neoliberalism’s generous giveaway of the middle classes high paying jobs is the finite nature of the time before automation of existing jobs, a change that is accelerating exponentially. This is not new but its generally not understood for what it is except by scientists wit direct experience of it. It could be explained by the tendency of the left (past) side of the time graph where the present is in the middle to be visualized by human nature as more horizontal and the future part which is unknowable to rapidly tend towards vertical. The exponential aspect is because the more we learn the faster we learn more. That means that technology is making a world without work possible in the very near future. However, estimates of rising incomes and productivity in the developing world lasting longer than in the developed world should not be turned into self-fulfilling prophecies by trading away jobs for preferential market access on favorable terms such as national treatment and most favored nation leading to prosperity and profits lasting a very long time (a core concept behind GATS and TiSA) Because the different rates of adoption of automation will shorink dramatically as the cost of computer hardware, software and network bandwidth approach zero. Cross border data flows – various kinds of telepresence also offer savy businesspeople the opportunity to use the wage gradient in various ways to maximize the value in their supply chains. A business can locate their labor intensive back office tasks in a low wage country, using employees who work at night for a fraction of what they would pay in a developed country. Similar but more immersive technologies can be used with machines and even in fields like medicine (surgery) No profession is immune from its reach. This is why the US is so adamantly fighting state owned monopolies i healthcare and education as well as rights to health, education and so on. The profit opportunities in reselling these services are huge. Also, the reduction in moral hazard as education healthcare etc, are “deskilled” and potential problems increase insulate politicians and governments from blame, after all they cannot be blamed for disasters which are no longer under their control. See the body of work at WTO on ‘disciplines on domestic regulation’ necessity tests, legal standards such as the “fair and equitable treatment” and “no more burdensome than necessary to ensure the quality of the service” also perhaps the news services of organizations involved in services negotiations for groups of developing countries. Generally NGOs in the developing world are orders of magnitude more clued in than US NGOS. Many maintain headquarters in and the center of activities in these talks is Geneva. TiSA actually began in 2006, not 2013. WTO began way back in the early 90s. So this isn’t new, the WTO negotiations just have stalled many times, a huge but little discussed (in the media) reason is Mode Four and the US reticence to put enough jobs on the table. Some way or another, I suspect that may be likely to change soon. They likely will enter into a deal to allow some other country or the WTO to play the heavy so that the US working class does not see it as a betrayal as clearly. Cover stories are always created in the form of domestic policies “agreed to” by the normally “dysfunctional” warring US parties.. regulations that cover approximately the same issues, but which are not the real reason at all for changes. In short its olitical theater at the nations and world’s expense. There would be far better ways to globalize. this is all being accomplished because Americans are being kept poor, little educated and incommunicado. See http://www.eua.be/activities-services/news/newsitem/15-02-05/EUA_Council_statement_on_TTIP_and_TISA.aspx for what I meant about education. See cuts-geneva and perhaps ICTSD for some news on the developing services deals as they progress. I hope this has been helpful. As you see I am not an economist, just a distressed concerned citizen saddened to see such a shallow “con” being performed so successfully on our country if I am right, or, if your theory is right, on the entire developing world over 20 years. Truly unparalleled – a search for an ElDorado of riches never to be delivered. Regardless which comes true, or if we both are right, truly it is an emperor has no clothes situation. How did economists get so out of touch with the trade negotiations, or did you just never know about them (like most Americans, its because the US media seems adamant not to cover anything trade related except in the least informative most cursory manner possible. Maybe 1% if that of what it should cover. And US presidential campaigns are just as bad, except for Sanders who is significantly better but still pretending the changes that have been made or which are being made and are almost concluded never existed. European media is better but not by much. Caveat Emptor under these conditions, Unless this rock can be lifted up soon and sun shine in, our world’s economic future looks very dark, despite the wonderful potential for a new age of learning opened up by technology’s gifts, we will have artificially magnified, fabricated scarcity and phony, unnecessary manufactured “crises” in healthcare, education, IT and so on, driving BAD policy.

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