America’s Protectionist History
“He who controls the past controls the future. He who controls the present controls the past.”
― George Orwell, 1984
We’re taught in school that America’s always been a free-trading nation. America was an open harbor, alone in a sea of socialists, economic authoritarians, imperialists—anything that isn’t code for “global free trader”.
We were taught wrong.
America was founded as an economically protectionist nation. And until very recently, America was still practiced protectionism.
What is Protectionism? A Definition
Before exploring the history, it’s important that we’re on the same page. What is economic protectionism?
Protectionism is a type of economic nationalism which argues that the government should shelter domestic industries from foreign competition, by limiting foreign access to domestic markets.
This is generally done by imposing tariffs (taxes on imports), although it can also be done using non-monetary means, like imposing import quotas, or raising other legal entry barriers.
An Example Of Protectionism In Action
For an example of protectionism in action, consider this: say China and America both make laptops. Now let’s say that China’s laptops are half the price (since they use slave-labor, and Chinese companies are supported by their government).
In a free trade scenario, Americans will buy Chinese laptops, not American laptops, since the Chinese ones are so much cheaper.
However, if America imposed a 100% tariff on Chinese laptops (doubling their price), they would be as expensive as American laptops, and therefore American companies would be able to stay in business.
Why would you want to do this? Lots of reasons, chief among them is national security: if America can’t manufacture its own computers, automobiles, or firearms, then we’re screwed if a war erupts and destroys our supply chains.
A good example is the damage OPEC has done to the US by controlling the oil supply—tariffs would prevent this situation from happening with manufactured goods too.
Either way, you should note that the debate between free trade and protectionism is something of a myth, since you can’t have a free domestic market without protecting it from foreign governments like China, who use companies as foreign policy tools.
The Goals Of Protectionism
The protectionist’s goal is to create domestic industries that will:
(1) ensure the country is self-sufficient (promoting economic autarky),
(2) maintain full employment (by preventing offshoring, and artificially raising demand for labor).
(3) and help the economy grow faster in the future (by creating economic diversity, and therefore synergistic relationships).
The Founding Father Alexander Hamilton believed that the united states needed a protective tariff for reasons (1) and (3):
…not only the wealth; but the independence and security of a Country, [is] materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavour to possess within itself all the essentials of national supply.
And as this quote reveals, president Abraham Lincoln was a fan for reasons (1) and (2):
I do not know much… but I know this… when we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money.
Now that we’re on the same page, let’s jump into the history.
The American (Industrial) Revolution
The first shots fired at Lexington in 1775 were, in part, fired over trade policy. America wanted to industrialize (like Britain was starting to) and end their colonial trade deficit.
In the decades preceding the Revolution, the British strengthened their economic grip on the colonies (mostly by enforcing existing, but often ignored, laws).
Britain had a good thing going: the colonies bought their manufactured goods (supporting Britain’s growing industries), in exchange for exotic products, like tobacco, and Spanish silver.
This trade system (exporting manufactured goods, importing raw materials) is called mercantilism.
Mercantilism was great for Britain, because the colonies fueled her industrial and economic growth. Need proof?
During the 18th C. Britain’s economy industrialized. By the 1770s, one in five British men worked in manufacturing (which is higher than it is today, and second only to the Netherlands at the time).
This growth came at America’s expense. In fact, Britain’s trade surplus with the American colonies grew from £67,000 (average between 1721-30) to £739,000 (average between 1761-70)—in a few decades it grew eleven times as big.
The composition of British exports likewise changed: rather than exporting woolens, she began exporting manufactured products, such as tools, glass, and scientific equipment. Essentially, Britain build whatever the colonies needed (if you needed a gun, it came from Britain etc.).
But remember, when Britain ran a surplus, the colonies ran deficits. To fix this, they began making stuff domestically.
Britain didn’t like this, since it cut into their bottom line—Britain could only maintain her industrial growth if the colonies kept buying her products.
In the 1750s Britain outlawed the construction of new iron mills. In 1775 she outlawed the production of steel, and banned the use of advanced textile-weaving (cloth-making) machinery. She also made it a crime to smuggle industrial blueprints out of Britain (to prevent the colonies from industrializing).
They were determined to keep their monopoly, and their profits.
The US: History’s Prime Example Of Protectionism
Eventually, the colonists had enough. They revolted.
In a sense, the nascent Industrial Revolution was one of the causes of the American Revolution. At the same time, the the Revolutionary War was one of the causes of America’s Industrial Revolution—they’re inextricably linked.
It went badly at first: the Americans had little industry, and were chronically short of war supplies like gunpowder, muskets, and even uniforms—they couldn’t buy them from Britain anymore, since they were now at war.
This highlights the fragility of global trade, and is one of the political motivations for protectionist policies.
Frankly, it was not until European powers, like France, supplied the colonists with weapons that the tide began to turn. The rest is history.
After Cornwallis’ surrender at Yorktown in 1781, the Americans were free, but vulnerable.
Their independence was in their allies’ hands: no weapons, no freedom.
To fix this, America needed an industrial base, capable building everything she needed to defend herself—America’s political independence required economic independence.
This is why the second bill George Washington signed was the Tariff Act of 1789. Tariffs made British goods too expensive to buy, and this forced American producers to pick up the slack. They did, and so America’s industrial revolution war born.
For Washington, protectionism was a question of political independence, a way to safeguard the gains of the Revolutionary War:
A free people ought not only to be armed, but disciplined; to which end a uniform and well-digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies…
Like I said, it worked, but progress was slow.
This changed after the War of 1812 when Britain’s naval blockade showed America how dependent on imports she still was. Practically speaking, America still depended on British imports.
This close call forced even the famous free-trader Thomas Jefferson to come around:
…experience has taught me that manufactures are now as necessary to our independence as to our comfort: and if those who quote me as of a different opinion will keep pace with me in purchasing nothing foreign where an equivalent of domestic fabric can be obtained, without regard to difference of price…
Congress took action, passing the Tariff Act of 1816, which unified America’s tariff policy, and doubled the average rates. This further sheltered America’s industries from British competition, and truly set the stage for the explosive growth of America’s industrial revolution.
From then until the Civil War, known as the Antebellum Period, America’s economic growth was the fastest in the world, driven largely by the North’s industrialization. Interestingly, this all happened in the absence of significant trade with Europe.
This also presents us with a natural experiment. The American North embraced high tariffs, and used them to industrialize. The South, however, continued trading with Britain, importing manufactured goods, and exporting cotton.
The South maximized their comparative advantage, and embraced free trade. According to conventional wisdom, they were more economically savvy. Of course, when war broke out, their lack of industry sealed their fate.
Many American Presidents Supported Protectionism
Although, like Jefferson, President James Monroe was somewhat sympathetic to free trade in theory, he recognized that it just didn’t work in reality, stating:
whatever may be the abstract doctrine in favor of unrestricted commerce, [the necessary conditions, reciprocity and international peace ] have never occurred and can not be expected… [reality] imposes on us the obligation to cherish and sustain our manufactures [through tariff protection].
President Ulysses S Grant also acknowledged that protective tariffs were the reason behind America’s success, just as they were for Great Britain’s:
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.
Of course, his views were shaped by the North’s success during the Civil War, which was predicated upon industry and railroads.
President Theodore Roosevelt was also an ardent protectionist, stating:
The country has acquiesced in the wisdom of the protective-tariff principle. It is exceedingly undesirable that this system should be destroyed or that there should be violent and radical changes therein. Our past experience shows that great prosperity in this country has always come under a protective tariff.
But perhaps no president was quite as enthusiastic about tariffs (at least rhetorically), as was William McKinley, who remarked:
Under free trade, the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man.
Hyperbole or not, he was right that tariff protection was the historical norm.
In fact, high tariffs were the norm until the 1970s (when the old regime began to unravel).
America Was Economically Protectionist, And It Worked
I promised you 7, and gave you 7. Let’s count them up: Washington, Jefferson, Lincoln, Grant, Monroe, McKinley, and Teddy Roosevelt.
These were smart men who knew what they were doing.
They knew that political independence required economic independence, and they knew that high tariffs were the best, if not the only way to ensure this independence.
They knew free trade didn’t always work.
This is as true today as it was historically.
It’s high time we learned from history, or else, we’re doomed to repeat it.
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