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Will U.S. Policymakers Repeat Our Past Protectionist Failures?

Summary:
The past couple years have been rough for free traders in the United States – not only did an avowed protectionist win the White House for the first time in decades, but he did so while claiming that protectionism has been an effective policy throughout the nation’s history.  Even worse, President Trump and his advisers were far from alone in perpetuating and repeating the view that past restrictions on foreign competition were unequivocally successful in achieving their stated policy objectives: decreased imports, increased jobs, industrial revival, opened foreign markets, and American economic prosperity more broadly. For us trade policy wonks, Trump’s revisionist history – and a lack of a vocal response to it from his political opponents, pundits and journalists – was both

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The past couple years have been rough for free traders in the United States – not only did an avowed protectionist win the White House for the first time in decades, but he did so while claiming that protectionism has been an effective policy throughout the nation’s history.  Even worse, President Trump and his advisers were far from alone in perpetuating and repeating the view that past restrictions on foreign competition were unequivocally successful in achieving their stated policy objectives: decreased imports, increased jobs, industrial revival, opened foreign markets, and American economic prosperity more broadly.

For us trade policy wonks, Trump’s revisionist history – and a lack of a vocal response to it from his political opponents, pundits and journalists – was both surprising and depressing because it seemingly ignored a vast repository of academic analyses of and contemporaneous reporting on the periods and policies in question.  Then again, one could hardly blame most laypeople for not digging into and regurgitating the academic work because at the time there really wasn’t an easily searchable survey of the many failures of American trade protectionism.  Early this year, I set out to change that, and the result is a new paper for Cato out today.  In it we see that the actual scholarship demonstrates how American protectionism—even in the periods most often cited as “successes”— not only imposed immense economic costs on American consumers and the broader economy but also failed to achieve its primary policy aims and fostered political dysfunction along the way.

The paper surveys academic literature from three periods of American history, demarcated by milestones in the evolution of the U.S. and multilateral trading system: (1) from the founding to the U.S. entry into the General Agreement on Tariffs and Trade (GATT) in 1947; (2) from the GATT’s early years to the creation of its successor, the World Trade Organization (WTO), in 1995; and (3) the current WTO era. These surveys show that, contrary to the fashionable rhetoric, American protectionism has repeatedly failed as an economic strategy:

  • Pre-GATT. U.S. history from the Founding through the early 20th century shows protectionism decreasing in effectiveness and increasing in costs for consumers and the economy more broadly. Multiple academic studies of the period between the Civil War and the Great Depression—often argued to be a golden era of American tariffs and industrial prosperity—show protectionism to have inhibited, rather than encouraged, industrial and broader economic growth. Instead, other economic factors—particularly rapid population expansion—drove American growth during this era. The protectionism of this era is also shown to have fostered modern American lobbying and rent seeking and, as a result, to have been closely associated with political corruption. Overall, however, pre–20th century U.S. trade policy provides few real economic lessons for modern policymakers because of the stark social, legal, and economic differences between that period and today.
  • From GATT to WTO. The findings from numerous studies of protectionist measures during the GATT period of general trade liberalization are unequivocal: U.S. protectionism not only produced far higher total economic costs than benefits, but also more often than not failed even to achieve its intended objective, whether that be the rejuvenation of an ailing American industry and its workforce or the opening of new U.S. export markets. In particular, these studies show the high economic costs of U.S. protectionism. For example, studies of specific U.S. import restrictions between 1950 and 1990 found that the measures cost U.S. consumers an average of $620,000 in current dollars per job supposedly saved in the protected industry at issue. By contrast, at the current hourly U.S. manufacturing wage of $20.69, a typical factory worker makes a little over $41,000 per year.

    Studies also found that protectionist measures failed in most cases to prevent further increases in imports or declines in U.S. jobs, finding only one instance—the bicycle industry—in which protectionist measures apparently resuscitated the industry in question. One analysis found that threats of retaliation through section 301 of U.S. trade law, again in the news last week, failed to achieve even partial success more than half the time, with actual retaliation working less than 20 percent of the time. Even the most heralded examples of American protectionist successes during this era—motorcycle safeguards that supposedly saved Harley-Davidson and the U.S.-Japan Semiconductor Trade Agreement—have been revealed to have imposed immense costs on U.S. consumers and companies for very little, if any, actual gains.

    These outcomes would likely be worse if similar policies were implemented today, owing to increased American integration into the global economy, the proliferation of global supply chains, the rise of other economic powers, and the creation of the WTO. Thus, protectionism today would yield even more pain for even less gain.

  • WTO. Following the advent of the World Trade Organization in 1995, American unilateral protectionism retreated—relegated to relatively few trade barriers on politically sensitive goods and services dating back decades and to narrow administrative actions under U.S. “trade remedy” laws, which govern antidumping, countervailing duties, and safeguards. The results of this protectionism, however, were no better than the previous eras and arguably worse given the U.S. participation in the WTO and further integration of the U.S. and global economies. Both created tangible ramifications (i.e., new prospects of retaliation and greater harms to import-dependent U.S. companies) that did not previously exist.

    Macroeconomic studies continue to show that U.S. protectionism imposes significant harms on American consumers and the broader economy. Examinations of trade remedies in specific sectors—steel, high-tech goods, lumber, paper, and tires—show massive consumer costs and the failure to revive the companies seeking protection. U.S. antidumping law has repeatedly been found not only to hurt U.S. consumers and many large American exporters, but also to only rarely improve the state of the protected industry. Instead, what often lies in the wake of protection is bankruptcy for the very firms that lobbied for protection. Other nontariff barriers, such as those on meat labeling, sugar, and maritime shipping, have proven no better and, in many cases, have led to foreign retaliation or the threat thereof.

In recent years, academic work and political commentary have focused on whether the “free trade consensus” view in America may have underestimated the disruptions to the U.S. economy caused by heightened import competition. This discussion, while worthwhile, has spawned troubling suggestions from scholars, pundits, and politicians that the U.S. government should be more willing to experiment again with protectionism to help American workers and the economy, particularly the manufacturing sector. My paper should help disabuse them of such ideas.

With little doubt, the United States has struggled in recent years to adapt to significant economic disruptions, whether due to trade, automation, innovation, or changing consumer tastes. How we should respond to these challenges warrants discussion and consideration of various policy ideas. What should not be up for debate, however, is whether protectionism would help to solve the country’s current problems. History is replete with examples of the failure of American protectionism; unless our policymakers quickly relearn this history, we may be doomed to repeat it.

The paper - “Doomed to Repeat It: The Long History of America’s Protectionist Failures” - is available for download here.

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