For evidence that crises fuel reckless proposals look no further than the March 13th, 2020, American Mind essay by William Upton. This essay was recommended to me by several persons who disapprove of free trade and who accuse those of us who continue to oppose protectionism of being heads-in-the-sand ideologues.
I’m not impressed.
The title of Upton’s essay – “Make America Autarkic Again” – gives you a strong hint about its contents. If only “free traders, roosting in their D.C. think tanks and on Wall Street” hadn’t had the political sway that allowed them, over the past several decades, to expose Americans to “our over-globalized world,” we good citizens of the land of the free and home of the brave would today be more secure in our wealth and health.
The emotional appeal of proposals such as Upton’s is understandable, especially in the midst of the panic caused by the coronavirus pandemic. The less we depend upon others for the likes of medical supplies, the more certain is our ability to care for ourselves. The more thoroughly we reject reliance upon foreigners for our economic well-being, the less we risk being harmed by foreigners’ fecklessness, stubbornness, greed, and unfriendliness.
Emotions, however, are poor analysts. The comforting assurances of the claims summarized in the previous paragraphs rest on a swirl of terrible misunderstandings – misunderstandings that, if acted upon, will devastate our wealth while making us less, not more, secure in our health.
These misunderstandings are of both history and of the basic workings of market economies. Let’s look first at Upton’s flawed understanding of history.
The Current (Pre-COVID-19) State of the American Economy
To cobble together a case for autarky – that is, a case for government to forcibly prevent us Americans from consuming anything that we ourselves do not produce directly and from scratch – Upton predictably puts on parade several familiar fallacies.
He writes, for example, “that we’ve outsourced our industrial and supply capacity to cheap, overseas markets like China and Vietnam.” Not so. While it’s true that the value of our imports from these (and many other) countries has increased over the past few decades, Upton’s key claim in this passage is wholly false: America’s industrial and supply capacity has not been “outsourced.” As of the end of 2019, U.S. industrial capacity, measured in real terms, was at an all-time high, and 16 percent higher than when China joined the WTO in 2001. Also at an all-time high is American industrial production.
Given these facts, it’s unsurprising that the real value of Americans’ exports – that which we exchange for imports – is today just barely off the all-time high that it hit in the first quarter of 2018 (that is, just prior to the launch of President Trump’s trade war).
And of course, before governments began their COVID-19-inspired sledgehammering of the global economy, the unemployment rate in the U.S. had been for several months at or near a half-century low.
As economist Michael Strain makes clear in his 2020 book, The American Dream Is Not Dead (But Populism Could Kill It), the incessantly told tale of (pre-coronavirus) American economic woe and decline is not merely untrue; it’s spectacularly the opposite of true. Yet because it so conveniently serves the cause of those who seek greater government control over the economy, this tale continues to be repeated, ad nauseam and typically without even a nod to the existence of vast evidence to the contrary. (To his credit, the conservative protectionist Oren Cass does acknowledge this evidence, which he attempts to discredit with his Cost-of-Thriving Index. But Scott Winship and others convincingly show that Cass’s Index is fatally flawed.)
The Myth of Successful Industrial Policy
Upton is also factually mistaken in his clichéd assertions about the role of government in fostering American economic growth in the 19th century, Japanese economic growth in the 20th century, and Chinese economic growth over the past 40 years.
Regarding the role that protective tariffs played in the U.S. during its first full century of existence, Dartmouth’s eminent trade economist and historian, Douglas Irwin, says this:
[I]t’s become very hard actually to attribute US economic growth in the late 19th century to those higher tariffs. A lot of the key improvements in technology and a lot of the growth was in the service sector: telecommunications, railroads, and things of that sort. Manufacturing really didn’t grow much as a share of GDP in the late 19th century. A lot of that grew actually in the pre-Civil War period when tariffs were actually much lower – only in the range of 20 percent or so.
So there is the simplistic argument that one encounters a lot – that tariffs allowed us to grow rapidly in the late 19th century – but the more you look into it you see it’s a really tough case to make.
What about Japan, whose economic development is alleged to have been promoted by bureaucrats manning that country’s Ministry of International Trade and Industry (MITI)? Here’s economist Benjamin Powell: “While striking examples exist of companies succeeding despite MITI’s discouragement, evidence of successful promotion does not.” (See also David Henderson’s thorough debunking of the myth of successful Japanese industrial policy.)
China? Nope – the evidence is overwhelming that that country’s economic growth occurred only to the extent that markets there were freed. This conclusion is driven home by, among others, Nobel-laureate Ronald Coase and Ning Wang, and by the meticulous research of Nicholas Lardy.
Writing in 2003, Lardy noted “the unilateral trade liberalization that China undertook during the reform period, even prior to its accession to the World Trade Organization.” He concluded back then that “[b]y a number of measures China transformed its economy from one of the most protected to perhaps the most open among emerging market economies.” And Lardy now warns – as summarized by a report on his superb 2019 book, The State Strikes Back – that “China’s move away from market-oriented reforms has undermined the country’s economy, and Beijing’s leaders must reverse course soon to prevent a tailspin.”
Economies, in short, grow the more open and free they are – that is, the further they are from being autarkic. Economies do not grow as a consequence of politicians and mandarins using tariffs, subsidies, and other special privileges to shield domestic producers from foreign competition.
William Upton’s wildly mistaken understanding of history gives us a clue about the quality of his theoretical case for making American autarkic – a case that I’ll explore in my next column.