Not Only to No Single Person, But to No Council or Senate Whatever
After decades of advocating free trade, a growing share of Republicans want to return the party to the protectionism that once defined it. This sensibility, popularized by former President Donald Trump, echoes the economically unlearned fretting with which generations of interested politicians and lobbyists rationalized trade barriers. After prolifically introducing tariffs when in office, Trump has proposed a sweeping 10-percent tariff on imports. This, assuming steady import levels, would amount to a roughly $300-billion annual tax increase on Americans.
The GOP’s rediscovered protectionism reflects transient political (and often aesthetic) sensibilities more than any economic reality. Trump and likeminded populists often allege that free trade has chased American manufacturing jobs to foreign countries. “Some people in our country got rich, our industrial base got hollowed out,” Florida Gov. Ron DeSantis (another tariff-friendly Republican) said of America’s relationship with China, at the party’s second presidential primary debate.
International trade has enriched Americans greatly, and Trump’s trade war with China largely failed to achieve its goals and pummeled the domestic economy. While some previously American jobs have, indeed, emigrated to nations with lower labor costs, the mythologized disintegration of America’s manufacturing belt occurred more due to automation, union malfeasance, and other factors.
The GOP’s pivot recalls a bygone era, and equally old — and older — arguments can rebut Republican arguments. Economists have, for centuries, debunked shoddy protectionist theories. As free trade between individuals benefits the transacting parties mutually, so too does trade between nations.
In his 1776 classic, The Wealth of Nations, Scottish economist Adam Smith observed that “All…find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase…whatever else they have occasion for.”
Like any tax, tariffs artificially raise consumer prices, thus “protecting” domestic manufacturers from foreign competitors offering the same goods cheaper. Smith recognizes the obvious: “If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless,” he argues. “If it cannot, it must generally be hurtful.” Here, Smith continues, personal finance can explain international trade, writing, “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”
Economics concerns the allocation of scarce resources that have alternative uses. Government misdirection of resources leeches economic productivity despite policy makers’ rosy promises. Tariffs force domestic consumers to pay more for goods, harming especially those firms that lie downstream in protected industries’ supply chains. “The industry of the country…is thus turned away from a more, to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation,” Smith writes.
Despite Smith’s — and many others’ — erudition, politicians have long supported protectionism, often for their personal electoral benefit. Protectionism, however, has consistently revealed itself to be economically nonsensical.
And recent experience has not differed.
Trump’s protectionist measures, of which Joe Biden has kept many, demonstrably harmed those American firms whose input costs they inflated. The International Trade Commission reviewed Trump’s Section 232 and 301 tariffs, reporting that Americans absorbed almost the whole of these tariffs’ cost. “Tariffs damage economic well-being and lead to a net loss in production and jobs and lower levels of income,” writes the Tax Foundation’s Erica York. She estimates that 45th and 46th Presidents’ tariffs will dampen long-term GDP and wages by 0.21 percent and 0.14 percent, respectively. Other countries’ retaliatory tariffs will, moreover, “further reduce US GDP by 0.04 percent and eliminate 29,000 full-time equivalent jobs,” she states.
Some Republicans’ apparent assumption that the American economy would benefit if American companies operated fully within the US badly misperceives the basic realities of globalized trade. Foreign expansions generally come in excess (not in place) of domestic operations. Most US companies with foreign manufacturing plants also operate domestic ones. “Research…finds that few multinationals increase hiring abroad and decrease their US headcount (which would indicate foreign workers are replacing American ones),” writes Scott Lincicome, vice president of general economics and trade at the Cato Institute. The same is true of manufacturing investment, Lincicome adds.
Forcibly reshoring American industry would threaten an immense amount of productivity. US firms that manufacture transnationally comprise only 0.5 percent of all American manufactures. They nonetheless exceed by $2 trillion the whole of their entirely domestic competition’s global sales. And far from abandoning America to achieve this success, domestic plants account for more than half of these few, but mighty, transnational US manufacturers’ sales.
This astounding productivity stems from the economic advantages provided by diverse, complex, and far-flung trade webs. Transnational US companies innovate and invest in research and development at a disproportionately high rate, which ought to appeal to national-security hawks focused on US-China competition. Moreover, dividing manufacturing among multiple countries allows firms to reserve for American plants the making of high-quality goods (e.g., Ford SUVs), while foreign plants with lesser labor costs produce other goods (e.g., car components and Ford Fiestas); There is a finite supply of American workers, after all.
Adam Smith decried protectionism in a nation, 18th-century England, whose mercantilist economic system placed excessive restraints on the individual’s ability to flourish and to create economic value. The Scotsman concluded that no ruler should attempt to plan an economy. “The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would…assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever,” he wrote.
In short, as economist Friedrich Hayek argued famously almost two centuries after, no government can possibly possess the knowledge necessary to direct commerce and capital allocation effectively.
Republicans once understood this. They ought to remember it.
