No Trade, No Gain

Opposing trade means opposing innovation.

John Nye from the May 1996 issue

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Protectionists like to note that the United States had the highest tariffs of any industrial nation in the 19th century. But they do not note two things: First, all economic research suggests that the United States developed despite and not because of high tariffs. Indeed, until the Civil War, American average tariff levels were similar to those in liberal Britain, and they declined substantially from 1800 until 1860, when tariffs were raised. Second, and more important, America had virtually open markets for labor and capital.

Thus, the high costs of importing foreign manufactured goods were offset by the low costs of importing foreign workers. Large numbers of immigrants came to work from all over the world, putting pressure on the native work force. Restrictions on their entry were rudimentary and hard to enforce. Furthermore, it was relatively simple to invest in the United States, with its advanced capital markets and a lively financial sector that was leniently regulated.

Most important is that given the size of the unexplored frontier and the explosive growth of the American population, merchandise trade was of relatively little importance in the 19th-century United States. Neither exports nor imports were very important for American producers, with the exception of agriculture. Hence tariffs were imposed over the objections of the defeated Southern states, which suffered the most from protectionism. And America was at least as open as most other countries to the changes that characterized the period of late industrialization.

In the end, protection didn't stabilize the economy, and Americans were buffeted by the same technological shocks as Europeans. Nineteenth-century America suffered from monetary crises, recessions, deflation, labor unrest, and the problems of mergers and takeovers as the industrial landscape accommodated to the changing technologies of the railroad, telegraph, and electricity. Throughout it all the nation's economy grew steadily and impressively, eventually making most people better off. America's strength lay in its ability to absorb those inevitable shocks, learn new techniques, and change to meet the needs of the time.

Though international trade may have accounted for only a small part of GNP in the 19th century, it plays a much larger role now. We no longer have an expanding frontier, and population growth and immigration do not play the same roles they once did. Today, the new frontiers are the world markets, from Europe and Japan to the growing middle classes springing up in Southeast Asia, Latin America, the Middle East, and even Central Europe and Africa.

Just as with the contemporaries of the Industrial Revolution, we can't know the future that current changes are creating with certainty. We are going through difficult and exciting times but all told the United States is doing quite well. Periods of large, dramatic technological innovation are also periods of mind-boggling, even gut-wrenching changes. The open society shows the effects of those changes most rapidly and clearly. We must resist the temptation, particularly in an election year, to blame the messenger--free trade
--that brings both the bad and the good news.

The United States has adjusted to the changing state of global innovation and trade more successfully than most countries. It is now almost universally acknowledged abroad that for Europe and Japan to prosper they must become more like us. But they have postponed reform and so the will to change is weaker than ever. For example, protection of the German automobile industry from Far Eastern competition has meant slow adjustment to the needs of the world economy. Where Volkswagen was once a household word, it is now almost insignificant in the North American market and has lost thousands of workers while continuing to lose market share. The United States, by confronting the competition earlier, has seen its Big Three companies retrench and retool, and Detroit now shows record profits.

Japanese domestic regulation and agricultural protection have driven home prices so high that the Japanese have a real standard of living half that of Americans. Their system shields an inefficient banking system that may have up to a trillion dollars in bad debts. Germany and Japan may have been lulled by their protective walls into a false sense of security and stability, little suspecting that the day of reckoning will wreak even greater havoc and make the adjustments both more urgent and more politically painful.

The most interesting times feel like the most accursed. But if history is any guide, there is as much reason to hope for still greater prosperity as there has ever been in history. It is especially surprising that Republicans would be seduced by the siren song of protection. Long concerned about the problems of overtaxing and regulating the domestic economy, they do not see that taxing and managing foreign trade suffer from the same difficulties. Both are ultimately debilitating, and in the long run, both are equally futile.