Trade: Future Enemies

Protectionism kills new ideas, hurting future generations.

Protectionism is a bit like bloodletting. For centuries many intelligent and learned people passionately believed bloodletting was a panacea, and they fought for it on the political and intellectual battlefields. Yet they were hopelessly wrong. Unfortunately, whereas the practice of bloodletting has joined the flat earth, alchemy, and phlogiston physics in the dustbin of the history of science, protectionism somehow manages to raise its ugly head time and again in America. While the leaders of both major political parties have by and large embraced free trade, some fringe candidates have resurrected protectionism and are riding a wave of bigotry and parochialism, masquerading as "America First." Like taxes and death, we cannot shake it, and maybe we never will. But it is worth trying.

The intellectual case for protectionism is about as alive as a doornail. To be sure, a few clever economists have constructed some pathological scenarios in which a tariff could be beneficial. For the protectionists to take solace from this literature would be akin to flat earthers finding vindication in the fact that the Earth is slightly flattened at the poles or phlebotomists gloating about a few rare diseases in which removal of blood can be beneficial. But economics, unlike physics or medicine, cannot experiment and has no laboratories. The burden of proof is always heavier, and those who refuse to believe in the obvious can find a sympathetic audience, especially since protectionism has been able to draw support from the seemingly inexhaustible reservoirs of xenophobia and prejudice that bubble beneath the surface of American society. Moreover, there are always groups that stand to gain from protection. These groups naturally ignore the intellectual bankruptcy of protectionism and dig up various crackpot theories that seemingly show how tariffs can benefit a nation.

The most persuasive case against protectionism is not the standard one that undergraduate students are taught in their introductions to international economics, which goes like this: Tariffs distort the allocation of resources and impose a "deadweight burden." The few gain at the expense of the many, but their gains are smaller than the losses. Society throws away valuable resources by artificially inducing its producers to supply goods that can more efficiently be imported.

The standard argument is certainly correct, but somehow it has failed to persuade many people since it was first enunciated by Adam Smith and David Ricardo. Presumably political speeches that urge people to "support your local efficient allocation of resources" are not exactly sound-bite material. Sometimes arguments are correct but do not work politically. In this regard, physicians have done a better job in persuading us that bloodletting is a useless medical practice than economists have in defending free trade. Part of the problem may be the rhetoric of economics. An equally important obstacle is the powerful interests who stand to gain from protectionism's distortions at everyone else's expense.

A more dynamic argument can be constructed. It, too, may be more of an intellectual exercise than a good campaign slogan, but because we can explain it without relying on "little triangles" in supply and demand diagrams, it may be more appealing. The argument is this: Protectionism and insularism impede innovation, depriving our children of the comfort and security that progress and economic growth bring. Free trade and international competition not only lead to a better allocation of resources; they ensure that countries do not lull themselves into the technological lethargy that is the archenemy of economic growth.

The omnipresent danger to continued technological advance is that innovation–not unlike free trade–has many enemies who would like nothing better than to impose legal and political restrictions on it, from licensing laws to featherbedding. Technological change is creative destruction. It almost always involves losers. These losers cannot be expected to stand idly by and watch others superannuate them.

Medieval guilds were by and large successful in codifying explicitly all stages of manufacturing, thus making new ideas almost impossible to introduce. Beginning in the 1920s, British labor unions tried the same thing. The technological status quo embodies huge investment in physical and human capital. It is hardly surprising that its owners promote slogans like, "If it ain't broke, don't fix it." Technological success breeds its own failure by using politics to protect itself from the next wave of innovation. For that reason technological success in any society is usually short-lived, a regularity that I have called "Cardwell's Law."

In an open economy, where producers constantly have to compete with foreigners working under different institutions, it is far more difficult to erect such barriers. An industry that cannot or refuses to innovate will be wiped out by imports. Since producers expect this, the incentives to stay near the cutting edge of technology are far stronger. Imports mean that consumers will still be able to get new products, unless the vested interests can persuade the government to surround the country with a wall of tariffs to protect an increasingly obsolete industry.

An example is the late-19th-century British shoe industry. The economic historian Roy Church has shown how these manufacturers were reluctant to buy the fancy shoemaking machines developed in the United States yet were eventually forced to do so because of the flow of cheap machine-made shoes from America. Britain remained loyal to free trade, and time and again the forces of technological reaction in Victorian Britain were defeated by the powerful forces of foreign competition.

In other words, protection not only compels consumers to pay more than they should for the products they buy; it deprives future consumers of the main benefit of competitive capitalism: continued product and process innovation. Free trade guarantees the unhindered flow of information and knowledge.

This point flies in the face of the "infant industry" argument, which says protection is necessary for young and inexperienced firms to reach maturity and learn to use new technology. That argument, first dreamed up by Alexander Hamilton and tirelessly reproduced by protectionists ever since, is rarely supported by any evidence, and the many assumptions on which it rests are never tested. As Jagdish Bhagwati, the dean of international trade theory, noted in his 1988 book Protection, it is usually simply assumed that because firms produce, they "learn" and eventually become more efficient. But unless there is pressure from imports, internal competition may be insufficiently intense to spur the effort to develop and learn new techniques.

Superficially, the historical experience of the United States seems at odds with the argument that protectionism hinders economic progress. After all, the United States emerged from the Civil War as protectionist as ever. In the 19th century the Republican Party was the party of protection, and free trade, traditionally favored by the South, bit the dust in 1863. Yet the years after the Civil War were a period of accelerated technological progress.

Such superficial correlations should not mislead us, however. It often happened that patients who were bled recovered, convincing both doctor and patient that the bloodletting had been beneficial. In 19th-century America, commerce between states and regions dwarfed foreign trade. Interregional competition did for the United States then what international trade does today. The U.S. Constitution is the greatest free trade document in history, assuring free trade between the states. Had the states been allowed to set up internal tariffs, protectionism might well have destroyed economic growth in America.

Furthermore, America was hardly insular: While it was protectionist as far as goods were concerned, it let people in relatively unhindered until 1922. Anyone who wanted to introduce new technology into America could immigrate here and innovate all he wanted. Samuel Slater, Andrew Carnegie, Leo Baekeland, Nicola Tesla, Vladimir Zworykin–the number of foreign-born inventors and innovators who helped build America's technological leadership is striking.

Today's neo-populists wish to shut off the flow of immigrants while simultaneously curtailing imports of goods and services. This will mean cutting off the influx of new ideas. Their logic is that if it is worth inventing, American ingenuity will create it. This goes beyond protectionism; it is insularism inspired by ethnic arrogance. For many centuries, proud empires such as China and the Ottomans assumed they had nothing to learn from barbarians, with devastating effects on their long-term economic development. By 1900 these insularist empires had fallen hopelessly behind the comparatively open economies of the West. In the 20th century, Albania and North Korea fared no better.

There is no real danger that America will become as insularist as that. But the aggressive protectionism advocated by some candidates resonates with a worrisome number of voters. Trade measures would be met by retaliation, and full-scale trade wars with Japan and the European Union, thus far mercifully avoided, might erupt. The economic damage to future generations would be enormous.

Joel Mokyr ([e-mail]), Robert H. Strotz Professor of Arts and Sciences and a professor of economics and history at Northwestern University, is Simon Visiting Professor at the University of Manchester. He is the author of The Lever of Riches (Oxford University Press, 1990).