Protectionism? It’s Nothing New
When reading the news, you might think that the trade tensions between China and the US are a contemporary issue. However, if you look at history, it becomes evident that protectionism has existed for centuries. Modern arguments of unfair trade are only a variation on the age-old argument that protectionism saves domestic industries from the threat of foreign competition.
Protectionists only see lost jobs lost. They ignore the jobs created by free trade. As free trade lowers prices, consumers have more money to spend on other industries, creating new jobs.
Likewise, the producer only thinks of protectionism in isolation. He does not realize that free trade might gain his access to cheaper supplies to create his goods, thereby allowing him to compete with the cheaper foreign producers. He also fails to realise that he too will be able to buy other goods cheaper, bringing down his own cost of living. Even subsidised foreign goods are welcome, as the foreign government is essentially covering their own producers’ losses so that we can get cheaper goods – essentially free stuff. There are numerous other arguments against protectionism.
Adam Smith argues against protectionism in his magnum opus The Wealth of Nations, indicating that tariffs were a problem as far back as 1776. In Book IV, chapter 2, Smith lays the groundwork for free-trade advocates. He notes:
‘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. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor.’
Smith writes in great detail on the dangers of domestic monopoly, and its negative impact on prices and competitiveness. He also highlights the market distortions created by protectionism. He suggests that as capital is allocated to the protected production of goods which foreign countries have a clear advantage in producing, that same capital is denied from the production of goods which the domestic country is more efficient at. Modern free trade advocates, reuse and iterate on Smith’s arguments from 1776. They are fighting the same problem.
During the 18th century a form of protectionism called mercantilism was at the forefront of politics. Mercantilism differs from traditional protectionism in that it is an ‘active’ form of protectionism. It seeks to create a positive balance of trade for the country by accumulating gold reserves – as was the global standard – by boosting exports. Therefore, countries sought favourable reciprocal trade deals which did so, and limited imports from other countries that could harm the positive balance of trade.
Alexander Hamilton was the leader of this movement in America. Although a Founding Father, and as such associated with the idea of liberty, he was in fact an advocate of centralised government throughout his career. In his Report on Manufacturers, Hamilton lays the groundwork for his mercantilist sentiment by advocating for overall tariffs, especially for the protection of infantile industries. Future president Abraham Lincoln was another staunch mercantilist.
Protectionist sentiments were present across the Atlantic as well. Following centuries of tension between France and Britain, the two countries tried to reconcile via trade. However, after they signed a trade-deal in 1786, the French were displeased with the outcome as underdeveloped French industries were forced to sell at loss-making prices in Britain – giving rise to protectionist sentiment in France.
Despite seeking such free-trade deals, the United Kingdom also at certain times fostered mercantilism. With its growing empire, 18th century tariffs were a way to secure much-needed revenue for further expansion. The most notable instance was the Corn Laws of 1815, erected in order to keep British grain prices high.
This disastrous trade policy ended in the Irish Famine of 1845, which was caused by widespread failure of the potato crop on which Irish peasants relied and the high tariffs on imports of food from other places, causing a scarcity. The abandonment of the Corn Laws soon afterwards was a turning point towards free trade, both in the UK and across Europe. Scottish philosopher David Hume greatly helped in championing the cause for free trade with his price-specie-flow mechanism.
Protectionism would return in later periods, mostly as an attempt to revive the domestic industry after a crisis – such was the case during the 1930s. International trade barriers were erected after the 1929 Stock Market Crash, as the US signed the Smoot-Hawley tariff act which introduced tariffs on more than 20,000 goods in order to prop up the American industry. The international community responded with tariffs of their own and many economists believe the Smoot-Hawley bill to be the trigger for the double digit unemployment numbers seen throughout the 1930s.
The graph below indicates these shifts in protectionist sentiments of some of the major superpowers. As evident, tariffs sharply reduced after the 1840s in Great Britain, whilst they shot up in the US after the American Civil War. As mentioned, Lincoln was a staunch advocate for protectionism and implemented tariffs of 44% during the war.
Therefore, given the historical examples above, it is evident that protectionist sentiment has existed for centuries. The examples are not exhaustive, but they sufficiently indicate the longevity of the idea, as well as the various shifts in opinion.
You might wonder as to how protectionism managed to survive for so long. The answer is simple: self-interest. It is in the interest of every individual to sell as many goods of his product for the highest price, and as such, foreign competition becomes a threat. Free trade usually lowers the prices of goods as well as offering a wider array of choices, thereby negatively impacting an uncompetitive domestic producer. It is no wonder that producers often create cartels to have a larger influence over the push for trade barriers. As Adam Smith writes: ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’
Given such self-interest, and the prevalence of it over the centuries, the only reasonable solution to protectionism is a constitutional amendment in favor of 0% tariffs without any exception. Exceptions MUST be disallowed as the argument for protectionism tends to change, thus potentially shifting public opinion in favor of it. The mercantilist argument was focused on exports and gold, while the current arguments are based on reciprocal fairness. The traditional argument has been for the protection of domestic industries, or for newer not-yet-established industries. Whatever the argument may be, by disallowing any exceptions, we can secure the future of free trade from any political newspeak that advocates for protectionism, regardless of how plausible the arguments may initially appear.
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