What is protectionism, what is free trade, and which is the better policy for America?
For much of the past century, trade policy around the world has tended towards “free trade” – that is, low tariffs and small or nonexistent barriers to trade between countries. One of the biggest indicators of this is the North American Free Trade Agreement, which established a trade bloc between Canada, the United States, and Mexico.
President-elect Trump has criticized these policies in much the same way that two-time independent candidate Ross Perot did, famously declaring that NAFTA would cause a “giant sucking sound”, drawing American jobs south to Mexico. However, proponents of free trade often point out the advantages of this: because American companies can off-source manufacturing to Mexico, where labor is cheaper and regulation is much less burdensome, they can offer their products at much lower prices than if they manufactured domestically. This benefits the American consumer.
But is this really the best situation for America?
Think about exactly why these American companies are so quick to move to Mexico (or China, for that matter). Labor is less expensive. Regulations are less burdensome. Taxes are lower. Overall, it’s much cheaper for a company to make its widgets in Mexico or overseas than here in the U.S., where the marginal corporate income tax rate is 39% and regulation and red tape provide significant obstacles to business. Furthermore, labor costs in the U.S. are significantly higher than in other countries. American workers expect high wages, benefits, easy work weeks, etc. The minimum wage means that it’s impossible to hire very unskilled workers who are only worth less than the minimum wage. Think about this. If you run a company manufacturing your widgets in the United States, and you’re given the opportunity to move to Mexico and make much more money, why would you not move unless you were insane? I would also note that this effect is exaggerated by the fact that many trade agreements do indeed favor other countries over the United States.
Trump wants to prevent these companies from moving out of the States, or bring them back if they’re already gone. But his main way of doing this seems to be moving the United States away from a free trade policy. He’s said the following several times: “Every car and every part manufactured in this plant that comes across the border, we’re going to charge you a 35% tax, and that tax is going to be paid simultaneously with the transaction.” This is effectively a massive tariff charged on imported goods. Does he plan to couple this tariff with a business-friendly tax plan and a corresponding massive decrease in regulation? He had better, because otherwise these companies are simply stuck between a rock and a hard place and they will just die.
Now let’s check out the history of protectionist policies such as what Trump said above. In 1930, the Depression was in full swing. Americans were losing their jobs left and right. Congress got together and basically came to the same conclusion as Trump: “We need to force economic development to stay in America by placing huge tariffs on imported goods.” The result was the Smoot-Hawley Tariff Act, which, according to Wikipedia, raised tariffs on over 20,000 imported goods to unprecedented levels. The “dutiable tariff rate” was raised to about 60% by 1932. The result? This, coupled with the Keynesian high-tax, high-spend, high-regulation policies of the Roosevelt administration, combined to yank the U.S. further into depression by choking American business to death on all sides.
I don’t think the Trump administration wants to raise taxes or increase regulation – in fact, Mr. Trump has repeatedly stated that his policy will be to decrease taxes and halt regulation. Republican control of the Congress will, hopefully, ensure that highly protectionist policies will be shut down.
Let us hope that Trump and the GOP do not repeat the mistakes of the 1930’s.