Look Who's Afraid of Free Trade
Over the past year, the Democratic candidates for President have settled on two core themes. One is that the Iraq war was a disastrous foreign-policy error from which the country must be extricated expeditiously—a proposition on which they differ only in the details. The other represents less a policy conviction than a profound change in the basic political philosophy of the party ever since its founding in the late 1820’s. As against one of their party’s oldest traditions, the 2008 Democrats are in general agreement that free trade is no longer in the economic interests of the United States.
To justify this shift, all of the Democratic candidates point to the unacceptably high cost imposed by jobs going to low-wage countries, and the impact this has had on wages here. To reverse these alarming realities, all suggest that our national attitude toward trade policy must change. Thus, Hillary Clinton has called the North American Free Trade Agreement (NAFTA) “a mistake,” even though her husband, fifteen years ago, made it a signature issue of the first year of his presidency and worked hard and successfully to get it through a reluctant Congress. Barack Obama, for his part, recently voted in the Senate against a new free-trade agreement with Central America and against a similar one with Peru, even though that country’s GDP is less than 1 percent of that of the United States. “Our trade policy,” John Edwards declares flatly, “has been bad for working Americans,” while Dennis Kucinich, the most unabashedly left-wing of the candidates, merely extends the views of the others in proposing not only to cancel NAFTA but to pull the United States out of the World Trade Organization, one of the proudest achievements of post-World War II diplomacy.
To be sure, none of the Democrats has called for transforming the world’s largest economy, with more than a quarter of global GDP, into a 21st-century Tokugawa Japan, walled off from the rest of the world. But their general position, if implemented, would inevitably lead to greatly diminished American overseas trade. That would profoundly affect every sector of the American economy, every region of the country, and the habits of every American household. More: it would lead to a decline in trade for most countries, with potentially catastrophic consequences for the world as a whole.
How did the party that throughout its long history has advocated the lowest possible impediments to free trade become the party that is afraid of free trade’s effects? The answer to that question requires a brief look at the history of American trade and the politics behind it.
Like all colonies founded in the Western hemisphere by Europeans, those that would become the United States began as exporters of raw materials and importers of practically everything else. (Tobacco, rice, and deerskins were among the major exports of the Southern colonies; wheat, flour, furs, pig iron, and lumber of the Northern ones.) The mother country wanted to keep it that way. By the mid-18th century, as colonial economies were expanding and diversifying rapidly, Britain imposed tighter and tighter restrictions on them. Britain also forbade the colonies to engage in most direct trade with foreign countries, instead requiring that such trade pass through British middlemen and be subject to British tariffs.
These laws were a prime cause of the American Revolution, and were something of which the Founding Fathers were very mindful in writing the Constitution. While a tariff on imports from foreign countries was expected to be the major source of income for the federal government—as indeed it routinely was until World War I—they flatly forbade taxes on exports.
For most of the early years of the Republic, thanks to surging imports, federal revenues rose sharply and were in surplus. But when the British imposed a naval blockade on the U.S. during the War of 1812, domestic manufacturing came into its own, especially in the North. This would pose a problem when the war ended and the blockade with it. Facing intense competition from more established and more efficient British textile mills, the new American textile manufacturers lobbied for protection. They succeeded: a duty of twenty-five cents a yard effectively excluded cheap British cloth from the American market.
This may have helped the North, but the Southern states, which increasingly depended on shipping their raw cotton to both American and British mills while importing most manufactured goods, arose in opposition. In 1828, a new and considerably higher tariff, denounced by Southern politicians as a “Tariff of Abominations,” caused the nation’s first great secession crisis. Four years later, President Andrew Jackson, himself a Southerner, was able to defuse the crisis by upholding the constitutionality of tariffs while simultaneously pushing a lower tariff bill through Congress.
Enter the Democrats. Jackson had first run for the presidency in 1824, winning the popular vote but losing to John Quincy Adams in the House of Representatives when he failed to carry the electoral college. His supporters, who identified themselves with the interests of the common man, were dubbed Democratic-Republicans, soon shortened to Democrats. When Jackson trounced Adams in the election of 1828, the Democratic party was in business. Downward pressure on the tariff would henceforth and forever become one of its defining causes.
The party’s identification with that cause was tested early by the need to raise federal revenues quickly in the Civil War. This led to a much higher tariff. By war’s end, moreover, the political and economic landscape of the United States had been profoundly transformed. The South, the center of opposition to protectionism, was for a decade essentially an occupied country with little political influence. Meanwhile, the North had become an industrial powerhouse, and the new industrialists were aligned with the dominant and overwhelmingly Republican sources of political power in the post-Civil War era. The party and its backers saw to it that the tariff wall was maintained for decades—another defining cause, and one that would mark the key line of division between the two parties right down to the modern period.
Over time, the Democratic base came to encompass not only the stricken “Solid South” but the rapidly growing number of industrial workers and poor farmers who were hit hardest by the regressive effects of Republican-championed protectionism. William Jennings Bryan, who would be nominated by the Democrats for President three times beginning in 1896, got his start in national politics by his brilliant oratory against the tariff. His philosophy of a low tariff combined with the free coinage of silver—a means of inducing inflation to help debt-ridden farmers—would be the party’s banner until the eve of World War I.
Of course, by Bryan’s time, the American market was anything but static. With immigrants arriving in ever-increasing numbers—on average, nearly 900,000 a year between 1900 and 1914—and with the native-born population rapidly multiplying as well, the economy grew rapidly, ensuring competition despite the best efforts of capitalists to form cartels and monopolies. By 1900, thanks to “Yankee ingenuity” and the rapid adoption of new technology, the United States was able to produce most goods at a lower cost than European competitors.
If the tariff nevertheless stayed high in those decades, it was because of heavy lobbying from corporations loath to compete with foreign firms. Only when a dispute within the privately held Carnegie Steel Company led to the public release of documents showing the company’s astonishing profits did the solid political wall against free trade begin to crack. In 1912, the Republicans split between President William Howard Taft and former President Theodore Roosevelt, enabling the Democrats to win control of both Congress and the White House. In 1913 they significantly lowered the tariff for the first time since the Civil War, and American trade increased.
It would not last. Republicans regained control in the election of 1920, raising the tariff once again although not to the heights seen before World War I. Those heights would return, however, after the election of 1928. Campaigning for the presidency, Herbert Hoover had promised farmers, already distressed because of excess food production, that he would sponsor legislation to protect them from cheaper foreign imports. Once in office, he summoned a special session of Congress to deal with his proposal, thereby setting off a classic feeding frenzy. Special interests descended on Capitol Hill, demanding protection from “unfair” competition.
With the crash in the stock market in October 1929 and a contracting economy, it became politically impossible to withstand the demands of even minor industries. The fateful result was the Smoot-Hawley tariff of 1930 (named for its chief sponsors, Republican Senator Reed Smoot of Utah and Republican Congressman W.C. Hawley of Oregon). Raising tariffs to the highest point in American history, Smoot-Hawley inevitably sparked a series of retaliatory tariffs by foreign nations on American goods. The resulting collapse in world trade brought it by 1939 to a lower point than in 1895. Regarded by most economic historians as among the chief causes of the Great Depression that swept the globe beginning in 1930, and nowhere more severely than in the United States, Smoot-Hawley has taken its place as one of the most disastrous acts of statecraft in the modern era.
The political consequences of Smoot-Hawley were no less enormous. In 1932, the near-total collapse of the American economy led to the election and successive re-elections of Franklin Delano Roosevelt and a reshaping of the political and ideological landscape. Chastened by the long experience of the 1930’s, the policy of the United States since the end of World War II, through Democratic and Republican administrations alike, has principally been to negotiate lower tariffs and eventually to eliminate them and other barriers to trade.
Thus, after World War II, the United States moved decisively to help rebuild a shattered Europe with the Marshall Plan and to construct a stable world monetary system with the Bretton Woods Agreement and the International Monetary Fund. In 1947, the Truman administration negotiated the establishment of GATT, the General Agreement on Tariffs and Trade, as a way of reducing tariffs and promoting world trade. (It became the World Trade Organization in 1995.) Every postwar administration has been involved in and supportive of these international negotiations.
The result was a steady increase in total world trade. Between 1950 and 1970, trade in agricultural products more than doubled, in mining products more than tripled, and in manufactured goods more than quintupled. The next decade would see even more spectacular increases. Overall, between 1950 and 2000, the world’s exports of manufacturing, agricultural, and mining products increased by a factor of eighty. By contrast, world GDP, net of inflation, grew by a factor of only six.
To be sure, it was not only the steady reductions in tariffs and non-tariff barriers that brought about growth. Nor were the changes always to America’s short-term benefit. By 1970, for example, one of the 20th century’s most important inventions—the cargo container—was beginning radically to reduce the cost of shipping goods long distances by sea. With much briefer turnaround times for ships, much smaller crews of longshoremen, and radically reduced dockside pilferage, factories could be located in distant low-wage countries and their products could still be sold profitably at home. More and more labor-intensive goods, like clothing, now began to be manufactured abroad—a first step, in turn, in the economic launching of the so-called “Asian tigers” of South Korea, Hong Kong, Taiwan, and Singapore. The jet engine, which similarly reduced the cost of air shipment, made it possible to trade high-value products, like fresh flowers, worldwide as well.
Also by 1970, both Europe and Japan had fully recovered from the devastation of World War II. Their factories, being newer than American counterparts, were often both more productive and more innovative. The temporary American monopoly in high technology and capital-intensive industries like electronics and automobiles began to slip away, as did the country’s trade surplus and financial dominance.
The combination of greatly lower shipping costs and increased foreign productivity produced the “rust belt,” symbolizing the erosion of America’s manufacturing base. The very heart of that base, the automobile industry, suffered especially. Needless to say, this led to renewed and intense political pressure for protection. While the free-trade consensus held, bilateral agreements were soon struck to freeze quantities of various goods exported to the United States, and voices were increasingly heard accusing foreign countries of dumping—i.e., selling products in the American market below cost.
Through much of the 1970’s and 80’s, the United States, under intense competitive pressure from foreign countries, underwent an often agonizing economic restructuring. New and much more productive methods were adopted to produce goods that could compete with the flood of imports. Steel, which for a century had been the sine qua non of an industrialized economy, was a case in point. In 1974, 521,000 American steel workers were producing 99 million tons. In 2000, nearly exactly the same amount was being produced by only 151,000 workers.
At the same time as this profound restructuring in manufacturing was getting under way, an even more significant revolution was sweeping through the entire economy. The microprocessor—basically, a dirt-cheap computer on a chip—entered the marketplace in 1971. It has already changed the world more than any invention since the steam engine, and we have not yet begun to see the end of its effect, or even the end of the beginning. If the recovery of American manufacturing led to an expansion in output but not so much in jobs, the microprocessor has produced massive job creation, both in the software industry in particular and in services in general.
In short, capitalism’s process of “creative destruction,” to use Joseph Schumpeter’s famous phrase, has been at work as never before in the American economy. Every year, about seven million jobs disappear in the United States, but many more than that are created. Since 1994 there has been a net creation of about 23 million jobs.
Still, all is not rosy—or is ever completely rosy. And this is where the politics of the Democratic party re-enter the picture. Not the least effect of the microprocessor has been a collapse in the price of worldwide telecommunications, a consequent explosion in their use, and, inevitably, an increasingly globalized economy. The automobile industry, to return to that, is now nearly wholly globalized. Although people still think of General Motors as an American company and Toyota as a Japanese one, that is true mostly in a nominal sense. While the corporate headquarters of the two companies and most of their stockholders are located in their respective countries, each manufactures vehicles all over the world from parts made in many countries.
Here at home, the resultant pinch has been felt most keenly by organized labor—the one major part of the American economy that did not benefit in the long run from the restructuring of the 70’s and 80’s, and that has suffered a severe diminution in membership. If, in 1953, 35 percent of American workers belonged to unions, today only 12 percent do, and that figure would be much lower were it not for the public sector, the one area of the economy that has seen a dramatic growth in union jobs. Nor is there any reason to think that the downward trend will change, especially given the pressures of globalization.
It is no surprise, then, that organized labor, once a bastion of free-trade advocacy, has become no less adamantly anti–free trade in recent decades. And although labor is a much less potent force in the American economy than it was in the immediate postwar years, it remains a major player in Democratic-party politics—able to provide massive numbers of “volunteers” to operate phone banks and supply other boots-on-the-ground aid to political candidates. In the meantime, the Democrats themselves, no longer the clear majority party in the country, have become increasingly more dependent on the political power of organized labor.
But labor organizations and their bread-and-butter concerns are not the only factor in today’s growing Democratic animosity to free trade. Two others must be named, of which the first is NAFTA.
NAFTA was, from the beginning, an unusual trade agreement. Most such economic deals are struck either between two countries or among a group of countries sharing similar economic circumstances (like the European Union). But NAFTA involves three countries—the United States, Canada, and Mexico—occupying two starkly different sets of circumstances. The U.S. and Canada are highly developed nations with educated populations, high per-capita GDP, and stable currencies. Mexico boasts the world’s 14th largest economy, but its per-capita GDP is much smaller than that of Canada or the United States and its wealth is much less evenly distributed. Although the Mexican oligarchy is among the richest in the world, there are vast numbers of both urban and rural poor, with about 47 percent of the latter at subsistence level.
One of the main arguments for ratifying NAFTA was that it would stimulate Mexico’s economy to the point where it would begin swiftly to converge with those of the United States and Canada. By thus transforming Mexico into a first-world country, NAFTA would greatly reduce the pressure on impoverished Mexicans to migrate to the United States in search of a better life. What happened was more complicated than that.
No sooner had the agreement come into force in 1994 than Mexico suffered a severe financial crisis and a radical contraction of its economy. Thanks to an international rescue effort crafted by President Clinton, and the growth in exports fostered by NAFTA, the crisis ended in 1996 and the economy began growing again. Indeed, in nominal terms, Mexican GDP has approximately doubled in the last ten years, poverty has fallen significantly, and exports have been surging. Mexico is now one of the world’s leading trading nations and the biggest in Latin America, surpassing even Brazil.
On the basis of these encouraging results, there is reason to speculate that in the long run Mexico will emerge as a modern industrial and even post-industrial economy. But it was naive, if not disingenuous, to suppose that the evolution from a semi-developed into a full-fledged modern capitalist economy would occur in only a few years. The promise of a rapid convergence that did not occur is what has allowed critics of NAFTA to claim, however wrongly, that it has been a failure.
Still worse, from the political point of view, is the claim that NAFTA’s failure has flooded the country with illegal Mexican immigrants, calamitously damaging the circumstances and prospects of the lowest-paid workers in the United States. This, too, is wrong. For one thing, by no means do all illegal immigrants from south of the border come from Mexico, which has its own problems with its southern border. For another, although NAFTA has, to some degree, suppressed wages at the low end of the economic scale in the United States, those who trumpet such statistics often overlook the fact that individuals in the lowest category of wage earners do not tend to stay there very long. The vast majority of people who were in the lowest quintile in 1980 and are still in the workforce today have moved to a higher quintile. The United States remains a land of economic opportunity without parallel in human history.
But NAFTA’s alleged failures are only one source of the protectionist mood now rising in the Democratic party. A second is a shift in thinking among liberal economists, whose writings once provided the strongest intellectual bulwark for a politics of free trade.
In 2004, Paul Samuelson, a Nobel laureate, called into question one aspect of David Ricardo’s idea of comparative advantage, a fundamental doctrine of classical economics. Ricardo (1772-1823) had assumed that very low-wage labor in distant countries like China and India would not threaten the wages of English manufacturing workers because of the very high transportation costs of his day. But, according to Samuelson, this is no longer true. Wages lost in developed countries today are not always compensated for by lower prices for goods at Wal-Mart. Not everyone, in other words, is a winner from globalized free trade, at least not in the short term.
Paul Krugman, another distinguished economist when he is not being a rabidly partisan Democrat, recently pointed out that the United States now imports more manufactured goods from third-world countries than from fully developed ones. This, Krugman wrote, may be a “very good thing . . . for the world economy as a whole and especially for poorer nations.” But for American workers “the story is much less positive.” In fact, Krugman contended,
[I]t’s hard to avoid the conclusion that growing U.S. trade with third-world countries reduces the real wages of many and perhaps most workers in this country. And that reality makes the politics of trade very difficult.
Although Krugman was at pains to stipulate that “I’m not a protectionist,” he concluded that “those who are worried about trade have a point, and deserve some respect.”
Like Samuelson, Krugman recognizes that, in the long run, free trade will help everyone. To this it may be added that the long run is not as long as it once was. The economic historian Gregory Clark notes that an agriculture-dominated economy requires that the vast majority of a population be poor and remain so. But today, for the first time in history, fewer than half the world’s workers are farmers, and that number will continue to fall as more and more opportunities open up in manufacturing and service in countries that have had peasant economies. As better wages begin to percolate through the economies of these underdeveloped countries, they will become ever better markets for the high-end goods and services in which the rich countries have a comparative advantage.
South Korea is a good example here. In 1960, it was one of the most underdeveloped countries on earth. A single generation later, it had achieved first-world status and now has the twelfth largest economy in the world. Nor is Korea an isolated instance: the global economy is growing strongly almost everywhere. The number of “working poor” in East Asia has been cut in half in just the last ten years, and nearly everywhere else the numbers are falling as well.
But intellectuals and historians can afford to take such medium- or long-term views. Politicians often cannot or will not, at least during election season. They are in the business of winning office, and their time horizon rarely exceeds two years (for the House), four years (the presidency), or six years (the Senate). This is a big problem, for the indisputable benefits of free trade can take at least a generation to be fully realized, while its short-term effects can work to the disadvantage of many. For a politician, the argument against free trade is therefore always easy to advance, and even easier to advance demagogically, especially when a well-known economist can be cited in one’s corner. And as for the media, with their built-in bias toward the negative, the fact that Ford has laid off 10,000 workers will always be front-page news, whereas the fact that Google went from zero jobs to well over 10,000 in the last decade will invariably go unreported.
This is not to say that Democrats are the only susceptible politicians in town. Within the Republican field of presidential candidates, Mike Huckabee, who made a surprising charge into the top tier over the fall of 2007, transformed himself from a free-trade supporter during his years as governor of Arkansas into some kind of free-trade skeptic. His views on this matter, as on others, lack specificity, but there is no mistaking the emotional appeal he was making last April in saying that “if somebody in the presidency doesn’t begin to understand that we can’t have free trade if it’s not fair trade, we’re going to continually see people who have worked for 20 and 30 years for companies one day walk in and get the pink slip and told, ‘I’m sorry but everything you spent your life working for is no longer here.’” Ron Paul, the insurgent candidate who raised more money than any other Republican in the last quarter of 2007, describes himself as a libertarian, which would ordinarily signal a deep commitment to free trade. But as a member of Congress, Paul has voted against every recent free-trade proposal.
Such views have much in common with those expressed in the protest candidacies of Patrick J. Buchanan and H. Ross Perot in 1992. (Perot, who ran as an independent, won the lion’s share of his support from Republican voters.) But the protectionist tenor of those candidacies was so out of step with the mainstream of the Republican party that Bill Clinton was able to depend on the support of Newt Gingrich and Bob Dole to secure congressional passage of NAFTA. When George W. Bush levied a temporary tariff on steel in 2002, the loudest voices heard in condemnation came from inside his own camp. Similarly, today’s mainstream Republican candidates for President—John McCain, Rudolph Giuliani, Mitt Romney, and Fred Thompson—are part of the party’s postwar consensus in favor of free trade.
Thanks in part to the populist potency of the Huckabee and Paul candidacies, one cannot dismiss the possibility of substantial pressure on the party to follow the Democrats in pulling away from free trade. But so far, and despite waverings on the margins, it remains the fact that the Republican party, long the champion of protectionism, is now essentially the owner of the ideology of open trade, while the mainstream of the Democratic party, a party founded on that ideology and proudly identified with it for virtually its entire existence, is in the process of a stunning reversal.
True, Democrats do not flat-out oppose lower barriers to trade, or flat-out endorse explicitly protectionist measures. Instead, their views are usually couched in terms of environmental concerns and workers’ rights. Congressional Democrats, for instance, will claim that they are not against free trade; they just insist on provisos in free-trade agreements that no sovereign nation could possibly accept.
Would a Democratic President, were he or she to be elected, be willing to walk the walk of protectionism? That is a good question, and one that cannot be answered definitively in advance. It is certain, however, that any such President would be constrained by anti-free-trade campaign rhetoric, inhibited from advancing new free-trade proposals, and under pressure from constituent groups both to tighten the terms of old agreements and to take an increasingly tough line with America’s trading partners. If that should happen, the American position as an advocate of ever freer trade across national boundaries—an advocacy without which the extraordinary postwar increase in global trade would not have been possible—would be at risk of much graver and more perilous erosion.
That is why politicians who understand the overwhelming importance of free trade to our future as a nation must unceasingly make the case for its benefits, as Ronald Reagan and Bill Clinton did. By the same token, because no one today has personal memories of what happened when a downturn in the American economy and the workings of politics-as-usual produced the Smoot-Hawley tariff, thereby helping to turn an ordinary recession into the Great Depression, politicians favoring free trade are under an obligation to remind us of this repeatedly and in no uncertain terms. While they are at it, they might also be mindful of the sound warning tendered by the 19th-century French economist Frédéric Bastiat: “Where goods do not cross frontiers, armies will.”