Protect us from the new protectionists

Presidents Franklin Delano Roosevelt and Ronald Reagan probably wouldn’t have agreed on much, but they were on the same page when it came to trade. Both warned Americans about the dangers of protectionism. 

In FDR’s words:

Trade is fundamental to the prosperity of Nations, as it is of individuals. All of us earn our living by producing for some market, and all of us buy in some market most of the things we need. We do better, both as producers and consumers, when the markets upon which we depend are as large and rich and various and competitive as possible. The same is true of Nations.

We have not always understood this, in the United States or in any other country. We have tried often to protect some special interest by excluding strangers’ goods from competition. In the long run everyone has suffered.

Reagan later observed:

A creative, competitive America is the answer to a changing world, not trade wars that would close doors, create greater barriers, and destroy millions of jobs. We should always remember: Protectionism is destructionism.

But many of those talking about trade policy today sound more like President Herbert Hoover than Reagan or FDR. When approving the protectionist Smoot-Hawley Tariff Act in 1930, Hoover said: “There are certain industries which cannot now successfully compete with foreign producers because of lower foreign wages and a lower cost of living abroad.” 

That view wasn’t shared by the leading economists of the day. More than 1,000 of them signed a statement opposing the Smoot-Hawley tariff increases. “Few people could hope to gain from such a change,” they argued, noting:

Miners, construction, transportation and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades, and scores of other occupations would clearly lose, since they produce no products which could be protected by tariff barriers. … We cannot increase employment by restricting trade.

Reports of companies like Nabisco moving operations to Mexico illustrate the need for more free trade. The U.S. government restricts imports of sugar, forcing Americans to pay roughly twice the world price. As a result, many sugar-using companies have relocated production from the United States to other countries. According to a Commerce Department study, “For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.”

{mosads}In 2015, over 60 percent of U.S. imports were either intermediate goods, such as parts, or capital goods, such as machinery used by U.S. manufacturers to compete in the global economy. Eliminating tariffs on these goods would support the creation of more manufacturing jobs here in the United States.

Mexico’s embrace of free trade has encouraged some carmakers to locate there instead of in the United States, according to The Wall Street Journal. As CBS Money Watch reported, “Mexico … trumps the U.S. on free trade. It has agreements with 45 countries, meaning low tariffs for exporting globally.”

Some suggest that U.S. trade deficits with China and Mexico are a big problem. But there is no evidence that trade deficits shrink the economy. From 2008 to 2009, the U.S. trade deficit plummeted by over 50 percent, and U.S. gross domestic product (GDP) also declined. Then from 2009 to 2014, the U.S. trade deficit increased by $125 billion, but U.S. GDP increased by $2.9 trillion as U.S. manufacturing output soared to the highest level ever.

What about the idea that U.S. companies who relocate to other countries should be penalized? That type of government control over economic activity seems more suited for North Korea or Russia than a country based on private property rights and the rule of law. It would also risk the jobs of over 6 million Americans working for foreign companies that invested in the United States. If the U.S. government starts penalizing companies that move abroad, what’s to stop other countries from retaliating by penalizing companies that want to invest in the United States? By the way, in 2014, new foreign investment in the U.S. exceeded new U.S. investment abroad by $185 billion.

Another idea that has been floated is to force Americans to pay high tariffs on Chinese-made clothing and other products, supposedly in order to create jobs in the United States. That makes as much sense as forcing Americans to stop downloading movies and start shopping at Blockbuster Video stores again.

These types of backward-looking proposals would create some jobs, but would destroy others and make Americans poorer. The Heritage Foundation’s annual “Index of Economic Freedom” shows that countries with low trade barriers are much more prosperous than those that restrict trade.

Americans should reject the failed trade policies of Herbert Hoover and his modern protectionist successors, and instead embrace the pro-trade vision of FDR and Reagan.

Riley is the Jay Van Andel Senior Policy Analyst in the Heritage Foundation’s Center for Trade and Economics.