Sometimes a politician or a political party can come up with some really bad ideas. For example, people tend to agree that events in American history such as ‘segregation’, the Vietnam War, or the 2003 invasion and subsequent occupation of Iraq–just to name a few–were bad policy decisions. ‘Protectionism’ is another really bad policy decision that most people now regret. Protectionism is bad economic policy because it slows trade, sparks trade wars, and impoverishes working people.
What is ‘protectionism’?
The last time many of us heard the word ‘protectionism’ it was in a middle school history class that was covering the “Great Depression”, but this controversial economic policy has been regaining favor with politicians. Protectionism is an economic policy that is meant to help domestic industries by restricting international trade. For example, the federal government might try to force Americans to buy goods that are ‘made in America’ by taxing goods that are manufactured elsewhere.
Think of an American factory that makes widgets. To manufacture these widgets, the factory must buy raw materials from another company. These raw materials are available from a Chinese company at $1 per unit (including shipping), or they are available from an American company at $2 per unit (including shipping).
The reason why the raw materials from China are so cheap is because the cost of labor in China is much lower than the cost of labor in the United States. The factory chooses to buy raw materials from the Chinese company, and that eventually leads to the American company laying off all workers and going bankrupt. Alternatively, the American company moves their operations to China where the cost of labor is a huge bargain for them. American factory workers increasingly lose their jobs and demand to know why their employers keep moving to other countries.
So, some politicians come up with a plan. They decided that the best course of action is to impose a tariff (a tax) on all goods that are imported from China and many other nations. The goal is to make the imported goods so expensive that American companies will no longer buy them, and instead start buying American products again. On the surface, this sounds like a good idea, but it has been tried before, and it turned out to be a huge disaster.
The Smoot-Hawley Tariff Act
While there are additional reasons that contributed to the Great Depression, the Smoot-Hawley Tariff Act is recognized as a leading cause. The Tariff Act of 1930, also known as the Smoot-Hawley Tariff Act, badly hurt both the U.S. and the global economy because it caused the price of raw materials to drop to almost nothing. Yet, many people seem to have forgotten how disastrous this economic policy was. To refresh our memories, Herbert Hoover and other Republicans had thought they could protect American jobs and industry by taxing goods that came from other countries. They mistakenly believed at the time that taxing imports would force businesses and citizens to ‘buy American’.
The plan didn’t work, and the U.S. descended further into a terrible economic depression. Import taxes were already high, but the Smoot-Hawley Tariff Act added an additional 20% tax on all foreign agricultural and manufactured goods. In retaliation, many other nations increased tariffs on American goods. That meant that American farmers and manufacturers were unable to export their goods outside the United States because no one was willing to buy them. Between 1929 and 1933, the United States gross national product dropped by almost 30%, industrial production fell by more than 46%, and unemployment reached 20%.
Global trade had slowed. Not only could American farmers and manufacturers NOT export their goods, but impoverished and out of work Americans could not afford to buy American either, no matter how cheap the goods became. Huge surpluses of produce were dumped while Americans went hungry.
Farmers began to dump their produce (and the produce of others) in an attempt to raise prices. Radical farm protests broke out and many farmers hoped to prevent farm goods from getting to the market. The price of produce was so low that farmers couldn’t sell them for cash and so they started bartering for goods amongst themselves. Not only would they trade one type of crop for another, but they started paying for services with crops. Sometimes, they would simply burn their crops as fuel. It was an apocalyptic nightmare that no one wants to relive.
Protectionism is back
During the Trump Administration, economic policy was rooted in protectionism and trade wars erupted between the U.S. and various trade partners. The unfortunate thing is that every Senator and State Representative that backed Trump’s economic policy KNOWS that trade wars are bad–or they would know if they had paid attention in economics 101.
Just like the economic policy of Herbert Hoover, Trump’s “America First” economic policy was all about using tariffs to encourage domestic production of goods. Trump hoped that reducing the trade deficit, which is when a nations imports more goods than it exports would bring manufacturing jobs back to the United States. For quite a while now, the United States has faced an increasing trade deficit and this is bad for workers because it pushes wages down. So, Trump made promises to out of work coal miners (for example) that he would “bring back coal”. Needless to say, coal is not back.
“I’m thinking about the miners all over this country,” Trump said. “We’re gonna put the miners back to work. We’re gonna put the miners back to work. We’re gonna get those mines open.”Scientific American
In an attempt to bring back coal, which is used to manufacture steel, Trump imposed 25% tariffs on steel imports. Sadly, this did not help American coal miners or the steel workers. This is because steel suddenly became much more expensive to buy and most Americans that work in the steel industry do not manufacture steel. Instead, these workers make products out of steel. Additionally, out of the total amount of steel used by American manufacturers, only 18% is imported from another country with only 2% from China. Ultimately, Trump’s tariffs on steel is hardest on American factories because they could no longer afford to buy raw materials to manufacture products.
Jobs in U.S. industries that use steel or inputs made of steel outnumber those involved in the production of steel by roughly 80 to 1.econofact.org
In the end, the steel tariffs made high prices for domestic steel even higher. So, not only did the price of domestic goods increase, but American manufacturers became less competitive when attempting to export their products. Why, for example, would Canada buy an American product when they can buy an identical product from China or India for half the cost?
The Trump Administration did not just impose tariffs on steel, but on a wide variety of imported goods. Across the board, these tariffs had the effect of increasing prices for domestic products.
Based on 2019 import levels, U.S. and retaliatory tariffs currently impact over $460 billion of imports and exports, and President Trump’s tariffs are increasing annual consumer costs by roughly $57 billion annually.American Action Forum
Protectionism is bad for the economy
Trade partners do not just accept tariffs. Instead, they retaliate with tariffs of their own. American manufacturers lose because it is harder to export their products to the global markets. Consumers or American goods in China or Europe, for example, no longer are willing to pay the price the American manufacturers need to make a profit.
A lot has happened in trade policy since the Great Depression. The global economy has become integrated in a way that earlier generations could not imagine or achieve without our many advances in technology. Trade wars are no longer a matter of hurting foreign manufacturing. These days, hurting Chinese manufacturing hurts American manufacturing, because American manufacturing has moved to China.
Many small business owners contract Chinese labor to manufacture their products. It is these American small businesses that are feeling the brunt of the tariffs, because it is they that must pay the tariffs. Without the reliance on cheap Chinese labor, these small businesses would not be able to operate. That is not an argument to justify the use of offshore labor, it is merely fact. This is the way the American economy has been structured.
American farmers are in the same boat. Especially the small family owned farms since the bulk of Trump’s tariff relief money is being given to large scale industrial factory farms. Meanwhile, China has stopped buying American soy beans and instead started sourcing soy beans from Brazil.
Oh, and the dumping has started. Dairy farmers are dumping their milk after prices have fallen almost 50%. Sound familiar? In addition to dropping prices, farmers cannot sell their produce due to the Covid-19 pandemic. This has left farmers with a large surplus with nowhere to go.
Trump has claimed that China has been taking advantage of the U.S. That isn’t quite the truth. We could say that U.S. corporations have taken advantage of U.S. workers, though. For 30 years, American manufacturing has been moving overseas. This has left U.S. factory workers in the dust, but the fact is the global economy has transformed over these last 30 years. It is impossible to coax the genie back into the bottle on this–without long reaching and calamitous financial ruin of apocalyptic proportions.
Decades from now, it is likely that students of both history and economics will be taught about Trump’s trade war. The textbooks will refer to Trump’s disastrous economic policy as the failed second attempt at protectionism, which eclipsed even the folly of Hoover. Importantly, if we manage to have kept the lights on, the textbooks will remind the students that the avoidance of protectionism is a lesson learned.
A final comment on protectionism
Protectionism is bad economic policy that hurts everyone. It is a lose-lose plan for impoverishing both the United States and their trade partners. If today’s conservatives want to roll back the effects of globalism on the American working class, they should have listened to the anti-globalists 30 years ago, instead of charging into free trade agreements without fear or regret. Did the conservatives not get what they wanted?