By Martin Hutchinson
October 31, 2017
“Good fences make good neighbors” wrote Robert Frost in 1914. Those who have lived in both British and modern American suburbs can agree. High fences are not ideal; you can’t talk to people across them. But nor are a complete lack of fences, which allows gangs of neighborhood kids to race across your garden every afternoon, spreading destruction. The ideal is modest fences, low enough to communicate across yet sufficient to act as a barrier and a reminder of a private space. The metaphor is highly applicable to trade and immigration policy.
No trade fences
Complete lack of trade fences was the strategy tried by Britain after the 1846 Repeal of the Corn Laws and the 1860 Cobden Treaty. The attempt rested on an extreme interpretation of Adam Smith’s thesis that free trade would maximize welfare, allied to John Stuart Mill’s Utopian belief that it would bring world peace.
Whatever its potential for world peace, the British free trade policy fell apart within two years, when the United States passed the highly protectionist Morrill Tariff in 1862. David Ricardo had attempted to prove that unilateral free trade still maximized the benefit to the free trader, but real-world frictions made the reality very far from this. In the second half of the nineteenth century, Britain proved the hard way that unilateral free trade did not work.
Britain had invented the Bessemer process for steel manufacture, demonstrated by Henry Bessemer in Cheltenham in 1856, but in the long-term it received very little benefit from this pioneering effort, since the U.S. built much larger scale steel works behind the high walls of the Morrill and McKinley Tariffs. In steel, in agriculture after 1873 and in sector after sector elsewhere Britain’s capability was hollowed out by foreign competition developed behind tariff walls, while in spite of its gigantic Empire Britain found its home and Imperial markets attacked by dumping foreign competitors.
Almost free trade
Lord Liverpool, in proposing the initial move towards free trade in 1820, had excepted agriculture for strategic reasons, and had been careful to distinguish between different sectors. In cotton textiles Britain could compete entirely without tariffs, whereas in silk textiles Britain’s industry suffered from cost disadvantages and without tariffs would disappear. He took into consideration, as his Whiggish successors did not, that free trade could cause unemployment and that important sectors which were themselves internationally competitive, could be rendered less so by foreign tariff protections of competitors.
British free trade policy became even more suicidal after World War I, when a Britain grown weaker and deprived of its international investments was forced to compete with a world grown even more protectionist. Winston Churchill for ever after believed that Britain’s 1925 return to gold under himself as Chancellor of the Exchequer had been unjustified. The really unforgivable policy had been his own campaigning a mere 18 months earlier against a modest 10% flat Imperial Preference tariff, which would have negated Britain’s global cost disadvantage and made the return to gold painless and profitable. Only nine years later did the great Neville Chamberlain finally institute Imperial Preference and cause the greatest economic boom Britain ever saw, but by that time it was too late for the global Gold Standard.
U.S. economy grew behind high tariffs
Britain’s economy fell into decline because it failed to fence its economic garden for eight decades; U.S. policy erred in the opposite direction, making its tariff fences much too high. Alexander Hamilton’s “Report on Manufactures” was already far more protectionist than had been fashionable in Britain since Thomas Mun departed this world. This protectionist tendency was kept more or less in check by Southern opposition until the Civil War – James Buchanan’s 1857 Tariff was a moderate, well-designed piece of legislation, like most ideas emitting from that grossly underrated statesman.
Republicans pushed for higher tariffs
Then when the Republicans took over in 1861 Lincoln showed the full force of his frontier economic illiteracy by signing the 1862 Morrill Tariff. This effectively cut the United States off from manufactured goods imports, and was intensified by several later edicts, notably the McKinley Tariff of 1890 and the Smoot-Hawley Tariff of 1930 (which itself increased the average tariff rate only modestly). It allowed the Robber Barons to build immense fortunes off the huge American market, free from foreign competition. It also made U.S. industry far more oligopolistic and cronyist than it needed to be. On the positive side (from the U.S. point of view) it allowed the U.S. steel and automobile industries, among others, to achieve positions of world domination which they were not to lose until freeish trade returned after World War II.
Huge benefits for few U.S. business leaders
Fun though it doubtless was for American statesmen to contemplate the pig’s breakfast the U.S. and other tariffs made of British industry (the feckless British Whigs, Peelites and Liberals should be given most of the blame for this, however) the excessive U.S. tariffs did impose some costs on the U.S. itself. For a start, they over-endowed the Federal government with revenues, making it hopelessly corrupt. The Gilded Age was notorious in this respect; the tariff was the root of the problem, culminating in the “Billion Dollar Congress” pork pig-out of 1889-91. Eventually, the U.S. found a use for the money, in building a gigantic Navy and conquering the remnants of Spain’s colonial Empire.
Large military machines financed through protectionist measures
In the longer term, the U.S. and other countries’ excessive tariffs can be given a large part of the blame for World War I (and, by extension II). John Stuart Mill may have been over-optimistic when he said free trade would bring peace, but a system of aggressive militaristic empires, building huge military machines primarily financed by high tariffs, is inherently unstable.
The breakdown of 1914 was inevitable in the long run. Then tariffs confined the 1920s recovery to the United States, and in the 1930s plunged the United States into a much longer and deeper depression than it had ever known before. The 1930s collapse of world trade was due to tariffs which the Roosevelt Administration did little to alleviate (the Reciprocal Trade Agreements Act of 1934 had very little effect before World War II) while other Hoover and Roosevelt Administration policies made the U.S. depression much worse than that suffered in freer-market Britain.
Low tariffs good for trade
Karl Marx didn’t like free trade; he remarked that “In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation.” This is one of the very few areas in which the whiskered old fool had a point. A system of modest tariffs, like the 1932 Imperial Preference flat 10% tariff, provides a useful friction against fluctuations in global prices and other conditions, thus ensuring that marginal domestic producers do not get unnecessarily wiped out and marginal domestic workers do not get unnecessarily immiserated.
Shock absorbers are needed
Under a system of low global tariffs, ideally monitored by the World Trade Organization or some similar body, huge tectonic shifts such as the advent after 1995 of modern telecommunications, which increased the competitiveness of global sourcing systems, would be dampened in their effects on the global economy, to the great benefit of low-skill workers in the West. One need not be a Marxist to believe this would be a preferable outcome to the mindless “globalization” of 1991-2007, which is now likely to be replaced by an equally mindless protectionism.
Unrestricted immigration is bad
On immigration, the same principles apply, with a modest additional bias towards restrictiveness. The social effect of a sudden surge in immigration is much greater than that of a sudden surge in imports, so that the immigration fences should be higher than the trade fences. As I have frequently written, the barber in Boston is richer than the barber in Bangalore only because of his wealthier surroundings. It thus follows that the U.S. government, whose primary responsibility is for the well-being of its own citizens, should not allow cheap-labor immigration to undercut his livelihood.
Global sourcing of products not labor
Equally, there is a much better case for allowing global sourcing of tech products than there is for allowing global sourcing of tech labor. Driving down wages for U.S. tech workers, thereby ensuring that the country’s potential STEM graduates all go to law school, where the global competition is less, should not be an objective of U.S. policy.
Likewise, if the United States cannot produce labor-intensive farm products using domestic labor, then those products should be produced in a country with lower labor costs. Importing peons, to avoid the costs of farm mechanization, is not acceptable. Even more than free trade, free immigration, given today’s low travel costs, is a system of “naked, shameless, direct, brutal exploitation.”
Moderate fences, moderate trade and immigration barriers
Moderate garden fences produce the gentle and civilized interactions of an English suburb. Similarly, moderate tariff barriers, combined with somewhat stiffer immigration restrictions, produce a contented populace, friendly to the rest of the world, and only modestly exploited in its working conditions. We should cement such policies in place, in the United States and globally.
Martin Hutchinson is a GPI Fellow. He was a merchant banker with more than 25 years’ experience before moving into financial journalism. Since October 2000 he has been writing “The Bear’s Lair,” a weekly financial and economic column. He earned his undergraduate degree in mathematics from Trinity College, Cambridge, and an MBA from Harvard Business School.
This article was originally published on the True Blue Will Never Stain
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