America’s economic future will be driven by openness and innovation, not drawbridge-up protectionism. Just as always. | American Enterprise Institute
Tariffs and trade protectionism didn’t make America great. It was during the late 19th and early 20th century that the US economy really outclassed Britain’s, growing twice as fast. It was also a time of high tariff walls. But don’t think the latter caused the former. As trade economist and historian Douglas Irwin writes in the magisterial “Clashing over Commerce: A History of US Trade Policy,” a review of the research and data make it difficult to argue “that high import tariffs were an important factor driving late nineteenth century economy growth.” (More on that here.)
What did boost economic growth? Irwin:
The United States was an enormous continental market with an abundance of resources waiting to be filled with people. … The nation had free internal trade and the free movement of labor and capital across states, and an abundance of agricultural land and untapped mineral resources, and the enforcement of contracts and protection of property rights through a non-politicized judicial system. … The federal government did not interfere with the process of creative destruction and limit competition or artificially prop up inefficient industries. … More than any other country in the world at this time, the United States had an extraordinarily diversified economy with an abundance of prime agricultural land, a large endowment of raw materials, and growing technical expertise in manufacturing. At this point, international trade was not critical to the prosperity of the country. … The most underrated international factor behind America’s industrialization was the work done by unskilled immigrants who labored in the manufacturing industries and by skilled immigrants who facilitated the absorption of new technology.
Irwin’s case is further supported by new research on the rise of the American automobile industry. As researchers Dong Cheng, Mario Crucini, Hyunseung Oh, and Hakan Yilmazkuday write the analysis “Early 20th century American exceptionalism: Production, trade and diffusion of the automobile,” the early years of the modern auto industry showed America to be “unrivalled in automobile adoption.” Through the first few decades of the 20th century, “the US adoption rate is systematically a factor of 10 higher than the rest of the world.” So what drove this American exceptionalism? A rapid decline in prices – and increase in affordability – driven by process and product innovation across domestic factories built by the Big Three — GM, Ford, and Chrysler. But things played out differently overseas: “Foreign governments reverted to highly protectionist tariffs, delaying adoption by their consumers and doing little to encourage foreign production beyond domestic demand, even in countries with established domestic brands.” Innovation, not protectionism, was the main ingredient in America’s secret sauce.
Indeed, the lack of global competition in the immediate postwar decades left too much of American industry complacent and unproductive. And once the rest of the capitalist world finally rebuilt itself after World War II, industrial America “collapsed at the first sniff of competition,” note Alan Greenspan and Adrian Wooldridge in their book, Capitalism in America. The fool’s gold of protectionism is a lesson that must apparently be relearned over and over.