What Presidents Trump and Lincoln Have in Common: Protectionism

In his address to Congress last night, President Trump quoted Abraham Lincoln, not in support of civil rights or a stronger union, but in support of trade protection. Here’s the passage:

The first Republican President, Abraham Lincoln, warned that the “abandonment of the protective policy by the American Government [will] produce want and ruin among our people.”

Lincoln was right — and it is time we heeded his words. I am not going to let America and its great companies and workers, be taken advantage of anymore.

Lincoln was a good man and a great president during our fiery trial of Civil War, but he was wrong about the benefits of trade barriers. The Republican-backed protectionism that predominated U.S. trade policy after the Civil War was not the source of American prosperity, just as the freer trade policies that have been adopted by the United States and other countries today has not been the source of “want and ruin.”

On the second point, we only need to look around the world. Those nations that are the most open to trade tend to be more prosperous than those that are closed to trade. According to the Cato Institute’s most recent Economic Freedom of the World Report, here are the 10 nations (or customs regions) that score the highest in their “Freedom to trade internationally”:

1. Singapore

2. Hong Kong

3. Ireland

4. New Zealand

5. Netherlands

6. Mauritius

7. Slovak Republic

8. Denmark

9. Panama

10. Georgia

Note that every jurisdiction listed is either a free and wealthy first-world economy, or a relatively well-performing emerging economy.

And here are the 10 countries that scored the lowest in terms of the freedom of their citizens to trade internationally, i.e. the most “protected” economies:

150. Libya

151. Central African Republic

152. Congo, Republic of

153. Guinea

154. Algeria

155. Congo, Democratic Republic

156. Syria

157. Argentina

158. Venezuela

159. Iran

Not one of those countries would be considered an economic success. In fact, they are among the most dysfunctional and/or least prosperous countries on the planet. Argentina and Venezuela were once reasonably prosperous developing economies, but they have been plunged into economic turmoil in large part because of government restrictions on trade and currency exchange.

When the present does not support their position, defenders of protection will sometimes retreat to America’s past to make their argument. After all, the U.S. economy grew robustly behind tariff walls erected by Lincoln’s Republican successors. They point especially to the half century from 1865 to the beginning of World War I in 1914 as an example of protectionist prosperity.

In recycling the Lincoln quote, President Trump is carrying on an argument made by Pat Buchanan and other conservative protectionists. It’s an argument I tackled on pp. 109–110 in my 2009 book Mad about Trade:

Just because American industry expanded behind high tariffs more than a century ago does not mean that the high tariffs were the key to the expansion. A closer look at that era shows that the tariffs were a drag on the U.S. economy. America in the 19th century grew despite the tariffs, not because of them.

The biggest hole in the high-tariff fable is the fact that it was not the protected industries that lead America’s economic surge in the late 19th century. According to Irwin, the sectors with the fastest productivity growth were services such as transportation, distribution, utilities, and communications as well as construction. Productivity growth in those non-traded sectors was much more rapid after the Civil War than in manufacturing or agriculture. In contrast, protection of textiles, silk, and woolens did nothing to boost the overall output or competitiveness of the U.S. economy. It was not protected steel mills and textile factories that spearheaded America’s emergence as a global economic power back then, but the railroads, the telegraph, the residential building trade, and electrical production and distribution.

While high tariffs on manufactured goods did nothing to promote America’s overall growth, they did impose real costs and distortions on the U.S. economy. Tariffs on capital goods — machinery used to produce other goods — reached 40 percent by 1890, forcing American companies to pay artificially high prices for British machine tools, steam engines, steel rails, and precision instruments, reducing investment from what it would have been under free trade. Lower investment in capital goods retarded the growth of knowledge and productivity among American manufacturers. Another economic historian, the University of California-Berkeley’s Brad DeLong, writes that the lesson from that period in American history is that “A high tariff economy is a lower-investment economy, a lower capital stock economy, and a lower wage economy.”

High tariffs further aggravated the problem of industrial concentration and even monopolies. By shielding domestic producers from foreign competition, the tariff wall allowed them to exercise monopoly pricing power against consumers. In the late 19th century, about the time of the Sherman Trust Act, a current saying was that “The tariff is the mother of the trust.” Those who denounce the trusts and the concentration of wealth at the time should aim at least some of the blame at high tariffs.

America’s industrial expansion in that era is less impressive in hindsight than the advocates of protection portray. What drove the expansion of U.S. manufacturing was not any great leap in competitiveness but a massive influx of capital and labor. In the language of economists, our industrial growth was “extensive” rather than “intensive.” We produced more because inputs of labor and capital grew, not because labor and capital together became dramatically more productive. When we consider the combined productivity growth of capital and labor, or “total factor productivity,” America’s record in the late 19th century was about the same as Great Britain’s during the same period. “In the end, productivity growth in the ‘protectionist’ United States was roughly the same as that in the ‘free trade’ United Kingdom,” concluded Dartmouth’s Douglas Irwin.

What allowed the United States to pull ahead of Great Britain in total output was the huge increase in the stock of both capital and labor. The capital came from domestic savings but also from abroad in the form of foreign investment, much of it from Britain itself. The steady inflow of capital from abroad was the main reason why the United States ran almost continuous trade deficits through the second half of the 19th century. Much of the expansion of labor came from the rest of Europe in the form of millions of immigrants, the “huddled masses” who arrived at Ellis Island from Scandinavia, Germany, Italy, Poland, Austro-Hungary, and Russia. In the half century from 1865 through 1914, the United States more-or-less welcomed 26.4 million legal immigrants. As a share of the U.S. population, the immigration rate during that period was more than double the rate today.

Consider the irony: The same era that Pat Buchanan and other trade skeptics praise for its high tariffs was also an era of persistent trade deficits and mass immigration! And all the evidence shows that it was those trade deficits and the inflow of foreign capital they accommodated combined with large-scale immigration that did the most to transform America into an industrial giant, not self-damaging tariffs.