The Rise and Fall of Protectionism in the United States
The Smoot-Hawley tariff of 1930 contained some of the highest tariff rates in U.S. history. It is widely regarded as one of the greatest blunders in economic policy in the history of the nation. It was intended by the Congress to protect jobs and wages of American workers, but trading partners retaliated, and it ended up hurting both Americans and their trading partners. Republican President Herbert Hoover signed the tariff bill, in spite of strong opposition that included a petition signed by over 1000 economists. Democratic President Franklin Roosevelt campaigned against Smoot-Hawley in the 1932 election, and he and his Secretary of State, Cordell Hull, tried to undo the negative economic effects of Smoot-Hawley, beginning with the Reciprocal Trade Acts of 1934. Hull won the Nobel Peace Prize for promoting international economic and political cooperation. Subsequently, Democratic Presidents generally supported freer trade policies. John Kennedy gave his name to the Kennedy Round of multinational trade agreements, and Bill Clinton promoted the regional North American Free Trade Agreement. Clinton played an active role in the passage of NAFTA, in spite of opposition from within his own party. Democrats in the Congress joined their Republican colleagues in granting fast track authority to every President from Gerald Ford to George W. Bush, until it expired July 1, 2007.
RISE OF PROTECTIONISM
However, over time Democratic support for freer trade has diminished, and Democrats have become the more protectionist party. Robert Samuelson (2015) has referred to the recent strong opposition to trade initiatives, especially among Democrats in the Congress, as a possible watershed in US trade policy. If protectionism succeeds, it would be a sharp break with the generally pro-trade policies that have dominated since FDR and Cordell Hull. In his first term, with a Democratic Senate and House, President Obama was the first President since 1975 to lack fast track authority. The only trade agreements (with Panama, South Korea, and Colombia) approved by the Congress during Obama’s first term were those negotiated earlier by the Bush administration, and they did not pass until Democrats lost control of the House in 2010. Although he announced his “Pivot to Asia” policy, the President did not formally request fast track authority in his first term, possibly because of strong opposition from Democratic leaders, Harry Reid in the Senate and Nancy Pelosi in the House.
It was not until the sixth year of his Presidency, after Democrats lost control of the Senate in 2014, that Mr. Obama received fast track authority from a reluctant Congress. In the Senate the procedural vote necessary to bring the fast track bill to a vote received the minimum number of votes necessary. Support was heavily Republican with 47 Republican Senators voting in favor and only 13 Democrats supporting the Democratic President. Democratic Congressional leaders, Harry Reid and Charles Schumer in the Senate and Nancy Pelosi in the House, voted against bringing fast track to a vote. In the House only 28 Democrats voted in favor. President Obama signed the fast track and Trade Adjustment Assistance bills on June 28, 2015. Congressional Democratic leaders announced that they will continue to oppose trade agreements, and union leaders promised to punish Democrats who vote for freer trade.
President Obama, himself has demonstrated lukewarm and inconsistent support for a more open economy. He continues to oppose the Keystone pipeline, and he has shown no support for abandoning the prohibition on crude oil exports from the U.S. The US Trade Representative, Michael Froman, has been negotiating the Trans-Pacific Partnership (TPP) with 11 Asian countries and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union, although the President has not taken a strong leadership role until his recent effort to pass fast track. On this subject, as in others, he has been criticized for “leading from behind”. Relative to all previous Presidents, the Obama sequencing of first negotiating agreements and then requesting fast track authority is backwards. Fast track is a promise by Congress to vote an agreement up or down without an amendment, and it is intended to simplify and speed up negotiations. Until now, Congressional approval of fast track authority has preceded trade negotiations.
SOURCES OF RISING PROTECTIONIST PRESSURE
What has caused the increase in protectionist sentiment, especially among Democrats? First, there has been a change in the comparative advantage of the American economy away from important manufactured products, such as steel and automobiles. The US was once the major exporter of these products, and the United Steel Workers and United Auto Workers Unions were strong supporters of freer trade within the Democratic Party. When the country became a net importer of these products, the unions reversed their positions on trade policy. After China opened its economy to trade, it received “most favored nation status” and became a member of the World Trade Organization, US producers lost their comparative advantage in several manufactured products. Secondly, in addition to steel and autos, employment has declined across a large number of industries within manufacturing sector, and many critics have blamed trade for this decline. Attributing this decline to trade is questionable, since technology has played a major role in reducing manufacturing employment at the same time it increased manufacturing output by raising worker productivity (Baily). Also the share of manufacturing employment in total employment has declined in all the high income countries, not just the United States. Third, the increased inequality of the income distribution has also been attributed to trade by many critics. This attribution is also questionable, since the same change has been observed in many countries, and it is related to technical change that is biased against the use of labor with middle skills and middle wages. Fourth, some protectionists claim that trade contributes to lower environmental standards and a “race to the bottom”. Finally, populism has become more fashionable, especially among some Democrats who claim that trade benefits only multinational corporations, Wall Street, and billionaires. Senators Elizabeth Warren and Bernie Sanders have resorted to populist rhetoric, and columnists, such as Paul Krugman, who once supported freer trade, now sound increasingly protectionist. George Soros opposed fast track (Drezner). Hillary Clinton, currently the favorite to be the next Democratic candidate for President, so far refuses to take a clear stand on trade agreements, even though she regularly spoke in favor of promoting trade in her role as Mr. Obama’s Secretary of State. She has recently resorted to Populist language by railing against “CEOs and hedge fund managers” and “billionaires and corporations”.
Based on recent Congressional voting, Democrats have become the more protectionist party, but they have no monopoly on protectionism. Some Republicans, such as Senator Ted Cruz, have also spoken out against fast track on the grounds that they cannot trust the President to implement and enforce the policies he proposes. President George W. Bush imposed a tariff on steel in 2002-2003 that was determined to violate WTO rules.
THE FUTURE OF US TRADE POLICY
Protectionism has grown in the US, and the main reasons given for increased opposition to trade are its alleged adverse effect on employment and wages in manufacturing, its alleged contribution to income inequality, and its alleged harmful effect on the environment.
Although protectionism is stronger in the Congress than in the recent past, there are also some current factors contributing to freer trade policies. Now that fast track authority has been re-authorized, the Administration has an opportunity to negotiate a complex TPP agreement with Asian countries, and present it to the Congress for an up or down vote. This process is expected to take time, and it may carry over into the 2016 Presidential campaign, that has already begun. The U.S. Trade Representative, Michael Froman, is also in the process of negotiating a complex TTIP agreement with 28 members of the European Union. The US and EU account for 60% of world GDP, 33% of trade in goods, and 42% of trade in services. Since current tariff levels among these countries are rather low, the biggest potential gains are from reducing non-tariff barriers. The USTR is also negotiating an Information Technology Agreement that would cover 97% of IT trade and an Environmental Goods Agreement. There is also a Trade in International Services Agreement that includes 24 countries and 67% of the world’s services, such as banking and communication (Palmer 2015). More than 80% of US workers are currently employed in the service sector, but continued expansion of the service sector is likely to have an ambiguous effect on protection. Tariffs have rarely been imposed on service trade, and the lower level of unionism in services would contribute to less protectionism. However, services are less traded internationally than manufactured products, and they are subject to many non-tariff barriers.
GEO-POLITICAL ASPECTS OF TRADE POLICY
Trade policies are based on geo-political issues as well as economic costs and benefits. The US has re-established diplomatic relations with Cuba, which could lead to the end of a trade embargo that began in 1959. Negotiations over a nuclear agreement with Iran could lead to the end of the trade embargo against Iran. Trade relations with Russia have moved in the opposite direction, as the US and NATO allies have imposed sanctions after Russian aggression in Ukraine, and Russia has retaliated with its own trade sanctions.
US relations with China remain an important and unsettled issue. Fareed Zakaria has asked, “What Happened to Obama’s Pivot to Asia?” Most of the attention of the pivot has focused on deterring aggressive actions by China. Deterrence is legitimate and necessary for maintaining peace in the region, but the US could simultaneously cooperate with China and encourage its integration into the world economy. China has the largest economy in Asia, and it is one of the largest trading countries in the world. Economic cooperation with China could provide gains to both countries. Does the Pivot to Asia mean always treating China as the enemy, or could it also mean seeking ways to achieve mutual benefits? As the largest Asian trading nation, China is conspicuously absent from the TTP. US opposition to the China-led Asian Infrastructure Investment Bank does not appear to have been based on economic considerations, and it has been described by some observers as “quite simply, dumb” (Zakaria). Among the 57 founding members are many U.S. allies, such as the United Kingdom, Germany, Australia, and most Asian countries (Irish Times). The United States is conspicuously absent.
A rise in protectionism by the US government would be bad for the US economy, but it would also be harmful to the world economy. International agencies, such as the World Trade Organization do play a role in promoting beneficial trade, but they have limited authority. The most important forces for an open world economy are the policies of the largest trading countries, especially the United States. Presidential candidates Hillary Clinton and Jeb Bush have both advocated a goal of returning to 4% real growth for the U.S. economy, and removing obstacles to mutually beneficial trade would contribute to this goal (Galston). The historical periods of greatest global prosperity have been marked by the absence of major wars and the pursuit of open trade policies by the major trading countries. Pax Romana and Pax Britannica were periods in which leading governments used their power and influence to create conditions conducive to freer trade.
There has been an increase in protectionist sentiment in the US that raises the question as to whether there will be a reversal of US trade policy that has been mostly open since 1934. Protectionist sentiment is especially strong now among Congressional Democrats. However, in spite of Democratic opposition, the Congress did grant fast track authority to the President, and the Administration is moving forward with negotiating the TPP agreement with Asian countries. The US Trade Representative is also negotiating the TTIP agreement with the European Union, as well as more specialized agreements covering information technology, services, and environmental goods. It remains to be seen as to whether the forces of protectionism or freer trade will prevail, but questions about trade policy will continue to be contentious issues for the rest of the Obama Administration and during the next Presidential election.
Baily, Neil. 2015. “How the U.S. Gets Manufacturing Policy All Wrong”. Wall Street Journal, June 3.
Drezner, Daniel. 2015. “The Dumbest Argument Against Trade Promotion Authority I’ve Seen Yet”. Washington Post, June 23.
Galston, William. 2015. “Hillary Got It Right About Growth”. Wall Street Journal, June 17.
Irish Times. 2015. “Countries Sign Up for China-Led Asian Infrastructure Investment Bank”. July 6.
Palmer, Doug. 2015. “US Trade Vote Puts TTIP on Faster Track”. www.politico.eu/article/us-trade-vote-ttip-obama/
Samuelson, Robert. 2015. “A Trade Watershed?” Washington Post, May 3.
Zakaria, Fareed. 2015. “What Ever Happened to Obama’s Pivot to Asia? Washington Post, April 16.
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