Proponents of so-called “free trade” often tell the story of the 1930 Smoot-Hawley tariff, the highest in U.S. history. Seeking to alleviate the sharp downturn in sales for U.S. businesses, Sen. Reed Smoot and Rep. W.C. Hawley, both Republicans, proposed the sharp increase in tariffs in order to make American-made goods more attractive to U.S. consumers as compared to imports. Sensing the bill’s shortsightedness, in that foreign nations were bound to retaliate against our exports, over 1,000 economists signed a petition denouncing the legislation. When it passed Congress anyway, a number of prominent business leaders, from J.P. Morgan CEO Thomas W. Lamont to industrialist Henry Ford, begged President Herbert Hoover to veto it, but he instead signed the bill into law.
The economists and business leaders were right of course, and Smoot-Hawley turned out to be a disaster that only exacerbated the Great Depression.
When it comes to learning lessons, however, we humans all too often have a tendency to go from one extreme to the other. Since Smoot-Hawley was such a failure, many politicians, Republican and Democrat alike, have concluded ever since that low tariffs are better than high ones, while no tariffs are best of all.
What we’ve heard over and over again from proponents of free trade is that if we buy other nations’ products, they’re bound to buy ours and everyone will live happily ever after. Unfortunately, that thinking is no less shortsighted than Smoot-Hawley, but it is only now, during our worst economic crisis since the 1930s, that many Americans will finally start to see why.
Overall, allowing the flow of tax-free goods between any two countries serves to turn what had been two distinct business markets into one.
For the U.S. to have done that with Canada, or any country that enjoys a standard of living comparable to ours, is not necessarily a bad thing. Since workers in both countries are comparably paid, each group should find it just as easy to buy products from the other country as domestically produced ones. The same would hold true for Japan, where typical workers’ wages are close to those in the U.S. However, the Japanese have to a large extent shunned free trade, particularly in order to protect their domestic agriculture.
What we have forgotten is that whenever we embark on free trade with third-world countries that have low standards of living, we are also turning two markets into one. In such cases, that is bound to have a leveling effect, with the standard of living in the third-world country going up and ours, inevitably, going down!
At the outset of such free trade, well-paid Americans can easily buy inexpensive third-world products. But not to worry, the free-trade proponents told us, the happily employed foreign workers will also buy exports from us and everyone will prosper.
But that has never happened and never will. When U.S. companies could no longer afford American workers because they couldn’t compete with cheap third-world labor, American factories shut down by the thousands and a huge “rust belt” was created. As for the promise that our newly prosperous third-world trading partners would also buy our exports, thereby maintaining a trade balance, that was an out-and-out deception that should have been seen from the outset. After all, there’s no way third-world workers making $1 an hour or, in many cases, $1 a day can afford to buy much of anything from a country where workers average at least $20 an hour.
And so, third-world countries benefited from lots of new industrial jobs that caused them to prosper, relatively speaking, while America’s industrial base was largely outsourced, and we Americans were informed that we now have a “post-industrial” service economy. In the course of this economic changeover, our main “accomplishment” has been to run up the greatest trade deficits and highest debts to foreign countries of any nation in history!
An economy that continues to run up such massive debts has got to be living on borrowed time, since neither an individual, a family or a nation can keep going deeper into debt perpetually. Though the current economic crisis was set off by mortgage and credit problems, it is quite likely to drag down a great deal more of our dangerously unbalanced economy before it is all over.
While most Republican and Democratic politicians alike supported free trade during the past two decades, the opposition consisted of two groups one would not tend to associate with one another – conservative, nationalist-minded Republicans (such as Pat Buchanan) and liberal Democrats with close ties to industrial labor unions (like Dick Gephardt). Strange bedfellows indeed! But it was they who were right, while the mainstream of both major parties were dead wrong. Unfortunately, however, it is not the politicians but the average American worker who has paid the price and will continue to do so at least in the near future.
