Steve Bannon tells us all that the American system was based on economic protectionism — Hey, it worked in the 19th century so it would work now, right? It’s an appealing contention with only one problem – it’s wrong.
If protectionism worked as an economic policy, then the entirely blockaded South would have boomed during the Civil War. But that’s not quite how we recollect things. Cuba would be vastly rich as it is entirely protected from competition by the hegemons of the United States. Simple observation tells us that there must be something more to it all than that.
Bannon makes his point in his “60 Minutes” interview. Doug Irwin, one of the good guys on trade, takes issue in the Wall Street Journal today. But we can and should go a little further here. As Paul Krugman (another one of the good guys on trade, whatever you think of his New York Times columns) says about the basic idea of this sort of economic nationalism, it’s based upon the ideas of Friedrich List — ideas proven wrong a century ago.
But even more than that, Bannon’s appeals to the 19th century and the evidence of that era doesn’t show us what he thinks at all. It’s most certainly true that the U.S. economy grew over that time, and it’s also true there were tariffs. It’s even true the economy really grew post-Civil War, and that tariffs rose in that time period as well. Rising growth, rising tariffs — maybe Bannon is onto something?
No, for it is not tariffs alone which influence trade. It’s the cost of trade which does.
Whatever barriers to trade there are, it is going to be the total cost of all of them which influence how much trade is going on. We can all talk about non-tariff barriers for example, as former French President François Mitterrand once made clear. Japanese VCRs were flooding the country to the detriment of the national champion electronics manufacturer, so VCRs could only be imported through Poitiers, an inland river port unable to take major ocean going ships and whose customs officers were not trained in being able to approve VCR imports. That’s a non-tariff trade barrier.
The two biggest costs are indeed tariffs first, and then transport costs. The thing about the late 19th century is that the innovation of the ocean-going steam ship reduced those transport costs by more than the tariffs rose. There are still technical arguments about how much total trade costs fell, just a bit or a lot, but there’s no doubt that they did fall on net. Late 19th-century economic growth is thus an example of what happens when trade costs and barriers fall, even though everyone’s entirely correct that tariffs rose at that time.
Therefore, the major piece of evidence being called into play here, that economic growth happened because of tariff protection, is simply wrong. Growth boomed as total trade costs fell. Basing a theory on selective pieces of evidence is generally a bad idea.
All of which does bring us to today. Air freight these days is some $2 a kg, less perhaps for regular volume. A container will move 36 tons of absolutely anything anywhere for $5,000 or less, which is why mineral water from Fiji is on U.S. supermarket shelves. Transport costs have fallen to where, for something valuable, they’re simply not a consideration any more. Apple actually flies iPhones out of China because that’s cheaper than the cost of tying up the money for a 30-day ship voyage.
This fall in total trade costs means we’d have to have tariffs up at ridiculous levels just to return to the sort of trade protection we had in the 1970s, let alone the 1870s — something we’re just not going to do.
You’re really not going to gain support for a general 40 or 50 percent tariff. The public simply won’t bear it.
The basic misapprehension here is that misreading of history. It is total trade costs which matter, not tariffs alone, and those trade costs were falling during that post-Civil War explosion of growth in the economy. History isn’t telling us what people are hearing from it.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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