History Offers A Solution To U.S. Trade Deficit

The following article originally appeared on TradeReform.org and was written by Richard Schmale, a retired executive.

Anyone who examines U.S. trade and tariff history quickly learns that the USA did not practice free trade before 1933. From the early days of the republic until 1933, America practiced a policy of high tariffs expressly designed to protect domestic manufacturing. Over the period 1820-1933, tariffs ranged from 35 to 50 percent. Henry Clay and later Abraham Lincoln supported the policy. This "protectionism" actually worked well and America experienced great prosperity. The country developed a formidable industrial base that later helped us win two World Wars. In America's protected home market, industrial wages soon rose above those in Europe because American workers did not have to compete against foreign workers earning a fraction of their wage.

In 1933, the USA's trade policy underwent a complete and radical 180 degree paradigm change. Suddenly a successful century-long policy of protective tariffs was gone; gone and replaced by a new-to-the-U.S. policy of free trade. The principal agent of change in 1933 was Franklin Roosevelt's then new Secretary of State Cordell Hull. Hull was a former congressman and senator, and a co-sponsor of the 1913 bill creating the U.S. income tax. Hull considered himself a visionary on the subject of free trade which he was firmly convinced would create nothing less than world peace by eliminating trade rivalries that he believed were the principal cause of all war. Hull took his inspiration from Woodrow Wilson's famous 14 points for peace after the first World War, point 3 having been a call for "open trade". During most of the remainder of the 1930s and again at the close of World War II, Hull used his knowledge of the workings of Congress and the authority ceded him by FDR to have a series of trade bills enacted which codified his free trade philosophy; thus setting this country on the trajectory we are on today. Hull never envisioned a 2009 wherein American workers are forced to compete against third world workers paid as little as 30 cents per hour. Henry Clay and Abraham Lincoln would never have countenanced this threat to American wages. Nowadays, American manufacturers often transform into virtual shell companies which are merely importers that contract actual manufacturing overseas to save up to 90% and more on wage costs. Sometimes referred to as "labor arbitrage", outsourcing manufacturing is a pernicious business plan in which greed displaces a former sense of a shared community and a formerly implicit social contract among Americans. Outsourcing has a snowball effect because some companies may feel compelled to outsource in order to stay in business if their competitors have already moved manufacturing overseas to cut costs. The American worker is now expendable.

The 1933 radical paradigm change in U.S. trade policy and our experience since suggests a basic question, "Which policy worked better for U.S. manufacturing and jobs, the protective tariffs the U.S. employed before 1933 or the 'free' trade it has practiced since?" It would seem obvious that the 19th and early 20th century system of tariffs worked better for Americans than the free trade begun under FDR's administration. American manufacturing has seen a long decline under free trade that accelerated in the 1970s, two decades after World War II. A side by side comparison of historically practiced protectionism in the U.S. against free trade should trump arcane, convoluted and unrealistic hypothetical models of trade theory. Historically, in the real world, U.S. manufacturing did much better with protective tariffs than under today's free trade.

Given that history demonstrates that protective tariffs work, the U.S. should consider returning to a modest protective tariff system today. Unthinkable? Not so. Tariffs have been employed for thousands of years since the beginnings of civilization. Ancient Greeks and Romans used tariffs. An across the board protective import tariff of approximately 20 percent would protect U.S. manufacturing and jobs by offsetting cheap, 30 cents per hour, overseas labor rates and would provide needed revenue for the government (another historic purpose of tariffs). In the early 1900s, U.S. import tariffs on manufactured products averaged 44 per cent and yet world trade continued. Freighters still traversed the world's oceans. Modest tariffs will not extinguish trade but will inhibit the "bleeding out" of U.S. industry to those areas of the world with 30 cent per hour labor. No nation is required to commit economic suicide by allowing its industries to be captured by rivals whose only "comparative advantage" is cheap labor. Unthinkable to abandon "free" trade? Perhaps not. Just as the generation in power in 1933 amended "mercantilist" trade policy begun in the 1820s, today's generation may amend free trade policies begun in 1933. Each generation is a nation unto itself and must discern it's own needs.

Click Here For Solutions To America's Economic Problems

Click here to contact your Representative in Congress.

Spread this message with Digg, Del.icio.us, Reddit, or Stumbleupon, and subscribe to the RSS Feed to track articles

Please Donate to EconomyinCrisis.org today

Please do your part, send a donation of $5, $10, $15 or any amount by PayPal or major credit card.

Download our Podcast from iTunes

Follow us on Twitter

Donate Today