The Manufacturing Factor: A History of America's Economic Ascension

Pat Choate writes in March 2005 how America came to be an economic superpower and how we have gone to great lengths to un-do what was created.

By suppressing American colonial manufacturing, Britain attempts to suppress American independence

The American revolutionaries almost lost the War of Independence because they did not have the manufacturing capacity to produce the arms they required. In the 17th and 18th centuries, Great Britain had prohibited its American colonists from manufacturing virtually any type of good for either their own use or export.

When the war began in 1776, a desperate Continental Congress sent Benjamin Franklin, the most famous American of his time, to Paris, where he was authorized to buy muskets, gunpowder, sails, cannon and shot. He also ordered blankets, pants, shoes and shirts for the Army Ð items the colonists could not manufacture in great quantities.

Once Franklin had the goods, he had to get them across the Atlantic, past the British Navy's blockade, and into the Caribbean Islands. Once there, smugglers put the goods onto lighter ships and slipped them up the coastal rivers to George Washington's agents. To get a musket and gunpowder from France to the U.S. took almost six months.

The deprivations caused by a lack of war supplies seared into the minds of the American revolutionaries the need for a strong domestic manufacturing base. Never again, swore George Washington, Alexander Hamilton, Henry Knox and a generation of other leaders, would the U.S. be dependent on others for the necessities required for its national defense.

Creating a strong industrial base was top priority for newly independent United States

When George Washington became President in 1789, his top priority was to create a strong U.S. industrial base. Early on, he commissioned Secretary of the Treasury Alexander Hamilton to devise a set of policies that could help the nation industrialize. The result was Hamilton's now famous, Report of Manufactures, issued in December 1791.

Hamilton proposed that the United States establish incentives to encourage foreign investors, mechanics and inventors to come, live and work in the United States. He also envisioned that the U.S. would never be able to compete against European and other foreign manufacturers unless its infant industries had the protection provided by a wall of tariffs.

By a striking coincidence of history, Adam Smith published his book, The Wealth of Nations, in 1776, the same year the American colonies declared their independence. Smith's book electrified intellectual thought in Europe and in the United States. Leading political figures, such as Thomas Jefferson, became strong advocates of free trade.

After the Revolutionary War, Jefferson and others argued that the United States should immediately adopt a free trade policy. Ironically, the British killed the idea by refusing to enter a treaty of commerce with the new nation and by banning U.S. trade in the West Indies. Simultaneously, British manufacturers began to dump their inventories of goods in the U.S. market at prices below their cost of production, their goal being to suffocate America's infant industries.

Nonetheless, the free trade advocates continued to urge open markets. The final blow to their hopes came after the war of 1812, a conflict in which Great Britain tried to reassert its control of its lost colonies. When the war ended, the British were as wooden headed as they had been before. Again, they tried to suffocate America's infant industries by dumping goods on the U.S. market, even as they imposed high tariffs and quotas on American imports into Great Britain.

Even Jefferson became convinced that free trade was a bad idea for the United States. In 1816, Senators Daniel Webster, John C. Calhoun and Henry Clay enacted America's first protective tariffs, creating the ÒAmerican SystemÓ of trade. It was Hamilton's plan.

America responds to British attempts to cripple American industry through cheap imports

Under the American System, the United States forfeited the quick consumer benefits from cheap imports. Instead, the nation took a longer view. It promoted domestic investment over personal consumption. Simultaneously, America allowed the import of foreign products for those willing and able to pay the tariff, ensuring consumer choice.

Robert G. Ingersoll, a prominent 19th century politician and orator, captured the thinking of that era as follows:

"It is better for Americans to purchase from Americans, even if the things purchased cost more. If we purchase a ton of steel rails from England for twenty dollars, then we have the rails and England the money. But, if we buy a ton of steel rails from an American for twenty-five dollars, then America has both the rails and the money."

The American System was U.S. trade policy from 1816 until 1933, the midst of the Great Depression. During that 117-year period, America had transformed itself from a handful of sparsely populated colonies on the East Coast, where 95 percent of the people lived on the farm, into the world's richest, most powerful, most technologically advanced industrial nation.

The Great Depression was not caused by American tariffs

The Great Depression marks the break point between trade eras in America. The old era ended in October 1929 when the New York Stock market experienced a financial panic. On Monday October 28, 1929, the market lost 13 percent of its value; the next day, Black Tuesday, it lost another 12 percent. The market did not hit the bottom until July 1932 with the Dow at 41 points. In that 32-month decline, the Stock Market lost almost 90 percent of its value. The market did not recover for another 22 years.

The panic was the first in the history of the U.S. Federal Reserve System, which Congress had created in 1913. When the panic came, the Fed first hesitated and then it did exactly the wrong thing Ð it tightened the money supply when it should have flooded the markets with liquidity. Over the next three years, the FED cut the money supply by almost 30 percent, turning a classic panic into the Great Depression.

Ironically, the two people who got the blame for the Depression were two Western politicians, not the Fed. They were Senator Reed Smoot (R-Utah) and Representative Willis Hawley (R-Oregon). Almost eight months into Wall Street's prolonged meltdown, they shepherded through Congress the now infamous Smoot-Hawley Tariff Act of 1930 that raised tariffs on about one-third of U.S. imports, which made less than 2 percent of the Gross National Product. Nonetheless, economists and politicians still blame a law created in June 1930 for creating a Depression that began in October 1929.

In 1933, Congress, fearing a backlash because of the public's false perception that the Smoot-Hawley tariffs had caused the Depression, delegated their Constitutional authority to regulate trade to the State Department and Secretary of State Cordell Hull, a former Member of both the House and Senate. Hull was a devoted free trader, but in his negotiations with other nations, he insisted on reciprocal tariff reductions.

Trade moves from a highly valued hallmark of US economic health to a giveaway concession in foreign policy negotiations

Reciprocal tariff reductions were the hallmark of U.S. trade policy until the late 1960s, when the United States negotiated the Kennedy Round of global trade negotiations. In those talks, the United States began to reduce tariffs in exchange for foreign policy and other concessions, such as military bases, and alliances in Cold War.

Trade concessions became a favored foreign policy tool. In quick succession, the Japanese negotiated policy concessions that allowed its electronics cartel to destroy the U.S. electronics industry. In the 1970s and 1980s, the U.S. destroyed its textile and apparel industries by granting other nations special quotas in exchange for their global political support. In the 1991 Iraqi war, the U.S. gave Turkey apparel quotas worth 20,000 U.S. jobs per year. In 2002, Turkey asked for even more concessions, plus $30 billion worth of aid to allow U.S. troops to cross its border and enter Iraqi from the North. Hundreds of similar examples exist.

With the end of the Cold War in 1989, billions of workers in countries that had previously been off limits to European, U.S. and Japanese companies were suddenly anxious to have foreign investment. To guarantee the safety of foreign investment in places such as Eastern Europe, China, even in Mexico, the U.S. led the world in the creation of the World Trade Organization (WTO).

The WTO witnesses willing American subordination of its sovereignty for the first time ever

The WTO sets the global rules on investment and trade. It provides a legal forum where nations can take complaints about the trade practices of other nations. It also imposes a global set of protections for intellectual properties.

The U.S. participation in the WTO is historic. For the first time in U.S. history, the Congress agreed to subordinate its powers to set U.S. trade policy to an international body. It agreed that were there a conflict between U.S. trade laws and WTO rules, the U.S. would change its laws to follow WTO rules or pay damages set by the WTO.

Under the WTO rules, it is illegal for the United States to give any priority whatsoever to American-owned companies that wish to manufacturer in the U.S. The Buy-America laws have effectively been repealed by an international treaty.

The new WTO global regime of trade encourages corporations to shift their production, and increasingly their research and development, from the industrialized world with its high wages, benefits, and worker protections to developing nations filled with penny-wage labor and lax government regulations. Then, the WTO rules also allow those companies to bring their products back into the rich world markets duty free.

Free trade and WTO has devastated the American industry so prized by our founding fathers

The open market policies advanced by the WTO and supported by a bipartisan majority in both Houses of the U.S. Congress have led to a rapid dismantling of the American economy. Since the mid-1990s, the U.S. has accumulated a trade deficit of more than $5 trillion, the largest unilateral transfer of wealth in history. Put into context, as recently as 1970, the United States manufactured here almost 95 percent of all that it consumed. Today, it produces less than half that portion.

At the same moment, the U.S. is shifting its manufacturing base abroad; it is also outsourcing its service jobs. Forrest Research estimates that American employers can profitably ship four out of ten U.S. jobs overseas electronically.

Today, America's trade and budget deficits are so large they exceed the capacity, and willingness, of U.S. and foreign investors to provide the financing required. Consequently, most of the capital that now finances the U.S. trade and federal budget deficits comes from the central banks of four Asian Governments Ð Japan, China, Taiwan and South Korea. They are also four of our major economic competitors.

Present U.S. trade policies are unsustainable. Unfortunately, our President and a majority in Congress do not understand the dangers created by the loss of the American manufacturing base nor do they realize how their policies are leading us to a financial calamity equal to the one that produced the Great Depression.

What is vital is that Americans understand that their country cannot be a superpower without its own manufacturing base. Nor can we maintain our standard of living or retain an assured national defense.

However, costly and however painful, this nation must eventually locate here the industries that produce most of the goods we need and consume, including those required for our defense. In sum, we must replace the ideology of free trade with the pragmatism of nation building. Our Founding Fathers would have understood.

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