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Clashing Over Commerce reviewed in the Economist

on Thu, 11/23/2017 - 11:50

Trade-policy wonks are gluttons for punishment. In good times, their pet topic is dismissed as dull. In bad, they find trade being faulted for everything. As Donald Trump blames America’s economic woes on terrible trade deals, one geek is fighting back.

In “Clashing over Commerce”, Douglas Irwin of Dartmouth College tells the history of American trade policy, showing that trade is neither dull nor deserving of the attacks on it.

Few could accuse America’s early trade history of lacking drama. Rules requiring American ships to send most of their cargo via British shores bred resentment against the colonial rulers. In 1773, when the British government tried to put smugglers out of business by slashing the official duty on tea, the Boston Tea Party protests followed, leading to an embargo and, ultimately, a war of independence.

After the American constitution gave authority on trade matters to Congress, the stage was set for centuries of wrangling. On the surface, tariffs did seem boring. Specific duties for items like molasses, salt and nails were motivated by the need for tax revenue; between 1790 and 1860 tariffs accounted for 90% of the federal tax take. But beneath the tangle of bureaucracy, bigger debates raged. Proponents wanted to shelter nascent industries, but opponents worried that they would shelter inefficient producers, push up prices and encourage smuggling. Alexander Hamilton, one of America’s Founding Fathers, justifiably worried that raising tariffs would provoke trading partners to do the same.

Trade creates winners and losers, and in America, these have often lived far from each other, generating divisions in Congress. Before the civil war, Southern exporters—their cotton competitive in global markets because of their slave labour—despised tariffs, whereas import-competing industries in the North enjoyed the protection. Given America’s institutional set-up, the result was stasis: the system has a bias towards the status quo.

Only twice has the broad direction of policy shifted, according to Mr Irwin. Both reconfigurations were triggered by catastrophic events. The civil war led to a new political balance, away from the southerners who favoured free trade. And as federal spending soared after the war, more tax revenue was needed. Special-interest groups organised to cheer their protections, including people like James Swank, founder of the American Iron and Steel Association, who wrote that “protection in this country is only another name for Patriotism.” (He was not the last of his kind.)

The second shift came after the Great Depression, and the self-harming Smoot-Hawley tariff of 1930, which led to retaliation by trade partners. As the American economy collapsed, so did trade flows, and the world descended into disaster. From the rubble a rare consensus emerged, in favour of lowering tariffs at home in order to persuade other countries to lower theirs. With the rest of the world economy in disarray, foreign producers posed little competitive threat, though that changed over the following decades as Japan and Europe regained strength.

As Mr Irwin spins this grand narrative, he also debunks trade-policy myths. During recessions, tariffs have often been assigned more of a role than they really had, low ones for inflicting American producers with excessive competition (as in 1818) and high ones for stimulating domestic production (as in 1893). But tariff changes were often too small or too late to have these purported results; monetary policy and other factors are more often to blame.

Political dynamics would lead people to see a link between tariffs and the economic cycle that was not there. A boom would generate enough revenue for tariffs to fall, and when the bust came pressure would build to raise them again. By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery.

Mr Irwin also methodically debunks the idea that protectionism made America a great industrial power, a notion believed by some to offer lessons for developing countries today. As its share of global manufacturing powered from 23% in 1870 to 36% in 1913, the admittedly high tariffs of the time came with a cost, estimated at around 0.5% of GDP in the mid-1870s. In some industries, they might have sped up development by a few years. But American growth during its protectionist period was more to do with its abundant resources and openness to people and ideas.

See full review here

Clashing Over Commerce: A History of US Trade Policy
Douglas A. Irwin
ISBN 9780226398969
Hardback, £26.50

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