Gregory Mankiw, the chairman of the White House Council of Economic Advisers, ignited what The Wall Street Journal called "a political firestorm" when, at a recent press conference, he ventured that the export of U.S. service jobs "is probably a plus for the economy in the long run." His argument, according to The New York Times, was that such exports would reflect an "expansion of free trade benefiting all nations, including the United States." For economists, the "long run" is when all economic theories come true—and when, in John Maynard Keynes's mordant quip, "we're all dead." Dennis Hastert, the Republican Speaker of the House, trapped in mere time, did not share Mankiw's Panglossian faith in free trade. Hastert conceded Mankiw's brilliance as an "economic theorist," but, he commented, "his theory fails a basic test of real economics." Then came the clincher, the kind of cheap but inarguable debater's point you'd expect from a politician. "An economy suffers when jobs disappear."
Keeping American jobs in America was the goal of trade policy from 1789 to 1933. Its instrument was the protective tariff, the most successful economic strategy in U.S. history. It is worth reviewing why the U.S. chose this path to development over free trade. Adam Smith, free trade's champion, had great prestige in America. In Wealth of Nations, published in 1776, he wrote, "All commerce that is carried on betwixt any two countries must necessarily be advantageous to both...." Consequently, "all duties, customs, and excise should be abolished, and free commerce and liberty of exchange should be allowed with all nations." Such was the "law of progress." What led America to break that law? And what can we learn from its decision?
The United States was born in protection—the first bill passed by the first Congress was the Tariff Act of 1789. Its purpose: to raise revenue for the new government and to aid in "the encouragement and protection of manufactures." President George Washington, who three months earlier had taken the oath of office wearing a homespun suit and who professed to eat as patriotically as he dressed ("I use no porter or cheese in my family, but such as is made in America") signed the bill on the Fourth of July—felicitously, for the tariff won America's economic independence.
The 1789 tariff was set too low to discourage imports, and for roughly the next fifteen years America freely traded with the world. It was a period of sailing-ship prosperity that rested on America's status as a neutral trading with both sides in the first round of the Napoleonic Wars. As early as 1785 Thomas Jefferson, who considered "free trade with all the world" a "natural right," had misgivings about America's dependence on commerce. Free trade, he warned, might not be free: "Our commerce on the ocean and in other countries must be paid for by frequent war." His fears were borne out during his second term as President, when Britain's renewed war against Napoleon rendered the oceans hazardous for U.S. trade. Napoleon's Berlin Decree establishing a blockade of Britain made fair game of American ships bound there: between 1803 and 1807 the French seized 389 of them. Britain's Orders in Council banned all American trade to Napoleon-dominated Europe. The British seized 528 American merchantmen and impressed thousands of American merchant sailors and, in the humiliating Chesapeake incident, a handful of U.S. Navy sailors as well. Trade had become so dangerous to peace that Jefferson placed an embargo on it lest the country be forced into a war for which, building cheap gunboats by the dozen to "protect us from the ruinous folly of a navy," he had left it unprepared. The embargo failed, Jefferson retired to Monticello, and war—"in defence of Free Trade and Sailor's Rights"—came.
To celebrate the return of peace crowds gathered on the docks of ports from Salem to Savannah. Shouting, "Have a care below! Off comes Madison's nightcap!" sailors threw off the tar-barrels used to cap the mast-tops of ships confined to port during the three years of "Mr. Madison's war." Amidst cheers for "Peace, Commerce, and Prosperity" down they fell in the spring of 1815 into a world in which sailing ships would never lead economies again. For war had brought a new kind of prosperity.
"[T]he injurious violations of the Neutral commerce of the United States," Albert Gallatin, Madison's Secretary of the Treasury, wrote in 1810, "by forcing industry and capital into other channels, have broken inveterate habits, and given a general impulse, to which must be ascribed the great increase in manufactures during the last two years." Unable to put their ships to sea to carry foreign goods to America, merchants became manufacturers of American substitutes. Peace, however, menaced what Niles Weekly termed America's "infant industries," for it loosed a flood of foreign goods. Sixty-five vessels arrived in New York in August. Twenty on November 14. Five days later fifteen ships and eight brigs filed into the harbor. Ingeniously "getting under the tariff," British traders emptied warehouses of goods that had accumulated during the war—cottons, woolens, iron, glass, hinges, currycombs—on America's docks, holding auctions on the spot.
Domestic makers of these products protested. Citing the failure of a cotton factory "with all hands discharged," the shutting of wire, glass, and hinge manufactories, the contraction of business for shopkeepers and markets for farmers, Pennsylvania manufacturers petitioned Congress for relief: "The tariff on duties established by the last Congress is wholly inadequate to stop the influx of British goods"—priced, they charged, below the cost of making them. For evidence they cited a speech in Parliament of Lord Brougham. After noting "the great losses suffered by the immense exportation of goods to the continent," Brougham turned to a more promising market:
The peace with America has produced something of a similar effect; though I am very far from placing the vast exports which it occasioned on the same footing with the European market ... because the Americans will pay ... and because it was well worth while to incur a loss upon the first exportation in order, by the glut, to stifle in the cradle those rising manufactures in the United States which the war had forced into existence contrary to the natural state of things.
(The Lord was admitting to dumping.) From other states came petitions telling of unemployment mounting in the mill towns, soup kitchens opening in the cities, pauperism increasing everywhere, and debtors' prisons filling up. Congress responded by enacting the first designedly protective tariff in U.S. history, with duties of 30 percent on iron products and 25 percent on textiles. Protection remained American policy for one hundred and twenty years.
Today Congress would do nothing to interfere with the murky providence of free trade. Anti-dumping legislation reserves countervailing tariffs on imports for special cases: if the import's low price is subsidized by a "bounty or grant" from a government or private source; and if these imports have wrought "material injury" on U.S. manufacturers. Dumping—"selling subsidized goods more cheaply in the export market than at home"—still occurs. Low wages, however, confer the main competitive advantage on the imports inflicting "material injury" now—and low wages don't qualify as a bounty. The International Anti-Dumping Code does not recognize "social dumping."
But the picture conjured up by Lord Brougham—foreign companies dumping goods on America—leaves something new out: U.S. firms relocating to low-wage countries, producing goods or rendering services there, and exporting them here—American corporations dumping on America. Absent a wage-equalizing tariff on those goods (or services), nothing will keep such companies here. Nothing will keep their jobs here. Nothing will prevent the erosion of the American standard of living. Either we will recognize social dumping as a threat to our way of life as grave as product dumping was to America's effort to industrialize—or the economic base of the middle class will be destroyed. "If large numbers of high-paying, high-value-added jobs like radiologists, stock analysts and computer programmers continue to leave America because 100 million well-educated Indian and Chinese workers will take them at a much-lower price over the next decade," Senator Charles E. Schumer (D., N.Y.) asks, "what jobs will grow in America?" The event from the "Era of Good Feelings" now shaping our time is not the tariff of 1816 but Chief Justice Marshall's holding, in the Dartmouth College case three years later, that corporations are persons. Persons enjoy near-complete economic freedom. They can go wherever they like.