Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Balanced Trade: Why Protectionism and Free Trade Failed, and Why Reciprocity Should Replace Them
In the course of its history the United States has pursued a mix of three approaches to trade policy: protectionism, free trade, and reciprocal trade. Protectionism worked when the U.S. economy was small and rivals were less inclined to retaliate. Free trade failed in the face of mercantilist exploitation. The solution is reciprocal balanced trade.
From the 1860s until the 1930s the United States pursued trade policies built around protectionism and the pursuit of mercantile advantage. Like China today, we often offered little protection for the intellectual property of the world's leading economic powers. The United States Congress, allied to domestic manufacturing interests that held sway within the Republican Party, constructed tariff barriers that helped encourage the growth of U.S. domestic industry at the expense of foreign competitors.
By the 1930s these protectionist and mercantilist policies were not working very well. Free trade policies were abandoned in Britain in the face of continued U.S. mercantilism even in the face of the Great Depression. Without the British willing to provide unilateral free trade, U.S. manufacturers suffered substantial losses.
Democrats had never been as supportive of high tariffs as Republicans, and once the Great Depression swept FDR into power, Democrats engineered a dramatic departure from historic U.S. trade policy. The key innovation was the concept of reciprocity, and the explicit goal became, over time, the creation of a world in which barriers to trade had been eliminated, a world in which the advantages of free trade embedded in the concept of comparative advantage would produce rising global welfare. Institutions were created after World War II and over subsequent decades that sought to bring this world about.
Unfortunately, U.S. commitment to reciprocal reductions in barriers became, over time, a U.S. willingness to tolerate dramatically imbalanced trade for the sake of other policy goals. In the 1930s Democrats shifted authority over the tariff from Congress to the President. Presidents have pursued trade policy as an instrument of foreign policy, sometimes in ways that substantially weakened the U.S. economically in exchange for other benefits. Trade reciprocity -- reciprocal flows of trade -- got lost in the pursuit of 'free trade'. The key failure was an over-narrow focus on tariffs as the gauge of reciprocity.
Japan, China, and a variety of other U.S. competitors found ways to exploit U.S. free trade ideology. By pursuing policies (currency manipulation, non-tariff barriers...) that create effective barriers to trade without depending principally on tariffs, trade was brought out of balance, and U.S. manufacturing prominence across many industries destroyed.
What is needed in response is a return to the principal of reciprocity -- the valid nugget at the heart of the efforts Roosevelt made to change U.S. trade policy in the 1930s. But reciprocity must be defined appropriately. And the appropriate definition must depend upon rough equality of trade flows, and a focus on the totality of trade barriers including those that are not tariff barriers. And to protect the principle of reciprocity, the United States must be willing to enact policies such as the scaled tariff that respond effectively and even automatically when large trading partners fail to engage in reciprocal exchange of goods.
The Obama administration is currently set to fail once again a test when it comes to its ability to craft such a policy. The appointment of Summers as Federal Reserve chair would put an individual who is almost entirely on the wrong side of the trade debate in a key position http://www.nakedcapitalism.com/2008/04/larry-summers-disingenuous-discussion.html.
Journal of Economic Literature:
Atlantic Economic Journal: