Did Protectionism Make America Great?

This is the first of what may become a series of podcast reviews. They will usually be relevant to a topic that’s currently making the news but may also include some that we think will be of general interest to readers.

I’m kicking off with an episode of Trade Talks, a series of podcasts hosted by Chad Brown of the Peterson Institute for International Economics  and Soumaya Keynes of The Economist. Both are trade geeks and the podcasts usually get down in to the weeds of international trade, how it works and the various organisations and treaties that have been set up to facilitate it.

The general tone of Trade Talks is a conversation between 2 or more friends, it can be a bit stilted as they prompt each other to explain some of the more technical issues rather then let them flow, but it does make the subject more accessible for the lay listener. When the have guests they take the form of Q&A sessions.

It should come as no surprise to most leaders to learn President’s Trump’s protectionist rhetoric and action has a long historical precedent and even “Make America Great Again” isn’t new. In episode 23 the hosts talk to PIIE Senior Fellow Douglas Irwin about his recent book “Clashing over Commerce: A History of US Trade Policy” and the role that protectionism played in the US economy during its industrial development of the 19th century.

The podcast starts in the 1820s where we learn about the “American System” and one of its major proponents Henry Clay. He proposed a series of tariffs which would protect American industries so that everyone would benefit. Part of the reasoning was that foreign markets are volatile and the USA couldn’t depend on them so American producers, mainly agriculture, should reduce their dependency on foreign markets and use the dependable American market to make them, and by extension America, strong. It turns out it’s hard to prove as they discuss at length.

They then move on to the infant industry argument. Great in theory, even John Stuart Mill considered the idea, but not so clear in practice. Are we protecting laggards who just never grow up, the perennial teenager living in the basement, or industries that just want protection from competition?

In practice it is difficult to tease out whether infant industry protectionism works, not least because, as Douglas says, economists are obsessed by the counter factual. There are also many confounding factors, the growth in service industries, high immigration, changes in banking laws. The cotton textile industry (12 mins) is given as an example of a mature industry that was protected but didn’t suffer when tariffs were reduced because they imported different types of cloth, so everyone gained.

Subsidies are discussed as a better way of helping struggling industries in place of tariffs because they are more transparent, have to be granted in budget and the money is fought over by other interested parties. Subsidies are also less distortionary, tariffs raise prices and are therefore a disincentive to consumers who spend less on the industry, hardly protecting them.

The podcast finishes by discussing how the Trump administration can help the economy. The advice is that protectionism helps industries of the past rather than industries of the future and they should look to help them.

This is a good way to spend 20 minutes to get an understanding of the history of protectionism in the USA to help put the current debate in context. I’ll leave the listener to decide if protectionism made America great and if it can do so again.

You can listen to this episode at the link above or find Trade Talks in your favourite podcast provider to download them all.

Clashing Over Commerce: A History of US Trade Policy (Markets and Governments in Economic History)