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The US Did Not Become A Global Power Thanks to Protectionism

By: Iván Carrino - Nov 8, 2016, 1:00 pm
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After 240 years of economic growth, and improvement in our living conditions, free trade is still a controversial issue. (Aqua)

EspañolThe debate on free trade has existed almost for two centuries. In 1776, Adam Smith criticized the arguments of mercantilism, and the world began to turn to the free exchange of goods and services.

But after 240 years of economic growth and improvement of our living conditions, free trade is still a controversial issue. Donald Trump is perhaps responsible for installing this debate worldwide.

The eccentric millionaire argues that the United States’ free trade agreements are taking away American jobs. Countless politicians echo statements like this one across the globe.

In Argentina, former presidential candidate Sergio Massa recently proposed to suspend imports for 120 days. Later on, Ricardo Alfonsín, son of the former president of the same name, posted on his Twitter account that “no country in the world has been industrially developed, opting for free trade,” and that developed countries become industrialized thanks to their restrictions on imports.

Alfonsín’s argument is not new. In fact, it is very common to hear that during the second half of the nineteenth century, before becoming the first world power, the United States had a markedly protectionist policy. It is further said that as a result of this, the country developed across multiple industries.

Is it true that the US — a benchmark when talking about open trade borders — had a protectionist system, and that it grew thanks to this policy?

The Answer is No

In a paper titled “Tariffs and Growth in Late Nineteenth Century America,” Dartmouth University Professor Douglas Irwin investigated what effects the existing high protective tariffs had on the development of the US economy.

In the late nineteenth century, the United States experienced rapid economic growth and emerged as a world industrial power. During this period, the United States also maintained high import tariffs that kept out foreign manufactured goods.

Despite recognizing the correlation, Irwin noted that that does not mean protectionism generated growth. Correlation is not the same as causality.

The increase in the population and a large accumulation of capital caused the economic growth in the US during the second half of the nineteenth century — not tariffs.

Between 1870 and 1913, the GDP of the United States grew 1.8 percent per year, much more than the 1.0 percent growth in England, which was much more liberal commercially. However, the US population grew 2.1 percent per year — against England’s 1.2 percent — and non-residential capital stock rose a 5.5 percent, while for England it only made it up to 1.7 percent.

A greater abundance of capital and human resources seem to be much more explanatory elements of economic growth than trade barriers. The latter, at best, can benefit the protected sectors, but not the entire economy.

Moreover, Irwin pointed out that the accumulation of capital was not a result of protectionism, but that it happened despite the latter. The barriers to imports of foreign products makes them more expensive, which generated the goods needed for production to be more expensive as well. That “may have been very harmful for capital accumulation and growth,” the author stated.

One might think that the “import substitution” the obstacles to trade imposed could have generated greater capital accumulation due to the demand of the protected sectors. However, in light of the data, this thesis also crumbles.

Nonetheless, the researcher of Dartmouth cited a study that stated the largest growth in the capital/product ratio happened in the non-tradable sector of the economy. That is, in sectors that do not compete with imports, such as housing and road development. Furthermore, productivity in these sectors grew faster, well above that of the manufacturing industry — which is “protected.”

Another important comparison that the author brings up is the difference between the “protectionist” United States of the mid-nineteenth century, and the more “liberal” United States of the period between 1950 and 1922.

In 1950, the average tariff had fallen to 10 percent, and continued to go down toward five percent in 1992. During this second period, GDP per capita grew faster than during the protectionist era, but thanks to improved production efficiency, and not so much to the influence of large influxes of new population. Access to cheaper imported goods from abroad may have been decisive for this greater efficiency.

Protectionism advocates often cite the United States as a paradigmatic example of how barriers to imports may lead to a process of sustained economic growth. However, as Douglas Irwin has shown, correlation does not imply causality.

Economic growth in the United States when it was protectionist was not greater than during its low-tariff times. In addition, it was not a result of protectionism, but of the increasing number of inhabitants, the larger accumulation of capital, and the development of sectors not related to tariff protection.

The reasons why it’s good to open it to the world exceed the specific experience of a country in a particular time. It is good, however, to remember that, even in this case, arguments in favor of protectionism have no grounds.

Iván Carrino Iván Carrino

Iván Carrino holds a Master's Degree in Economics and a Bachelor's Degree in Business Administration. An economics professor at Belgrano University and at ESEADE in Buenos Aires, he also works as a consultant at Inversor Global. Follow him: @ivancarrino.