Economy

Here's How We Can Really Protect America

A progressive argument for an American Brexit.
From Thomas Friedman to Barack Obama, from Mitt Romney to John McCain, it's fashionable among the "intelligentsia" and elites of both parties to ridicule "protectionism" as a way to rebuild America. 
 
Yet during his campaign, Donald Trump openly embraced the idea of slapping tariffs on imported goods.
 
After visiting where I grew up in Michigan for the holidays, I’d argue this was more than half of why he won the Electoral College part of the election of 2016. Protectionism built America, and people here in the industrial Midwest know it. The people, while often mal- and mis-informed by our corporate media, aren’t stupid, and many are old enough to remember how good things were for workers when we operated under a nakedly protectionist system of trade. 
 
By abandoning protectionism, we now find ourselves in a situation where we can no longer build a missile without parts from China, a country that could cut us off anytime it chooses. 
 
Every night, in retail stores across the nation, a button is pushed and all the money taken in that day is sucked up into an account in Bentonville, Arkansas (Walmart HQ) or other cities, and then much of that money is immediately sent to China, Vietnam, Mexico and other low-wage nations to pay for the goods bought on American credit cards. 
 
We get cheap goods, they get our money. To the point that our trade deficit with other nations has been hovering in the $600 billion/year range for most of the lives of most millennials. That money makes its way back into the U.S. (it is dollars, after all, so they pretty much ultimately have to be spent here) in the form of massive purchases of our factories, stores and commercial buildings; and now so much is being poured into residential real estate that “housing booms” which are actually bubbles are forming all across the country, pricing average Americans out of affordable housing as foreign buyers become our new landlords.
 
Prior to the Reagan administration, when we still had strong tariffs in place and almost a quarter of our workforce was both engaged in manufacturing and unionized, America was the world’s largest creditor nation. More countries owed us money—mostly from importing our well-made goods—than any other country in the history of the world. 
 
Today, we are the largest debtor nation in the world, almost entirely because of neoliberal changes in our trade policies, what the best and the brightest call free trade.
 
Similarly, before Reagan, we were the world’s largest exporter of finished, manufactured goods, and the world’s largest importer of the materials necessary to make them (from iron ore to exotic woods). 
 
Today, the tables have completely flipped: we’re now the world’s largest importer of finished goods, and have become one of the world’s largest exporters of iron ore, oil/fuel, coal, timber, and other raw materials that are then used to make the goods and packaging that we import back here from China, et al. 
 
When Donald Trump proposed a return to protectionism, he wasn’t promoting some bizarre, right-wing theory. It has a long and successful history.
 
Back in 1790, newly elected President George Washington gave his new Treasury Secretary Alexander Hamilton what time has shown to be one of the most important duties in the history of America. The British had been able to conquer North America and suppress any sort of insurrections by the British colonists by virtue of the power of their international-trade juggernaut and its principle instrument of power, the British East India Company, almost all of whose stock was owned by the king and members of Parliament. 
 
The principles of British trade were straightforward: Britain first. 
 
Hamilton was just building on King Henry VII’s “Tudor Plan” of 1485, which turned England from a backwater state with dirt/mud roads, straw-thatched huts, and raw wool as its chief export into a major developed state that produced fine clothing and other textile products from wool and a wide variety of finished manufactured goods from weaponry to furniture to the technologies of the day. 
 
Henry VII accomplished this by severely restricting the export of wool from England with high export tariffs and restricting the import of finished woolen products with high import tariffs, thus protecting the British manufacturing of fine clothing (along with thousands of other things). King Henry learned this from the Dutch. They copied the Romans. And the Romans got it from the Greeks 3,000 years ago. 
 
As Adam Smith said in his famous, oft-misquoted "invisible hand" defense of protectionist trade policies, in his seminal book Wealth Of Nations (1776):
By preferring the support of domestic to that of foreign industry, he [the entrepreneur] intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. 
George Washington had been considering protectionism seriously as he moved into the president's residence in New York City (the White House was finished during John Adams' tenure), haunted by the experience he had when first inaugurated as president and the British protectionist laws had kept in Britain the sole manufacturer of the kind of fine suit he'd need for the swearing-in ceremony.

On April 14, 1789, Washington was out walking through the fields at Mount Vernon, his home in Virginia, when Charles Thomson, the secretary of the Continental Congress, showed up on horseback. Thomson had a letter for Washington from the president pro tempore of the new, constitutionally created United States Senate, telling Washington he’d just been elected president and the inauguration was set for April 30 in the nation’s capital, New York City. 
 
This created two problems for Washington, then 57. The first was saying goodbye to his 82-year-old mother, which he did that night. She gave him her blessing and told him it was the last time he’d see her alive, as she was gravely ill, and indeed, she died before he returned from New York.
 
The second problem was finding a suit of formal clothes made in America. For that he sent a courier to his old friend and fellow general from the American Revolutionary War, Henry Knox.
 
Washington couldn’t find a suit made in America because in the years prior to the American Revolution, the British East India Company (whose tea was thrown into Boston Harbor by outraged colonists after the Tea Act of 1773 gave the world’s largest transnational corporation a giant tax break) controlled the manufacture and transportation of a whole range of goods, including fine clothing. Cotton and wool could be grown and sheared in the colonies, but had to be sent to England to be turned into clothing.
 
This was a routine policy for England, and it is why until India achieved its independence in 1947 Mahatma Gandhi (who was assassinated a year later) sat with his spinning wheel for his lectures and spun daily in his own home. It was, like his Salt March, a protest against the protectionist colonial practices of England and an entreaty to his fellow Indians to make their own clothes to gain independence from British companies and institutions.
 
Fortunately for George Washington, an American clothing company had been established on April 28, 1783, in Hartford, Connecticut, by a man named Daniel Hinsdale, and it produced high-quality woolen and cotton clothing as well as items made from imported silk. It was to Hinsdale’s company that Knox turned, and he helped Washington get—in time for his inauguration two weeks later—a nice, but not excessively elegant, brown American-made suit. (He wore British black later for the celebrations and the famous painting.)
 
So here is the first big way we can reboot the economy: lose our recent fascination—obsession, really—with “free trade,” get back to protectionism, and impose tariffs (import taxes) on imported consumer goods as we used to do. 
 
Let’s apply the lessons our own rich history teaches us. In other words, let’s resume the manufacture of consumer goods in the United States, protect these industries from cheap foreign labor, and bring all those jobs back home.
 
The High Cost of 'Free Trade'
 
During the 1930s, none of the “Asian powerhouse economies” had adopted American industrialization strategies, so when Roosevelt put money into workers’ pockets and they bought toys or clothes or radios, all of those items were made in Alabama or Connecticut or Michigan. 
 
Now they’re made in China, which experienced a “labor shortage” in 2009, causing its average wage to increase from $0.80 per hour to $1.14 and its economy to grow by more than 8 percent.
 
China has been following the lead of Japan, Taiwan and South Korea during the past half century and has become an industrial powerhouse as a result. Ironically, each of those countries got its strategy from us: George Washington’s Treasury secretary, Alexander Hamilton, proposed it in 1791, and by 1793 most of the parts of his Report on the Subject of Manufactures had been instituted as a series of legislative and policy steps.
 
When Washington became president in 1789, most of America’s personal and industrial products of any significance were manufactured in England to maintain "full employment" at a good wage there. 
 
Washington asked his first Treasury secretary, Alexander Hamilton, what could be done about that, and Hamilton came up with an 11-point plan to foster American manufacturing, which he presented to Congress in 1791. 
 
By 1793 most of its points had either been made into law by Congress or formulated into policy by either President Washington or the various states, which put the country on a path of developing its industrial base and generating the largest source of federal revenue for more than 100 years.
 
Those strategic proposals built the greatest industrial powerhouse the world had ever seen and, after more than 200 successful years, were abandoned only during the administrations of Ronald Reagan, George H. W. Bush, Bill Clinton, George W. Bush, and Barack Obama. 
 
Modern-day China, however, implemented most of Hamilton’s plan (using, in addition to tariffs, "domestic content" and "domestic ownership of manufacturing" laws and a VAT tax as a super-tariff) and has brought about a remarkable transformation of its nation in a single generation.
 
The Way Forward
 
There are several ways we can begin taking back manufacturing here in America. 
 
Tariffs
 
The easiest and most blunt-force method is to do what Trump proposed on the campaign trail (and was implied by Sanders): Tear up the so-called free trade agreements going all the way back to NAFTA, and create a single, internal trade policy that assigns a consequential tariff amount back (as we once did) onto many of the over-20,000 product categories that are currently listed on the tariff code pages over at the Department of Commerce’s website. 
 
We used to carefully consider each of these items. 
 
World War II (most recently, although the Founding generation knew it from the Revolutionary War) taught us that there are some goods that are strategic – things that we’d be crazy to depend on another nation for. These items had typically higher tariffs (in the 15-40% range). Certainly, the millions of Chinese-made computers in every government office from the Pentagon to your local DMV would qualify, as would high-tech current-generation components used to make everything from Cruise Missiles to aircraft carriers. 
 
Buy America Act 
 
Back in 1933, partly to stimulate our economy and partly as a result of lessons learned from World War I, Congress passed and President Herbert Hoover signed (on his last full day in office before FDR was sworn in) the Buy American Act. (Also recommended by Alexander Hamilton.)
 
This law, still on the books, said that anything purchased by any federal agency had to be manufactured by and sourced to an American supplier. Given that government purchases are a huge part of our overall economy (estimates range from 4 to 11%, depending on definitions) this was a huge boon to American manufacturers, even though tariffs were also in place at the time. 
 
But with the adoption of the General Agreement on Tariffs and Trade (GATT), the US/Israel Free Trade Agreement, and several others originally initiated by the Nixon and Ford administrations and finally put into place in 1979 and enthusiastically embraced by the Reagan administration, the president of the United States was given the power to authorize “waivers” to government agencies that wanted to buy anything from furniture to computers to ammunition (much of ours is made in Israel, for example) from foreign manufacturers. 
 
Reagan passed these waivers out like the jellybeans he so loved, and no president since has halted the practice. This could be reversed, in large part, tomorrow. 
 
Subsidies 
 
As Hamilton suggested, the United States began a policy back in the 1800s of subsidizing “essential industries” – in this case, the exploration for and pumping of oil, as well as healthy subsidies for the production of coal (and, since then, natural gas).
 
These hundreds of billions in annual subsidies (which doesn’t even include the cost of our military protecting our shipping lanes from Saudi Arabia and other oil producing states) are not only no longer necessary, but massively enrich the petro-billionaires who support mostly Republican politicians, and are feeding destructive climate change.
 
If these subsidies were redirected toward environmentally friendly alternative energy and storage sources, they would create a massive jobs boom, while also making our country independent of brutal dictatorships in the Middle East and elsewhere. 
 
Support exports
 
Again, as Hamilton suggested and worked so well for about 200 years in the United States, we should emulate countries like Germany, Taiwan, Japan, South Korea, and China in putting into place specific incentives for other nations to buy US-manufactured goods. 
 
Most of those countries currently use reversible VAT taxes, which function as tariffs up to over 30% (well over 30% for Germany and Japan, which is why you see so many German- and Japanese-made cars here and so few American-made cars there). We could, too.
 
But what about the 'trade wars'?!?
 
I had a cab driver the other day say something like, “I like it that I can buy cheap stuff made in China at Walmart. I don’t want to pay $200 for a toaster or $50 for a pair of socks.” 
 
As anybody old enough to remember when virtually all toasters and socks sold in the US were also made in the US, those prices are nowhere close to reality. Yes, American manufactured goods will be a bit more expensive than those made in China. 
 
But while the cost of things will go up, so will pay. I told the cabbie I’d be pleased to pay an extra 20% for everything in the store if my paycheck was 30% higher – as was the case when I was a teenager and in my 20s (1960s/1970s). He thought for a minute (he looked like he was around my age) and finally said, “Yeah, you’re right. I’ve been fed a line of bullshit.” 
 
We’ve all been fed a line of bullshit by the neoliberals in both parties ever since Richard Nixon started us down this road and Reagan put it on steroids. 
 
And the American people know it, which is one of the main reasons I’m hearing – both from Trump voters who call into my radio show and from my old friends whose parents worked at Oldsmobile and Fisher Body here in Lansing – that Donald Trump is on his way into the White House. 
 
It’s time to wake up and realize that we’ve become the planet’s village idiots. Giant transnational corporations and the politicians the Supreme Court has allowed them to own have sold us out. We’re the only developed country in the world that doesn't aggressively practice at least some form of protectionism. 
 
Yes, it almost certainly will lead to a “trade war” which, over the short term, could collapse our markets and cause a severe recession. Shortly thereafter, however, entrepreneurs all across America will see the opportunity to begin manufacturing everything from socks to furniture to computers right here at home. Soon, our economy will be booming. 
 
For statistics, history and information to back this all up, check out Aemonn Fingleton’s books and writings for Forbes Magazine, and books by Ha-Joon Chang. For reference, Hamilton’s plan is reprinted in part below.



Alexander Hamilton’s 11-point 'Plan for American Manufactures'
 
A full view having now been taken of the inducements to the promotion of manufactures in the United States, accompanied with an examination of the principal objections which are commonly urged in opposition, it is proper, in the next place, to consider the means by which it may be effected.…
 
In order to a better judgment of the means proper to be resorted to by the United States, it will be of use to advert to those which have been employed with success in other countries. The principal of these are—
 
I. Protecting duties [tariffs]—or duties on those foreign articles which are the rivals of the domestic ones intended to be encouraged.
Duties of this nature evidently amount to a virtual bounty on the domestic fabrics, since by enhancing the charges on foreign articles, they enable the national manufacturers to undersell all their foreign competitors.…[I]t has the additional recommendation of being a resource of revenue. Indeed, all the duties imposed on imported articles, though with an exclusive view to revenue, have the effect in contemplation; and, except where they fill on raw materials, wear a beneficent aspect towards the manufacturers of the country.
 
II. Prohibitions of rival articles, or duties equivalent to prohibitions.
This is another and an efficacious mean of encouraging national manufactures;…Of duties equivalent to prohibitions, there are examples in the laws of the United States…but they are not numerous.…[I]t might almost be said, by the principles of distributive justice; certainly by the duty of endeavoring to secure to their own citizens a reciprocity of advantages.
 
III. Prohibitions of the exportation of the materials of manufactures.
The desire of securing a cheap and plentiful supply for the national workmen, and, where the article is either peculiar to the country, or of peculiar quality there, the jealousy of enabling foreign workmen to rival those of the nation with its own materials, are the leading motives to this species of regulation.…
 
It is seen at once, that its immediate operation is to abridge the demand and keep down the price of the produce of some other branch of industry, generally speaking, of agriculture, to the prejudice of those who carry it on; and though if it be really essential to the prosperity of any very important national manufacture, it may happen that those who are injured in the first instance, may be eventually indemnified, by the superior steadiness of an extensive domestic market depending on that prosperity: yet in a matter, in which there is so much room for nice and difficult combinations, in which such opposite considerations combat each other, prudence seems to dictate, that the expedient in question ought to be indulged with a sparing hand.
 
IV. Pecuniary bounties.
This has been found one of the most efficacious means of encouraging manufactures, and it is in some views the best; though it has not yet been practised upon by the government of the United States, (unless the allowance on the exportion of dried and pickled fish and salted meat, could be considered as a bounty,) and though it is less favoured by public opinion than some other modes, its advantages are these—
 
1. It is a species of encouragement more positive and direct than any other, and for that very reason, has a more immediate tendency to stimulate and uphold new enterprises, increasing the chances of profit, and diminishing the risks of loss, in the first attempt. 
 
2. It avoids the inconvenience of a temporary augmentation of price, which is incident to some other modes, or it produces it to a less degree; either by making no addition to the charges on the rival foreign article, as in the case of protecting duties, or by making a smaller addition. The first happens when the fund for the bounty is derived from a different object (which may or may not increase the price of some other article, according to the nature of that object); the second when the fund is derived from the same or a similar object of foreign manufacture. One per cent duty on the foreign article converted into a bounty on the domestic, will have an equal effect with a duty of two per cent exclusive of such bounty; and the price of the foreign commodity is liable to be raised, in the one case, in the proportion of one per cent; in the other, in that of two per cent. 
 
Indeed, the bounty, when drawn from another source, is calculated to promote a reduction of price; because, without laying any new charge on the foreign article, it serves to introduce a competition with it, and to increase the total quantity of the article in the market.
 
3. Bounties have not, like high protecting duties, a tendency to produce scarcity.…
 
4. Bounties are sometimes not only the best, but the only proper expedient, for uniting the encouragement of a new object.…
 
The true way to conciliate these two interests, is to lay a duty on foreign manufactures, of the material, the growth of which is desired to be encouraged, and to apply the produce of that duty by way of bounty, either upon the production of the material itself, or upon its manufacture at home, or upon both.…
 
[P]ecuniary bounties are in most cases indispensable to the introduction of a new branch.…Bounties are especially essential, in regard to articles, upon which those foreigners who have been accustomed to supply a country, are in the practice of granting them.
 
The continuance of bounties on manufactures long established, must almost always be of questionable policy; because a presumption would arise in every such case, that there were natural and inherent impediments to success But in new undertakings, they are as justifiable, as they are oftentimes necessary.…
 
V. Premiums.
 
These are of a nature allied to bounties, though distinguishable from them in some important features.
 
Bounties are applicable to the whole quantity of an article produced or manufactured, or exported, and involve a correspondent expense—. 
 
Premiums serve to reward some particular excellence or superiority, some extraordinary exertion or skill, and are dispensed only in a small number of cases. But their effect is to stimulate general effort.…
 
VI. The exemption of the [raw] materials of manufactures from duty.
 
The policy of that exemption, as a general rule, particularly in reference to new establishments, is obvious.…Of a nature, bearing some affinity to that policy, is the regulation which exempts from duty the tools and implements, as well as the books, clothes, and household furniture of foreign artists, who come to reside in the United States; an advantage already secured to them by the laws of the Union, and which it is, in every view, proper to continue.
 
VII. Drawbacks of the duties which are imposed on the materials of manufactures.…
 
[S]uch drawbacks are familiar in countries which systematically pursue the business of manufactures; which furnishes an argument for the observance of a similar policy in the United States; and the idea has been adopted by the laws of the Union, in the instances of salt and molasses. It is believed that it will be found advantageous to extend it to some other articles.
 
VIII. The encouragement of new intentions and discoveries, at home, and of the introduction into the United States of such as may have been made in other countries; particularly, those which relate to machinery.
 
This is among the most useful and unexceptionable of the aids which can be given to manufactures. The usual means of that encouragement are pecuniary rewards, and, for a time, exclusive privileges. The first must be employed, according to the occasion, and the utility of the invention, or discovery. For the last, so far as respects “authors and inventors,” provision has been made by law.…
 
It is customary with manufacturing nations to prohibit, under severe penalties, the exportation of implements and machines, which they have either invented or improved.…As far as prohibitions tend to prevent foreign competitors from deriving the benefit of the improvements made at home, they tend to increase the advantages of those by whom they may have been introduced; and operate as an encouragement to exertion.
 
IX. Judicious regulations for the inspection of manufactured commodities.
 
This is not among the least important of the means by which the prosperity of manufactures may be promoted. It is, indeed, in many cases one of the most essential. 
 
Contributing to prevent frauds upon consumers at home, and exporters to foreign countries—to improve the quality and preserve the character of the national manufactures…
 
X. The facilitating of pecuniary remittances from place to place—
 
Is a point of considerable moment to trade in general, and to manufactures in particular; by rendering more easy the purchase of raw materials and provisions, and the payment for manufactured supplies. A general circulation of bank paper, which is to be expected from the institution lately established, will be a most valuable mean to this end.
 
XI. The facilitating of the transportation of commodities.
 
Improvements favouring this object intimately concern all the domestic interests of a community; but they may without impropriety be mentioned as having an important relation to manufactures. There is perhaps scarcely any thing, which has been better calculated to assist the manufacturers of Great Britain, than the meliorations of the public roads of that kingdom, and the great progress which has been of late made in opening canals. Of the former, the United States stand much in need…
 
These examples, it is to be hoped, will stimulate the exertions of the government and citizens of every state. There can certainly be no object, more worthy of the cares of the local administrations; and it were to be wished, that there was no doubt of the power of the national government to lend its direct aid, on a comprehensive plan. This is one of those improvements, which could be prosecuted with more efficacy by the whole, than by any part or parts of the Union.…
 
The following remarks are sufficiently judicious and pertinent to deserve a literal quotation: “Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of a country more nearly upon a level with those in the neighborhood of a town. They are upon that account, the greatest of all improvements.”…
 
It may confidently be affirmed, that there is scarcely any thing, which has been devised, better calculated to excite a general spirit of improvement, than the institutions of this nature. The are truly invaluable.
 
In countries where there is great private wealth, much may be effected by the voluntary contributions of patriotic individuals; but in a community situated like that of the United States, the public purse must supply the deficiency of private resource. In what can it be so useful as in prompting and improving the efforts of industry?
 
All which is humbly submitted.
ALEXANDER HAMILTON,
Secretary of the Treasury
 
Note: This excerpt has been edited for length, eliminating Hamilton’s debate with Jefferson over an industry- versus agriculture-based economy.

Thom Hartmann is a talk-show host and author of over 25 books in print

 

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