Today we woke up to the delightful news that a close ally of Angela Merkel has called for Europe to retaliate if Donald Trump implements the protectionist trade policies he tells us will put “America First.” A lot of people have asked me why Donald Trump’s use of “America First” as a slogan is worrisome to me and many other Americans. The answer is, because it borrows the name of a 1930s era movement associated with anti-semitism, isolationism, and protectionism. Putting aside the disturbing anti-semitism and morally bankrupt isolationist foreign policy for future discussion, we need to talk about why reviving 1930s style trade policies is bad for our economy. Trump supporters want the US government to put their interests first, and that is appropriate. Unfortunately, trade policy is complex, and Trump’s simplistic policies do not promote our indvidual or collective interests. Isolationism and protectionism will shrink or stagnate the economy, start trade wars, and damage alliances. They did not work in the 1930s, and they aren’t going to work now.
Protectionism prolonged the Great Depression
Although, reasonable economists disagree about how much protectionist economic policy prolonged the Great Depression, no one thinks it improved America’s economy. In 1930, about a year after the Wall Street crash, isolationists in Congress passed the Smoot-Hawley tariff act, imposing the highest import tariffs in 100 years. Over 1000 economists signed a letter to President Hoover asking him to veto the bill, stating that it would only worsen America’s economic situation. While the Act did not start the Great Depression, it is widely accepted among economists that the Act lengthened the Depression and prevented recovery, not least because it started trade wars with our closest trading partners.
Trade wars do not improve the economy
Canada, then as now our largest trading partner, was so irate about high tariffs that it not only retaliated with tariffs of its own, it kicked out the existing government because the tariffs weren’t high enough. Similar tariff provisions were imposed throughout Europe, hampering recovery of trade relations everywhere. For example, US imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932. The problem with beggar thy neighbor policies is that when one country adopts them, every country adopts them, thereby impoverishing the entire world economy. The less stuff we sell, the fewer jobs we have, and no one will want to buy our stuff or sell to us if we charge them ridiculous tariffs.
This may sound like doomsaying, but Europe is not the only economic force promising to engage in a trade war. Mexico has promised a trade war over Donald Trump’s proposed wall tariff. China has promised to retaliate if Trump enacts higher tariffs. The assertion that foreign governments will react as they did to the Smoot Hawley act isn’t a hysterical overreaction, it is what our trading partners have announced they are going to do. We would be well advised to look to analogous historical circumstances and avoid making the same mistake.
Solutions for those left behind must also promote growth
The United States is not an independent actor. If we damage other countries’ trade interests, they will retaliate. Moreover, trade wars are more dangerous today than they were in 1930 because global trade is more interconnected. Globalization of trade is not going anywhere. It is completely understandable why the people negatively impacted by globalization might buy Donald Trump’s promises, but he can’t deliver. Starting a trade war with Mexico may make people feel good, but it won’t help them get manufacturing jobs back. Those jobs don’t exist. Contrary to his rhetoric, 88% of those jobs have been lost to robots, not Mexico. We desperately need to address economic inequality and the fact that the only way to get a job is a back-breakingly expensive education. However, to do so, we need to look elsewhere. Protectionism and isolationism are not a way to put America, or Americans, first.