Free Trade and the Founding Fathers
The landscape in Washington, D.C., is populated with many memorials and monuments honoring our Founding Fathers for their vision and leadership. Americans honor our Founding Fathers for various reasons, but Americans who favor free trade may question that honor when they realize that our Founders advocated protectionism and rejected free trade.
Advocates of free trade and free markets often claim that our U.S. Constitution is founded upon laissez-faire economic principles and that that is how America rose to become the economic superpower that it is. However, nothing could be further from the truth.
The U.S. Constitution never mentions free trade or free markets in any sense of those terms.
Article I, Section 8, Paragraph 1 of the U.S. Constitution states that all Duties, Imposts and Excises shall be uniform throughout the United States.
Article I, Section 8, Paragraph 3 empowers Congress To regulate Commerce with foreign Nations, and among the several States. Certainly, by any definition, taxes, tariffs, duties, and regulation are not consistent with free trade, free markets, or laissez-faire economics. That is because our U.S. Constitution never intended for us to engage in foreign trade without regulation, cost, or taxation.
Merriam-Webster Dictionary defines laissez-faire as:
- A doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights.
- A philosophy or practice characterized by a usually deliberate abstention from direction or interference, especially with individual freedom of choice and action.
In previous editions, Merriam-Webster de fined laissez-faire as: letting people do as they please, especially non-interference in matters of economics and business; letting the owners of industry and business fix the rules of competition, the conditions of labor, etc. as they please, without government regulations or control.
The U.S. Constitution is not a libertarian or laissez-faire document. If it was, President George Washington violated the Constitution when he signed the Tariff Act of 1789, which imposed a tariff of 5 percent on the majority of dutiable imports for the encouragement and protection of manufacturing in America.
George Washington signed this tariff bill into law on July 4, 1789, the first major bill that he signed after approving of the Great Seal of the United States. For the next one hundred and twenty-five years, tariffs on imports provided 50 percent to 85 percent of all revenue required to run the federal government.
Merriam-Webster defines free as:
- Having no trade restrictions – duty-free imports
- Not subject to government regulation – free competition
Any form of regulation or restriction of trade is a violation of free trade and free markets as defined by Merriam-Webster. Moreover, the definition of laissez-faire and free are opposed to any form of government regulation since laissez-faire, or free markets, imply a state of being unregulated.
It is foolishness, therefore, to conclude that the principle of unregulated free markets finds any standing in the U.S. Constitution. To the contrary, the Constitution prohibits the pursuit of free markets by charging Congress with the power and responsibility to regulate commerce with foreign nations, as well as among the states, and to regulate the medium of exchange (currency) in all transactions.
The U.S. Constitution also says that all laws are to be applied uniformly and equally. It leaves no room for any legislator to misapply or circumvent our laws in a manner that would inflict injury on any industry, segment, or individual within our society for the benefit of others.
Free Trade Beyond the Founding Fathers
Popular American presidents such as Abraham Lincoln, Theodore Roosevelt, and Herbert Hoover were proud to be called protectionists and regarded the reference as praise and honor. They ridiculed those who challenged them, dis missing them as English free traders.
Today, the roles are reversed. When economists and public officials refer to someone as a protectionist, it is often meant as a demeaning slur.
Those who agreed with the long-term view of Alexander Hamilton believed that import tariffs encouraged investment in the United States rather than abroad. As domestic manufacturers invested in U.S. operations, they created economic stability and revenue to fund the government. Meanwhile, foreign producers funded the government, too, through taxes (tariffs) on their imports.
U.S. producers have to operate within the parameters of U.S. law and pay taxes to the U.S. Treasury to access consumers in the U.S. market. Why shouldn’t foreign manufacturers, who produce under a different set of laws, have to pay taxes to access consumers in the U.S. market?
Today, however, free trade-leaning thinkers and politicians have a special deal for any company or corporation that doesn’t wish to operate within the parameters of U.S. laws. With free trade policies firmly in place, they might as well be saying:
We can’t do anything to relieve you of the costs of abiding by our laws if you stay in America, but if you close your factories, fire your workers, and move to China, we will exempt you from our laws, and you can sell your foreign-made products in the U.S. by paying an average duty of just 2 percent. You will not have to pay a penny into Social Security/Medicare programs or to school district funds to educate your kids or anyone else’s kids. However, you will make a pile of money for your stockholders and executives.
Our government requires American workers to pay 6.2 percent of their yearly wages into Social Security. Therefore, it is blatantly unfair for our government to then encourage the importation of products from countries whose workers pay nothing toward Social Security, and who earn close to, or less than, 6.2 percent of American wages for their total wages. This is one way that free trade subsidizes imports.
Through unconstitutional free trade policies, our government also encourages the importation of products from foreign workers whose total hourly wages are less than, or equal to, American workers’ hourly contribution to national defense, so that we as a nation may combat foreign aggression and be victorious in military conflicts not only here but abroad.
Free traders always contend that consumers will pay more for American-made goods without a free trade policy that encourages imports at the expense of tax-generating domestic industries.
However, free traders conveniently ignore that the hundreds of billions of dollars that we pay each year in interest on the national debt burdens every man, woman, and child in the USA with thousands of extra dollars in tax responsibilities each year. This is caused by our world-wide trade deficit, which exists in large part because of free trade policies.
On top of that, we have squandered hundreds of billions of dollars of tax revenue by forfeiting our production to cheaper-labor countries like China and Mexico. This free trade fraud is all based on the foolish notion that consumers are best served by cheap imports, even though no nation has ever consumed its way to greater wealth.
For decades, to pay for the increase in our national debt, resulting from the forfeiture of production to China, U.S. officials genuflected to Chinese officials in Beijing, begging them to help finance our national debt. Their approach is to ask the Chinese to return the money we sent them for Barbie dolls, GI Joes, and an abundance of other toys that 100,000 workers in China produce for the American market.
In exchange, we give China T-Bill mortgages on our Treasury. Then, we agree to pay China interest on these T-Bills…tax free! (China now holds hundreds of billions of dollars in mortgages on our U.S. Treasury, we pay them billions of dollars in interest every year, and it was all our money in the first place.)
Much still needs to be done to bolster the U.S. economy. The official unemployment rate is artificially low. Even our current president admitted this fact while campaigning in 2016. Thousands of homeless people in America could easily be trained and employed in the toy industry, for example.
The homeless population in Los Angeles County as of May 2017 alone surged 23 percent to 58,000, compared to the previous year, despite a strong increase in placing local citizens in taxpayer-funded housing. The sharp increase suggests that we need to do more than fund outreach and support services, rent subsidies, and new construction.
The toy industry is just one of several industries now dominated by China. American Plastic Toys makes 100 percent of its toys in the United States, and the toys are sold in brick-and-mortar toy stores as well as online at reasonable prices. If we buy American, employ American, and hire those without jobs, we can stop taxing our system of government and instead free up funds that may be used for more beneficial purposes.
Every import is a drag on the U.S. economy for the simple reason that it constitutes a forfeiture of production and all of its residuals of income, jobs, tax revenue, and the ripple multiplier effect.
No government official should be engaged in determining which domestic industries should be sacrificed for the benefit of everyone else who consumes the products of those industries. And no government employee, including the president, is empowered under our Constitution to engage in trade deals that would cause any American-based company, or its employees, to be victimized by any foreign producer that does not operate under the same rules or their equivalent.
Our legislators have no right to place any American citizen on such sacrificial and discriminatory alters. That is the inherent purpose of the equal protection clause of the 14th Amendment of the U.S. Constitution, which prohibits states from denying any person within its territory the equal protection of our laws.
Free Trade is a Defeatist Mindset
The free trade mindset dictates that America simply cannot win on trade. To those with the free trade mindset, there is no way for us to stop flooding our market with goods from workers in foreign countries who pay no taxes to America. There is no way for us to restrict trade, even though Congress is given the power in our Constitution to regulate trade with foreign nations, and other nations like China restrict trade with great success for their economies.
Without a doubt, free and open trade causes injury to American workers and industries. Every time we give foreign producers lower-cost access to American consumers than we do our own domestic producers, we lose, and they win.
But according to free traders, we should not protect American producers and manufacturers from cheap imports, because, supposedly, protection invites retaliation. And they see that as a scenario in which nobody wins. But if nobody wins, we still lose.
As it relates to the auto industry, Volkswagen CEO Hinrich Woebcken proclaims, There is no winner with protectionism, and free trade is what we need for this industry. If that’s true and there is no winner with protectionism, then Germany should immediately drop its 10 percent import tariff on U.S.-made automobiles and all other restrictive and protectionist trade measures. Anything less is hypocritical.
Japanese Prime Minister Shinzo Abe said at the G7 Summit on June 9, 2018, No country benefits from protectionism. If he truly believes that, and Japan is so supportive of free trade, then Japan should eliminate all restrictive trade measures against American exports to Japan.
Germany is clearly winning on trade since it has a trade surplus with us and sells more to us than we sell to it. China, which recently and ironically has publicly denounced protectionism, is winning with its trade surplus with us too, as its average import tariff was about four times higher than ours before we began retaliating against China with our own tariffs on a large scale.
We must fix our massive trade imbalances. No nation and no individual can continue to buy more than they sell forever. That’s just common sense.
Free traders believe that we should not use import tariffs to regulate commerce, even though this is authorized in our Constitution and has been used repeatedly throughout our history to both raise revenue and protect and bolster U.S. manufacturing.
But times have changed, we are told. We are in a global economy. Things are different now, we are told, so we need to do things differently. If that’s true, and we need to change things simply because times have changed, let’s throw out the Constitution, and maybe even the Declaration of Independence, while we’re at it. Let’s elect a king instead of a president.
If George Washington was wrong to sign the Tariff Act of 1789, maybe he was wrong that we shouldn’t have a king. All bets are off. The fact that economic times have changed, and that time has progressed, is not reason enough for our nation to switch from a protectionist trade policy to a free trade policy. We have been trading with other countries since the birth of our nation. Only the volume of trade has changed.
With free trade, there’s no way that we can erase trade deficits and return to trade surpluses (some would even argue that we shouldn’t). History shows that we almost always had trade surpluses under protectionist policies.
China’s protectionism results in trade surpluses for China. Japan’s protectionism results in trade surpluses for Japan. Protectionism in Germany results in trade surpluses for Germany. But protectionism can -not have the same result for America, if you listen to free traders. They stand by this belief, almost like a religion, despite American trade history and despite modern day evidence that protectionism works to the advantage of major trading partners like China, Japan, and Germany.
Free traders believe that the reverse is true. They believe that imposing tariffs on imports will result in retaliation, even though the U.S. has rarely retaliated over the last several decades when foreign nations have imposed protectionist tariffs on U.S. exports. It is indeed ironic that so many political thinkers in America claim that trade retaliation is inevitable when our country has such a long history of not doing it.
In May 2018, Japan made a formal threat of retaliation in response to the imposed U.S. steel tariff, but as of this writing, Japan has not retaliated. Japan wants access to our lucrative market. And Japan knows, as all nations should know, that it is always good business to do business with the United States.
An April 2017 Quartz Media Auto Motives article pointed out another example of significant unfair trade with China, While the U.S. taxes imported cars and car parts at a maximum of
2.5%, China charges tariffs of between 21% and 30%. And yet China has the gall to lecture the United States about the supposed dangers of protectionism.
The Smoot-Hawley Tariff of 1930
It may be impossible to have an in-depth discussion about trade policy without bringing up the Smoot-Hawley Tariff, since free traders almost always assign this piece of legislation the blame for ushering us into an era of supposedly dangerous protectionism, inviting retaliation, and destroying our economy. The Smoot-Hawley Tariff is constantly mentioned by free traders as a way to end the debate between free trade and protectionism. They often say something like, We cannot apply tariffs on imports, because that is what we did with the Smoot-Hawley Tariff, and we all know how that turned out.
Specifically, as former U.S. Representative Don Bonker (D-WA) wrote in a May 20, 2019, Wall Street Journal commentary, …protectionist policies…may provoke a repeat of the 1930 Smoot-Hawley Tariff Act…
It’s a convenient refrain, but it’s misleading at best. At worst, it’s false and intellectually dishonest.
I have already explained how free trade, using the definition in Merriam-Webster Dictionary, cannot include any restrictions on the international exchange of goods (such as tariffs). And although Merriam- Webster states that free trade may include tariffs as a source of revenue, the vast majority of free traders reject any use of tariffs outright. Whether tariffs are applied to imports to generate revenue or for protection, they still represent a restriction on foreign competitors.
As mentioned in Chapter One, Merriam-Webster defines protectionist (an advocate of protectionism) as: an advocate of government economic protection for domestic producers through restrictions on foreign competitors. Restrictions, of course, are listed right in our U.S. Constitution as Taxes, Duties, Imposts, and Excises.
To accurately explain the effects of the Smoot-Hawley Tariff of 1930, it is necessary first to rid ourselves of popular myths. With our slate wiped clean, we may then derive conclusions from facts rather than fantasy. I will list some common myths here, and then, using historical facts, prove why they are just that, myths.
The myths that prevail, even today, several decades after the Tariff bill was signed by President Herbert Hoover, are as follows:
- The Smoot-Hawley Tariff established the highest tariff rates in U.S. history, and the sharp rise in tariff rates caused many nations to retaliate with tariffs of their own.
- The Smoot-Hawley Tariff contributed to the instability of the stock market.
- The Smoot-Hawley Tariff caused the Great Depression (or made it much worse).
Campaigning against Herbert Hoover for the presidency in 1932, Franklin D. Roosevelt saw the Tariff as a way to get a leg up on his Republican opponent’s incumbent bid. In later years, even Republicans began to mischaracterize their party’s former president, as well as the Tariff bill he signed into law in 1930.
President Ronald Reagan said, The Smoot-Hawley Tariff helped bring on the Great Depression. However, the Smoot-Hawley Tariff was enacted more than eight months after the start of the Great Depression. President Reagan also said, the Smoot-Hawley Tariff…made it virtually impossible for anyone to sell anything in America…and spread the Great Depression around the world.
However, more than two-thirds of the goods imported into the United States entered duty-free, and some nations actually increased exports to the United States after the Great Depression.
Al Gore fell for the same politically correct lie as Reagan. In his 1993 debate with Ross Perot, Gore claimed that the Tariff was one of the principle causes…of the Great Depression. There was actually a higher percentage of imports on the duty-free list in 1930 than there was after Ronald Reagan left office.
Even the Democratic Party Platform of 1928 noted that tariffs were necessary to sustain legitimate business and a high standard of wages for American labor. The platform also encouraged the equalization of the cost of production at home and abroad to safeguard…the wage of the American laborer. Today, many Republicans and Democrats alike regard equalizing tariffs as extreme.
The confidence that Hoover expressed in high tariffs in his reelection bid was echoed throughout the campaign. If the word of the day was that high tariffs had caused the Great Depression, Hoover’s stance would have been political suicide.
Even FDR was unable to totally shake the call for high tariffs. On the campaign trail in October 1932, he proclaimed, I favor continued protection for American agriculture as well as American industry. The creation of the myth that the Smoot-Hawley Tariff caused the Great Depression would have to wait.
Remaining the World’s Number One Economic Superpower: What We Must Do Now
Our status as the world’s number one economic superpower depends upon our stance regarding free trade. If we continue our current course of free trade, free market, and laissez-faire policies, which have no standing in our U.S. Constitution, it is likely that China will soon pass us economically. Then America will be forced to deal with a Communist-led, world-leading, economic superpower.
An October 2017 speech by Chinese President Xi Jinping showcased China’s aspirations to become the world’s number one superpower. In his three and a half hour speech to China’s Communist Party Congress, President Jinping said, The Chinese nation has stood up, grown rich, and become strong, and it now embraces the brilliant prospects of rejuvenation. It will be an era of China moving closer to center stage…No one should expect China to swallow anything that undermines its interests.
Addressing the Chinese military, President Jinping said, We must build a powerful and modernized army, navy, air force, rocket force, and strategic support force; develop strong and efficient joint operations commanding institutions for theatre commands; and create a modern combat system with distinct Chinese characteristics.
According to many news sources, China has indeed already overtaken the United States in several key areas.
On March 1, 2019, Bloomberg.com featured an article entitled In Tech Race With China, U.S. Universities May Lose a Vital Edge.
On November 2, 2017, CNBC.com published an article entitled China has a real tech edge over the US, and it’s cultural.
An October 18, 2017, article on Bloomberg.com was entitled Who Has the World’s No. 1 Economy? Not the U.S.
A story at usatoday.com in April 2017 was entitled Why China is beating the U.S. at innovation.
And perhaps most interesting, an article in the free trade-leaning The Economist Magazine in February 2018 was entitled China will soon have air power rivalling the West’s, subtitled In some technologies, it has surpassed it.
In the first (1996) of three editions of my book How Americans Can Buy American, I featured a chapter entitled Free Trade or Protectionism, in which I laid out a brief advocation of protectionism.
Greg Ip wrote the following in the Wall Street Journal on November 6, 2018: Few people have championed U.S. engagement with China as forcefully or successfully as Henry Paulson, first at Goldman Sachs Group Inc., later as Treasury secretary, and now as elder statesman.
So, when Mr. Paulson concludes engagement is failing and an ‘economic Iron Curtain’ may soon descend between the two, it’s a sobering statement of the perilous state of relations between the two economic superpowers.
A November 18, 2018, New York Times article entitled The Land That Failed to Fail, basically declared that supporters of globalization and engagement with China were wrong. The article stated, Western economists doubted that innovation could take place under China’s rigid bureaucracy. They were proved wrong. The world thought it would change China, but China’s success has been so spectacular that China has changed the world. China tapped into a wave of globalization and emerged as the world’s factory. China’s high-speed rail network, the largest in the world, has changed the way its people move. It is less worried about catching up to the West. Instead, it wonders how to pull ahead.
And pull ahead it will unless the United States rejects free trade and returns to a policy of protectionism.
How is China accomplishing such a feat? The answer is decades of advantageous protectionism in various forms. These include high import tariffs, quotas, theft of intellectual property, forced technology transfers, mandating that American companies form joint ventures with Chinese companies to operate there, state subsidies for domestic firms, currency manipulation, and other forms of discrimination against foreign companies to favor national champions.
According to the U.S. Department of Commerce, roughly one-third of our trade deficit with China involves advanced technology products. We must do five main things to maintain our economic superpower status, and we must do them now:
- Impose equalizing tariffs on all trading nations.
This is by far the most important action that we must take, and we must do it with all nations, not just with China. As discussed earlier, an equalizing tariff is a tariff that makes production cost burdens the same for all producers and competitors.
As mentioned previously, President Theodore Roosevelt said that tariffs must never be reduced below the point that will cover the difference between the labor cost here and abroad.
What this means is that we must, as advocated by President Theodore Roosevelt, enact import tariffs that will cover the difference between the labor cost here and abroad. The only modification that I would suggest to Teddy Roosevelt’s analysis is that we focus not just on labor cost, but rather on all production cost burdens.
There are many items to be considered to determine a nation’s total production cost burden for a particular manufactured product. These include labor costs, tax rates, regulatory mandates (environmental, safety), health care costs, factory maintenance, and all other compliance costs required by the government to safely produce a particular good for the U.S. market.
For example, let’s suppose that China and the U.S. both produce a certain type of widget, and Congress decides to mandate pollution controls on U.S.-made widgets so that we don’t emit cancer-causing pollution that could be fatal to our citizens. And, let’s suppose that this mandate raises the cost of the U.S.-made widgets 10 percent (an additional 10 percent production cost burden). If China does not have the same mandate that results in the same cost burdens, it is only fair that we impose at least a 10 percent tariff on any similar imported Chinese widgets, based on environmental regulations alone.
If Chinese wages are 10 percent lower than U.S. wages as well, we would add an additional 10 percent tariff. If U.S. companies subsidize their employees’ health care, and that adds another 10 percent cost to production, and China does not, we would add another 10 percent tariff.
We must perform this production cost burden analysis on every category of industry so that American companies and American workers are competing on a level playing field. This is vital to making sure that we do not incentivize U.S. factories to move to China and other countries.
Adhering to a policy of equalizing tariffs does not mean that if China applies a 10 percent tariff on American steel exports that we must also apply a 10 percent tariff on Chinese steel. This is called reciprocity, about which President McKinley said, Wherever we have tried reciprocity or low duties we have always been the loser. Reciprocity does not work when considering the imposition of import tariffs because the production cost burdens of the two countries are different.
If China’s total production cost burden for a given product is 20 percent less than that of the United States, and China applies a 10 percent import tariff on that American product, then we would need to impose a 30 percent tariff.
A reasonable level of import tariffs is what resulted in America becoming the world’s number one economic superpower, which is a status that free trade policies threaten to destroy.
If the newly-revised NAFTA (now re-named the USMCA) eventually becomes law, it is unclear that it will result in a trade surplus with Mexico. Time will tell. But as the details of the proposed agreement are made known, the United States will have a better chance of having a trade surplus if our trade negotiators had the goal of establishing equalizing tariffs in mind.