Bidenomics and Free Trade

Since the founding of the first colonies, America has had a complicated, love-hate relationship with the concept of free trade—the legal right to import and export goods without restrictions or taxes being paid for the privilege.  

The history of how America has set, then reversed, trade policy is a complex and nuanced story that has evolved over centuries.  It's a narrative marked by periods of enthusiastic support for free trade, that have been interrupted by bouts of protectionism and trade restrictions.  This history reflects the interplay of economic, political, and social factors that have shaped the United States' approach to international trade.

In its infancy, the United States adopted a relatively open approach to trade.  The U.S. Constitution, ratified in 1789, granted Congress the authority to regulate commerce with foreign nations, emphasizing the importance of international trade for the new nation's economic growth.  This commitment to free trade was reinforced by policies such as the Embargo Act of 1807, which aimed to protect American interests on the high seas.  Since American manufacturing was just getting started, the fledgling country was eager to import foreign goods.

Throughout much of the 19th century, the United States generally adhered to a policy of free trade, with tariffs kept relatively low.  This era of free trade was driven by the belief in the benefits of laissez-faire economics and belief in "manifest destiny," which called for the westward expansion of the nation and access to international markets for American goods.  As the North became industrialized, Northerners wanted more tariffs on imports, while the South—where the economy was largely based on agriculture—desired the lower prices on manufactured goods that would come with free trade.  This North/South split over trade policy eventually became one of the causes of the Civil War.

Toward the end of the 19th century, the United States began to experiment with more protectionist policies.  After the Civil War, the South had lost political clout and was powerless to stop the North from enacting tariffs to protect Northern industry.  The McKinley Tariff Act of 1890 marked a shift toward even higher tariffs that were aimed at protecting domestic industries from foreign competition.  The protectionist sentiment intensified during the Great Depression of the 1930s, leading to the passage of the Smoot-Hawley Tariff Act in 1930, which raised tariffs to historic highs—an act that was quickly matched by other countries, creating a global financial crisis.

After World War II, the United States played a central role in the establishment of the General Agreement on Tariffs and Trade (GATT), a precursor to the World Trade Organization (WTO).  This marked a renewed commitment to free trade and the reduction of trade barriers.  The Bretton Woods Conference, in 1944, established a framework for post-war international economic cooperation, emphasizing trade liberalization.  

The 1970s and 1980s saw a resurgence of free trade policies.  The United States pursued trade liberalization, entering into bilateral and multilateral agreements, including the North American Free Trade Agreement (NAFTA) and the United States-Canada Free Trade Agreement.  These agreements aimed to expand market access and promote economic growth.

In the 21st century, the United States has continued to navigate a complex trade landscape. The country has been party to various free trade agreements, including the Trans-Pacific Partnership (TPP)—later known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—and the United States-Mexico-Canada Agreement (USMCA).  However, trade tensions have also arisen, leading to trade disputes with major trading partners, particularly China.

Recent developments have posed challenges to the United States' love of free trade.  Growing concerns about job displacement and economic inequality have led to calls for a reevaluation of trade policies.  The Trump administration, for instance, pursued a more protectionist stance, characterized by measures such as tariffs on steel and aluminum imports.

The COVID-19 pandemic further underscored the importance of domestic supply chains and self-sufficiency in critical industries, prompting discussions about the resilience of the nation's trade policies.

There have always been good reasons for America to pursue a policy of free trade, as it allows American consumers to buy goods at the lowest possible prices and it shifts domestic labor to where it will be most efficiently used while encouraging innovation.  And as the American economist Frédéric Bastiat said, "If goods don't cross borders, armies will." Bastiat argued that free trade and economic cooperation between nations could lead to greater harmony and reduce the likelihood of conflicts and wars.  It just might be even simpler than that, it may be that free trade promotes peace because before you can trade with anyone, you have to respect the other's right of ownership.  

Today, by contrast, it appears that one of the tenets of ‘Bidenomics’ is to move away from free trade.  A recent article in Politico (Biden’s Trade Experiment is Ticking People Off by Steven Overly and Doug Palmer, July 03, 2023) describes how Katherine Tai, the U.S. Trade Representative, is forming a new trade policy that moves from delivering the lowest price for consumers to one that protects American jobs.  This move, aimed at placating Labor, has alarmed members of both parties, and has drawn sharp criticism from our European allies.

Tai believes that traditional trade agreements such as Clinton’s North American Free Trade Agreement (NAFTA), Obama’s Trans-Pacific Partnership (TPP), or Trump’s United States-Mexico-Canada Agreement (USMCA) ultimately allowed American manufacturing to move jobs out of the United States in pursuit of the profits that would come from cheap labor.  Tai suggests, instead, that America should focus on “raising global labor and environmental standards” and on making more goods domestically.

I wish Ms. Tai luck but trying to protect domestic jobs in an increasingly global market seems akin to King Canute ordering the tide to recede.  But where Canute knew his act was futile and his humble act was an effort to teach his advisors the limits of power, no one is sure if Tai actually believes that her “worker-centered” trade initiatives will work or if those are simply pre-election assurances to the president’s pro-labor base.

As Politico reported:

“If we want different outcomes, we’ve got to be willing to try new things,” Tai said earlier this month following a speech outlining the administration’s new trade approach.  “I don’t know that every single one of them is going to work.”

This doesn’t sound like a thoughtfully reasoned economic policy—it sounds like the age-old, shady practice of politicians promising to protect jobs that are inevitably lost.