Picking Apart One of the Biggest Lies in American Politics: 'Free Trade'
by Thom Hartmann | August 22, 2015 - 7:31am
In 1992, Ross Perot won almost 20% of the entire presidential vote on the single issue of stopping so-called “free trade.” Today, several presidential candidates are gaining huge traction with similar opposition to NAFTA, CAFTA, and the upcoming Southern Hemisphere Asian Free Trade Agreement (SHAFTA, now called the Trans-Pacific Partnership or TPP).
Time has proven Perot right, and his arguments were consistent with a long history of American industrial success prior to the “free trade” era of the past 30+ years.
Our radical experiment of so-called “free trade” has clearly failed America, although few Americans know why or how. Here’s the back-story.
George Washington on “Made In America” goods
On April 14, 1789, George Washington was out walking through the fields at Mount Vernon, his home in Virginia, when Charles Thomson, the Secretary of the Continental Congress, rode 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.
The first was saying goodbye to his 82-year-old mother, which the 57-year-old Washington 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. She died before he returned from New York.
The second was finding a suit of 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 manufactured into clothing.
This was a routine policy for England, and is why until India achieved its independence in 1947, Mahatma Gandhi (who was assassinated a year later) illegally 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 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 they produced high-quality woolen and cotton clothing, and also made things from imported silk.
It was to Hinsdale’s company that Knox turned, and 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 most famous painting.)
When Washington became president in 1789, most of America’s personal and industrial products of any significance were manufactured in England or in its colonies. Washington asked his first Treasury Secretary, Alexander Hamilton, what could be done about that, and Hamilton came up with an 11-point plan to build 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 Washington or the various states.
Those strategic proposals built the greatest industrial powerhouse the world had ever seen, and were only abandoned, after more than 200 successful years, during the administrations of Ronald Reagan, George HW Bush, and Bill Clinton (and remain abandoned to this day, as President Obama prepares to further expand “free trade”).
China, instead of following our recent path, implemented most of Hamilton’s plan, and it brought about a remarkable transformation of that nation in just a single generation.
Hamilton’s 11-point plan for “American Manufactures” laid out how to do it (it’s at the end of this article).
He looked at the nation and determined what needed to be done to rebuild the country after the Revolutionary War had devastated it, and subservience to England’s Tudor Plan “free trade” policies had left us without any significant domestic industrial base.
The High Cost of “Free Trade”
During the 1930s, none of the “Asian powerhouse economies” had adopted Hamilton’s industrialization strategies, so when Franklin Roosevelt put money into worker’s pockets through the New Deal 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 to $1.14 an hour from eighty cents, and its economy to grow by over 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. And, ironically, each of those countries got their 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.
And it didn’t start with Hamilton; he was just building on King Henry VII’s “Tudor Plan” of 1485, which turned England from a backwater state with raw wool as its chief export into a major developed state which produced fine clothing and other textile products from wool.
King Henry VII accomplished this by severely restricting the export of wool from England with high export tariffs and restricting the import of finished wool products with high import tariffs.
King Henry learned this from the Dutch. They copied the Romans. And the Romans got it from the Greeks, three thousand years ago. It’s not new, and it’s not rocket science.
Nonetheless, President Obama continues to follow his predecessors – Reagan, Bush, Clinton, and Bush – in the religious belief that “free trade” will save us all. It’s nonsense. “Free trade" is a guaranteed ticket to the poorhouse for any nation, and the evidence is overwhelming. (Ironically, the concept of “free trade” was introduced by Henry VII in 1487 as something that England should encourage other countries to do while it maintained protectionism. It was invented as a scam.)
A more contemporary example of the application of the wisdom of trade protectionism can be seen in South Korea.
In the 1960s, Korea was an undeveloped nation whose major exports were human hair (for wigs) and fish, and their average annual income was around $400 per working family. Today it’s a major industrial power with an average annual per capita income of over $32,000, and it beats the US in its rate of college attendance, exports, and lifespan.
South Korea did all this in a single generation by closing its economy and promoting its export industries. A decade earlier Japan had done the same thing. Forty years earlier Germany had done it.
In July, 2009, with no evident irony or understanding of how South Korea went about becoming a modern economic powerhouse, President Obama lectured the countries of Africa during his visit to Ghana. As the New York Times reported: “Mr. Obama said that when his father came to the United States, his home country of Kenya had an economy as large as that of South Korea per capita. Today, he noted, Kenya remains impoverished and politically unstable, while South Korea has become an economic powerhouse.”
In the same day’s newspaper, the lead editorial, titled “Tangled Trade Talks,” repeated the essence of the mantra of its confused op-ed writer, Thomas L. Friedman, that so-called “free trade” is the solution to a nation’s economic ills.
“There are few things that could do more damage to the already battered global economy than an old-fashioned trade war,” Friedman opined in the Times. “So we have been increasingly worried by the protectionist rhetoric and policies being espoused by politicians across the globe and in this country.”
But South Korea did not ride the “free trade” train to success.
South Korean economist Ha-Joon Chang details South Korea’s economic ascent in his 2008 book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.
In 1961, South Korea was as poor as Kenya, with an $82 per capita annual income and many obstacles to economic strength. The country’s main exports were primary commodities such as tungsten, fish, and human hair for wigs. That’s how the Korean technology giant, Samsung, started—by exporting fish, fruits and vegetables. Today, it’s the world’s largest conglomerate by revenue ($173 billion in 2008). By throwing out “free trade” and embracing “protectionism” during the 1960s, South Korea managed to do in 50 years what it took the United States 100 years and Britain 150 years to do.
After a military coup in 1961, General Park Chung-hee implemented short-term plans for South Korea’s economic development. He instituted the Heavy and Chemical Industrialization program, and South Korea’s first steel mill and modern shipyard went into production.
In addition, South Korea began producing its own cars and used import tariffs to discourage imports.
Electronics, machinery, chemicals plants soon followed, all sponsored or subsidized and tariff-protected by the government.
Between 1972 and 1979 the per capita income grew over 5 times – more than 500 percent!
In addition, South Korean citizens adopted new protectionist slogans. For example, it was viewed as civic duty to shame anyone caught smoking foreign cigarettes.
All money made from exports went into developing domestic South Korean industry. South Korea enacted import bans, high tariffs and excise taxes on thousands of products.
In the 80’s South Korea was still far from the industrialized West but it had built a solid middle class. South Korea’s transformation was, to quote Chang, as if “Haiti had turned into Switzerland.” This transformation was accomplished through protecting fledgling industries with high tariffs and subsides, and only gradually opening itself to global completion.
In addition, the South Korean government heavily subsidized many of the larger industries at startup, at least until they were globally competitive. The government carefully regulated the banks and therefore the credit. It controlled foreign exchange and used its currency reserves to import machinery and industrial imports.
At the same time, the South Korean government tightly controlled foreign investment in that nation. Korea focused on exporting basic manufactured goods to fuel and protect its high-tech industries with tariffs and subsides.
Had South Korea adopted the “free trade” policies espoused by Friedman and the New York Times, it would still be exporting fish.
Another favorite Freidman free-trade example is the success of Toyota’s Lexus luxury car, immortalized in his book The Lexus and the Olive Tree.
But again, the reality is quite different than what Friedman naively portrays in his book. In fact, Japan subsidized Toyota not only in its development but even after it failed terribly in the American markets in the late 1950’s. In addition, early in Toyota’s development, Japan kicked out foreign competitors like GM.
Thus, because the Japanese government financed Toyota at a loss for roughly 20 years, built high tariff and other barriers to competitive imports, and initially subsidized exports, auto manufacturing was able to get a strong foothold and we now think of Japanese exports being synonymous with automobiles.
Founding Father Knows Best
For about 200 years, we understood well the benefits of tariffs, subsidized exports and protectionist policies in the United States. Had the fathers of the United States like Abraham Lincoln, George Washington, Andrew Jackson or Ulysses Grant applied for IMF loans, they would have been denied: All of them believed in high tariffs and a heavy control of foreign investment, and considered “free trade” to be absurd.
But it was another Founding Father—Alexander Hamilton—who knew best how to spawn American industry to make the country independent and competitive. As the nation’s first Treasury Secretary, Hamilton submitted his Report on the Subject of Manufactures in 1791 to the US Congress, outlining the need for our government to foster new industries through “bounties” (subsidies) and subsequently protect them from foreign imports until they become globally competitive.
Additionally, he proposed a roadmap for American industrial development. These steps included protective tariffs on imports, import bans, subsides, export bans on selected materials, and the development of product standards.
It was this approach of putting America first that our government followed for most of our history, with average tariffs of 30 percent through the 19th and 20th centuries. There is no denying that it helped turn America into an industrial and economic juggernaut in the mid-20th century and beyond.
The three periods when we radically dropped tariffs – for three years in 1857, for nine years in 1913, and by Reagan in 1987 – were all followed by economic disasters, particularly for small American manufacturers.
The post-Reagan era has been particularly destructive to our economy because not only did we mostly eliminate the tariffs, but we became “free trade” proponents on the international stage. After Reagan blew out our tariffs in the 1980s, and Clinton kicked the door totally open with GATT, NAFTA, and the WTO, our average tariffs are now around 2 percent.
And the predictable result has been the hemorrhaging of American manufacturing capacity to those countries that do protect their industries through high import tariffs but allow exports on the cheap – particularly China and South Korea.
The irony is that we have abandoned Hamilton’s advice—and our own history—while China, South Korea, Japan and other nations are following his prescriptions and turning into muscular and prosperous economic entities.
It’s high time we re-learned Alexander Hamilton’s lessons for our nation.
The first third of Hamilton’s report deals with Jefferson’s objections to it (withdrawn later) which were primarily over the subsidies to industry as Jefferson favored America being an agricultural rather than an industrial power in 1791. After that, though, Hamilton gets to the rationale for, and the details of, his 11-point plan to turn America into an industrial power and build a strong manufacturing-based middle class.
First, Hamilton notes that real wealth doesn’t exist until somebody makes something. A “service economy” is an oxymoron – if I wash your car in exchange for your mowing my lawn, money is moving around, it’s an “economy” of some sort, but no real and lasting wealth is created.
Only through manufacturing, when $5 worth of iron ore is converted into a $2000 car door, or $1 worth of raw wool is converted into a $1000 suit, is real wealth created. Hamilton also notes that people being paid for creating wealth (manufacturing) creates wages, which are the principal engine of demand, which drives an economy. And both come from a generally protectionist foreign trade policy.
In an early version of Keynes, Hamilton noted that when people make things, they also earn money, which will be used to buy more things, thus creating a real internal domestic economy with things of real value circulating in it.
In addition, Hamilton saw a clear government role in fostering manufacturing, not just in subsidizing it until it could compete on its own, but also in crafting a foreign trade policy that protected American enterprises.
“‘Tis for the United States to consider by what means they can render themselves least dependent,” of other nation’s manufactures, Hamilton wrote, “on the combinations, right or wrong, of foreign policy.”
But there were many voices in 1791 – the loudest being the young Secretary of State Thomas Jefferson – who argued that instead of becoming an industrial power we should remain an agricultural nation.
Hamilton believed both were possible, and there would even be a desirable synergy between the two. He felt that if America wanted to be competitive, it couldn’t just leave it to the so-called free market.
Government ought to play a role in fostering a strong industrial base, he argued: “To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government.”
In fact, Hamilton believed success was not possible without government. “To be enabled to contend with success, it is evident that the interference and aid of their own government are indispensable,” he wrote.
His reasons were pretty straightforward: it would take government’s power to set up a playing field for the game of business where investors who would otherwise be able to make more money overseas would keep their money in the United States.
“There are weighty inducements [in my plan] to prefer the employment of capital at home even at less profit, to an investment of it abroad, though with greater gain,” he wrote.
Having provided this overview, Hamilton got right to the meat of the matter – his 11-step plan (see end of article). It called for government to take an active role in developing its own industry, in discouraging imports through tariffs and prohibitions, in building transportation routes at home for internal trade, and in subsidizing manufacturing until companies become strong enough to compete on their own.
Consider the historical impact of Hamilton’s plan, which was adopted in a series of piecemeal legislative and executive action steps mostly by 1793: Tariffs became so important that they constituted pretty much the only source of revenue for the federal government until the Civil War, were the single largest source of federal revenue from then until World War I. And even when government had grown exponentially as we led up to World War II, fully a third of all federal revenues came from tariffs.
It is only since the Reagan era and subsequently with Bush, Clinton, Bush, and now Obama, that we have forsaken tariffs and have been chanting the “free trade” mantra—to our own detriment and destruction. A protectionist approach, including tariffs, is what the USA needs so it can get back in the game of manufacturing—before it’s too late.
How badly Reaganism and “free trade” have damaged us
When Ronald Reagan came into office, as the result of 190 years of Hamilton’s plan, the United States was the world’s largest importer of raw materials; the world’s largest exporter of finished, manufactured goods; and the world’s largest creditor.
After 34 years of Reaganomics, we’ve completely flipped this upside down. We’ve become the world’s largest exporter of raw materials, the world’s largest importer of finished goods, and the world’s largest debtor. We now export raw materials to China, and buy from them manufactured goods. And we borrow from them to do it. Our trade debt right now stands at over $11 trillion, and it’s the principle reason why one-seventh of all assets in the United States are foreign-owned.
China’s 2009 “stimulus package” – about the same size as ours at around $800 billion – could explicitly only be spent on Chinese-made products from Chinese-owned companies employing only Chinese workers. Ditto for the 2009 Japanese version of “Cash for Clunkers,” which mandated the purchase of exclusively Japanese-made cars.
Here’s how we can unwind the damage Reagan and Clinton did to our nation:
First, go back to charging an import tax – a tariff – on goods made overseas that compete with domestic manufacturers, while keeping import taxes low on raw materials that domestic industries need.
It has become unfashionable in the post-Reagan era to talk about tariffs.
An easy way of explaining tariffs is to say, “If there’s a dollar’s worth of labor in a pair of shoes manufactured in the United States, and you can make the same pair of shoes with twenty cents worth of labor in China, then we’re going to charge you an eighty-cent tariff when those shoes are imported into the United States. If you can make them with fifty cents of labor in Mexico, then our import tariff from Mexico is fifty cents.”
In short, import duties are used to equalize manufacturing costs and protect domestic industries.
And the tariffs’ equalizing effects shouldn’t just be limited to labor. Products from other countries where toxic chemicals can just be poured into rivers (eventually ending up in the oceans we all share) instead of being more expensively disposed of or recycled, should be assessed a tariff to reflect that environmental cost. The same should apply to the way they generate their electricity (for example, using old coal-fired power plants that belch toxins into our air) to manufacture parts for the products.
Second, pull us out of the WTO, NAFTA, CAFTA, and the rest, and mandate that all purchases made with US taxpayers’ dollars be spent on goods and services provided by American workers employed by US-domiciled and incorporated businesses on American soil. No exceptions. (No more hiring Dubai-based Halliburton, for example.)
Third, have the government support new and emerging industries through tax policy, direct grants, and funding things like the National Institutes of Health, which funds most university research that leads to profitable new drugs for our pharmaceutical companies.
In Japan, it’s the Ministry of Industry and Trade (MITI) which helped develop the Lexus so beloved by Thomas Friedman. There is no shame in subsidizing our own companies—as long as they show their loyalty to the U.S. by employing American workers, investing in American enterprises, and not engaging in international business ventures that hurt America.
Then there are other tax incentives and domestic policies to pursue that will benefit the creation of jobs at home. Encourage Americans to save, so there’s a strong pool of investment capital for businesses to borrow against and grow – the best way to do this is to offer people an above-the-inflation-rate interest rate on savings.
This could easily be accomplished by offering US government savings bonds with a guaranteed rate of return (for example, inflation plus 3 points) and limiting their purchase to people who have a net worth of less than $5 million and selling no more than $1 million per person. This would establish a benchmark against which banks would have to compete, stimulating private banks and credit unions to offer higher returns on savings.
These are bold moves, no doubt, for any president or party to make, but they do have the advantage of pleasing the Tea Party populists as well as the Coffee Party progressive populists.
Of course, such protectionist policies would not sit well with some of the multinational conglomerates, whose loyalty is not to America, but only to their investors and shareholders. A lot of them manufacture products in China or Vietnam and sell them here at a huge profit without giving a damn about the consequences of these actions to American workers.
But if we want to “bring our jobs back home to America,” as politicians keep saying, all we need do is repudiate Reaganism and so-called “free trade” and go back to what George Washington and Alexander Hamilton worked out in 1791 that served our country so well until Reagan and Clinton dismantled them in the 1980s and 1990s.
Footnote: Here is part of Alexander Hamilton’s “Report on Manufactures” 11-point plan to build America, submitted to Congress in 1791 and largely instituted in a variety of ways by Congress and the George Washington administration by 1793. It stood in large part and built American industry from 1793 until the Reagan Revolution, and is now (in more modern forms, including using VAT taxes as functional tariffs, and “national security” as a form of “prohibition”) the principle trade policy for countries like China, Germany, Taiwan, South Korea, and Japan:
ii Washington’s American Made Inaugural Clothes, by Rosemary E. Bachelor, published at Suite 101, and educational site, http://americanhistory.suite101.com/article.cfm/washingtons-american-mad...
iii Defying Global Slump, China Has Labor Shortage By KEITH BRADSHER New York Times
Published: February 26, 2010 “As American workers struggle with near double-digit unemployment, unskilled factory workers here in China’s industrial heartland are being offered signing bonuses.
Factory wages have risen as much as 20 percent in recent months.”iv The New York Times, “Obama Wins More Food Aid but Presses African Nations on Corruption” by Peter Baker and Rachel Donadio, July 11, 2009.
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http://www.smirkingchimp.com/node/63530In 1992, Ross Perot won almost 20% of the entire presidential vote on the single issue of stopping so-called “free trade.” Today, several presidential candidates are gaining huge traction with similar opposition to NAFTA, CAFTA, and the upcoming Southern Hemisphere Asian Free Trade Agreement (SHAFTA, now called the Trans-Pacific Partnership or TPP).
Time has proven Perot right, and his arguments were consistent with a long history of American industrial success prior to the “free trade” era of the past 30+ years.
Our radical experiment of so-called “free trade” has clearly failed America, although few Americans know why or how. Here’s the back-story.
George Washington on “Made In America” goods
On April 14, 1789, George Washington was out walking through the fields at Mount Vernon, his home in Virginia, when Charles Thomson, the Secretary of the Continental Congress, rode 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.
The first was saying goodbye to his 82-year-old mother, which the 57-year-old Washington 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. She died before he returned from New York.
The second was finding a suit of 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 manufactured into clothing.
This was a routine policy for England, and is why until India achieved its independence in 1947, Mahatma Gandhi (who was assassinated a year later) illegally 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 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 they produced high-quality woolen and cotton clothing, and also made things from imported silk.
It was to Hinsdale’s company that Knox turned, and 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 most famous painting.)
When Washington became president in 1789, most of America’s personal and industrial products of any significance were manufactured in England or in its colonies. Washington asked his first Treasury Secretary, Alexander Hamilton, what could be done about that, and Hamilton came up with an 11-point plan to build 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 Washington or the various states.
Those strategic proposals built the greatest industrial powerhouse the world had ever seen, and were only abandoned, after more than 200 successful years, during the administrations of Ronald Reagan, George HW Bush, and Bill Clinton (and remain abandoned to this day, as President Obama prepares to further expand “free trade”).
China, instead of following our recent path, implemented most of Hamilton’s plan, and it brought about a remarkable transformation of that nation in just a single generation.
Hamilton’s 11-point plan for “American Manufactures” laid out how to do it (it’s at the end of this article).
He looked at the nation and determined what needed to be done to rebuild the country after the Revolutionary War had devastated it, and subservience to England’s Tudor Plan “free trade” policies had left us without any significant domestic industrial base.
The High Cost of “Free Trade”
During the 1930s, none of the “Asian powerhouse economies” had adopted Hamilton’s industrialization strategies, so when Franklin Roosevelt put money into worker’s pockets through the New Deal 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 to $1.14 an hour from eighty cents, and its economy to grow by over 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. And, ironically, each of those countries got their 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.
And it didn’t start with Hamilton; he was just building on King Henry VII’s “Tudor Plan” of 1485, which turned England from a backwater state with raw wool as its chief export into a major developed state which produced fine clothing and other textile products from wool.
King Henry VII accomplished this by severely restricting the export of wool from England with high export tariffs and restricting the import of finished wool products with high import tariffs.
King Henry learned this from the Dutch. They copied the Romans. And the Romans got it from the Greeks, three thousand years ago. It’s not new, and it’s not rocket science.
Nonetheless, President Obama continues to follow his predecessors – Reagan, Bush, Clinton, and Bush – in the religious belief that “free trade” will save us all. It’s nonsense. “Free trade" is a guaranteed ticket to the poorhouse for any nation, and the evidence is overwhelming. (Ironically, the concept of “free trade” was introduced by Henry VII in 1487 as something that England should encourage other countries to do while it maintained protectionism. It was invented as a scam.)
A more contemporary example of the application of the wisdom of trade protectionism can be seen in South Korea.
In the 1960s, Korea was an undeveloped nation whose major exports were human hair (for wigs) and fish, and their average annual income was around $400 per working family. Today it’s a major industrial power with an average annual per capita income of over $32,000, and it beats the US in its rate of college attendance, exports, and lifespan.
South Korea did all this in a single generation by closing its economy and promoting its export industries. A decade earlier Japan had done the same thing. Forty years earlier Germany had done it.
In July, 2009, with no evident irony or understanding of how South Korea went about becoming a modern economic powerhouse, President Obama lectured the countries of Africa during his visit to Ghana. As the New York Times reported: “Mr. Obama said that when his father came to the United States, his home country of Kenya had an economy as large as that of South Korea per capita. Today, he noted, Kenya remains impoverished and politically unstable, while South Korea has become an economic powerhouse.”
In the same day’s newspaper, the lead editorial, titled “Tangled Trade Talks,” repeated the essence of the mantra of its confused op-ed writer, Thomas L. Friedman, that so-called “free trade” is the solution to a nation’s economic ills.
“There are few things that could do more damage to the already battered global economy than an old-fashioned trade war,” Friedman opined in the Times. “So we have been increasingly worried by the protectionist rhetoric and policies being espoused by politicians across the globe and in this country.”
But South Korea did not ride the “free trade” train to success.
South Korean economist Ha-Joon Chang details South Korea’s economic ascent in his 2008 book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.
In 1961, South Korea was as poor as Kenya, with an $82 per capita annual income and many obstacles to economic strength. The country’s main exports were primary commodities such as tungsten, fish, and human hair for wigs. That’s how the Korean technology giant, Samsung, started—by exporting fish, fruits and vegetables. Today, it’s the world’s largest conglomerate by revenue ($173 billion in 2008). By throwing out “free trade” and embracing “protectionism” during the 1960s, South Korea managed to do in 50 years what it took the United States 100 years and Britain 150 years to do.
After a military coup in 1961, General Park Chung-hee implemented short-term plans for South Korea’s economic development. He instituted the Heavy and Chemical Industrialization program, and South Korea’s first steel mill and modern shipyard went into production.
In addition, South Korea began producing its own cars and used import tariffs to discourage imports.
Electronics, machinery, chemicals plants soon followed, all sponsored or subsidized and tariff-protected by the government.
Between 1972 and 1979 the per capita income grew over 5 times – more than 500 percent!
In addition, South Korean citizens adopted new protectionist slogans. For example, it was viewed as civic duty to shame anyone caught smoking foreign cigarettes.
All money made from exports went into developing domestic South Korean industry. South Korea enacted import bans, high tariffs and excise taxes on thousands of products.
In the 80’s South Korea was still far from the industrialized West but it had built a solid middle class. South Korea’s transformation was, to quote Chang, as if “Haiti had turned into Switzerland.” This transformation was accomplished through protecting fledgling industries with high tariffs and subsides, and only gradually opening itself to global completion.
In addition, the South Korean government heavily subsidized many of the larger industries at startup, at least until they were globally competitive. The government carefully regulated the banks and therefore the credit. It controlled foreign exchange and used its currency reserves to import machinery and industrial imports.
At the same time, the South Korean government tightly controlled foreign investment in that nation. Korea focused on exporting basic manufactured goods to fuel and protect its high-tech industries with tariffs and subsides.
Had South Korea adopted the “free trade” policies espoused by Friedman and the New York Times, it would still be exporting fish.
Another favorite Freidman free-trade example is the success of Toyota’s Lexus luxury car, immortalized in his book The Lexus and the Olive Tree.
But again, the reality is quite different than what Friedman naively portrays in his book. In fact, Japan subsidized Toyota not only in its development but even after it failed terribly in the American markets in the late 1950’s. In addition, early in Toyota’s development, Japan kicked out foreign competitors like GM.
Thus, because the Japanese government financed Toyota at a loss for roughly 20 years, built high tariff and other barriers to competitive imports, and initially subsidized exports, auto manufacturing was able to get a strong foothold and we now think of Japanese exports being synonymous with automobiles.
Founding Father Knows Best
For about 200 years, we understood well the benefits of tariffs, subsidized exports and protectionist policies in the United States. Had the fathers of the United States like Abraham Lincoln, George Washington, Andrew Jackson or Ulysses Grant applied for IMF loans, they would have been denied: All of them believed in high tariffs and a heavy control of foreign investment, and considered “free trade” to be absurd.
But it was another Founding Father—Alexander Hamilton—who knew best how to spawn American industry to make the country independent and competitive. As the nation’s first Treasury Secretary, Hamilton submitted his Report on the Subject of Manufactures in 1791 to the US Congress, outlining the need for our government to foster new industries through “bounties” (subsidies) and subsequently protect them from foreign imports until they become globally competitive.
Additionally, he proposed a roadmap for American industrial development. These steps included protective tariffs on imports, import bans, subsides, export bans on selected materials, and the development of product standards.
It was this approach of putting America first that our government followed for most of our history, with average tariffs of 30 percent through the 19th and 20th centuries. There is no denying that it helped turn America into an industrial and economic juggernaut in the mid-20th century and beyond.
The three periods when we radically dropped tariffs – for three years in 1857, for nine years in 1913, and by Reagan in 1987 – were all followed by economic disasters, particularly for small American manufacturers.
The post-Reagan era has been particularly destructive to our economy because not only did we mostly eliminate the tariffs, but we became “free trade” proponents on the international stage. After Reagan blew out our tariffs in the 1980s, and Clinton kicked the door totally open with GATT, NAFTA, and the WTO, our average tariffs are now around 2 percent.
And the predictable result has been the hemorrhaging of American manufacturing capacity to those countries that do protect their industries through high import tariffs but allow exports on the cheap – particularly China and South Korea.
The irony is that we have abandoned Hamilton’s advice—and our own history—while China, South Korea, Japan and other nations are following his prescriptions and turning into muscular and prosperous economic entities.
It’s high time we re-learned Alexander Hamilton’s lessons for our nation.
The first third of Hamilton’s report deals with Jefferson’s objections to it (withdrawn later) which were primarily over the subsidies to industry as Jefferson favored America being an agricultural rather than an industrial power in 1791. After that, though, Hamilton gets to the rationale for, and the details of, his 11-point plan to turn America into an industrial power and build a strong manufacturing-based middle class.
First, Hamilton notes that real wealth doesn’t exist until somebody makes something. A “service economy” is an oxymoron – if I wash your car in exchange for your mowing my lawn, money is moving around, it’s an “economy” of some sort, but no real and lasting wealth is created.
Only through manufacturing, when $5 worth of iron ore is converted into a $2000 car door, or $1 worth of raw wool is converted into a $1000 suit, is real wealth created. Hamilton also notes that people being paid for creating wealth (manufacturing) creates wages, which are the principal engine of demand, which drives an economy. And both come from a generally protectionist foreign trade policy.
In an early version of Keynes, Hamilton noted that when people make things, they also earn money, which will be used to buy more things, thus creating a real internal domestic economy with things of real value circulating in it.
In addition, Hamilton saw a clear government role in fostering manufacturing, not just in subsidizing it until it could compete on its own, but also in crafting a foreign trade policy that protected American enterprises.
“‘Tis for the United States to consider by what means they can render themselves least dependent,” of other nation’s manufactures, Hamilton wrote, “on the combinations, right or wrong, of foreign policy.”
But there were many voices in 1791 – the loudest being the young Secretary of State Thomas Jefferson – who argued that instead of becoming an industrial power we should remain an agricultural nation.
Hamilton believed both were possible, and there would even be a desirable synergy between the two. He felt that if America wanted to be competitive, it couldn’t just leave it to the so-called free market.
Government ought to play a role in fostering a strong industrial base, he argued: “To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government.”
In fact, Hamilton believed success was not possible without government. “To be enabled to contend with success, it is evident that the interference and aid of their own government are indispensable,” he wrote.
His reasons were pretty straightforward: it would take government’s power to set up a playing field for the game of business where investors who would otherwise be able to make more money overseas would keep their money in the United States.
“There are weighty inducements [in my plan] to prefer the employment of capital at home even at less profit, to an investment of it abroad, though with greater gain,” he wrote.
Having provided this overview, Hamilton got right to the meat of the matter – his 11-step plan (see end of article). It called for government to take an active role in developing its own industry, in discouraging imports through tariffs and prohibitions, in building transportation routes at home for internal trade, and in subsidizing manufacturing until companies become strong enough to compete on their own.
Consider the historical impact of Hamilton’s plan, which was adopted in a series of piecemeal legislative and executive action steps mostly by 1793: Tariffs became so important that they constituted pretty much the only source of revenue for the federal government until the Civil War, were the single largest source of federal revenue from then until World War I. And even when government had grown exponentially as we led up to World War II, fully a third of all federal revenues came from tariffs.
It is only since the Reagan era and subsequently with Bush, Clinton, Bush, and now Obama, that we have forsaken tariffs and have been chanting the “free trade” mantra—to our own detriment and destruction. A protectionist approach, including tariffs, is what the USA needs so it can get back in the game of manufacturing—before it’s too late.
How badly Reaganism and “free trade” have damaged us
When Ronald Reagan came into office, as the result of 190 years of Hamilton’s plan, the United States was the world’s largest importer of raw materials; the world’s largest exporter of finished, manufactured goods; and the world’s largest creditor.
After 34 years of Reaganomics, we’ve completely flipped this upside down. We’ve become the world’s largest exporter of raw materials, the world’s largest importer of finished goods, and the world’s largest debtor. We now export raw materials to China, and buy from them manufactured goods. And we borrow from them to do it. Our trade debt right now stands at over $11 trillion, and it’s the principle reason why one-seventh of all assets in the United States are foreign-owned.
China’s 2009 “stimulus package” – about the same size as ours at around $800 billion – could explicitly only be spent on Chinese-made products from Chinese-owned companies employing only Chinese workers. Ditto for the 2009 Japanese version of “Cash for Clunkers,” which mandated the purchase of exclusively Japanese-made cars.
Here’s how we can unwind the damage Reagan and Clinton did to our nation:
First, go back to charging an import tax – a tariff – on goods made overseas that compete with domestic manufacturers, while keeping import taxes low on raw materials that domestic industries need.
It has become unfashionable in the post-Reagan era to talk about tariffs.
An easy way of explaining tariffs is to say, “If there’s a dollar’s worth of labor in a pair of shoes manufactured in the United States, and you can make the same pair of shoes with twenty cents worth of labor in China, then we’re going to charge you an eighty-cent tariff when those shoes are imported into the United States. If you can make them with fifty cents of labor in Mexico, then our import tariff from Mexico is fifty cents.”
In short, import duties are used to equalize manufacturing costs and protect domestic industries.
And the tariffs’ equalizing effects shouldn’t just be limited to labor. Products from other countries where toxic chemicals can just be poured into rivers (eventually ending up in the oceans we all share) instead of being more expensively disposed of or recycled, should be assessed a tariff to reflect that environmental cost. The same should apply to the way they generate their electricity (for example, using old coal-fired power plants that belch toxins into our air) to manufacture parts for the products.
Second, pull us out of the WTO, NAFTA, CAFTA, and the rest, and mandate that all purchases made with US taxpayers’ dollars be spent on goods and services provided by American workers employed by US-domiciled and incorporated businesses on American soil. No exceptions. (No more hiring Dubai-based Halliburton, for example.)
Third, have the government support new and emerging industries through tax policy, direct grants, and funding things like the National Institutes of Health, which funds most university research that leads to profitable new drugs for our pharmaceutical companies.
In Japan, it’s the Ministry of Industry and Trade (MITI) which helped develop the Lexus so beloved by Thomas Friedman. There is no shame in subsidizing our own companies—as long as they show their loyalty to the U.S. by employing American workers, investing in American enterprises, and not engaging in international business ventures that hurt America.
Then there are other tax incentives and domestic policies to pursue that will benefit the creation of jobs at home. Encourage Americans to save, so there’s a strong pool of investment capital for businesses to borrow against and grow – the best way to do this is to offer people an above-the-inflation-rate interest rate on savings.
This could easily be accomplished by offering US government savings bonds with a guaranteed rate of return (for example, inflation plus 3 points) and limiting their purchase to people who have a net worth of less than $5 million and selling no more than $1 million per person. This would establish a benchmark against which banks would have to compete, stimulating private banks and credit unions to offer higher returns on savings.
These are bold moves, no doubt, for any president or party to make, but they do have the advantage of pleasing the Tea Party populists as well as the Coffee Party progressive populists.
Of course, such protectionist policies would not sit well with some of the multinational conglomerates, whose loyalty is not to America, but only to their investors and shareholders. A lot of them manufacture products in China or Vietnam and sell them here at a huge profit without giving a damn about the consequences of these actions to American workers.
But if we want to “bring our jobs back home to America,” as politicians keep saying, all we need do is repudiate Reaganism and so-called “free trade” and go back to what George Washington and Alexander Hamilton worked out in 1791 that served our country so well until Reagan and Clinton dismantled them in the 1980s and 1990s.
Footnote: Here is part of Alexander Hamilton’s “Report on Manufactures” 11-point plan to build America, submitted to Congress in 1791 and largely instituted in a variety of ways by Congress and the George Washington administration by 1793. It stood in large part and built American industry from 1793 until the Reagan Revolution, and is now (in more modern forms, including using VAT taxes as functional tariffs, and “national security” as a form of “prohibition”) the principle trade policy for countries like China, Germany, Taiwan, South Korea, and Japan:
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 From Our Country, published in 1877 by Benson J. Lossing, http://www.publicbookshelf.com/public_html/Our_Country_vol_2/georgewas_b...
1. Protecting duties 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. It has the additional recommendation of being a resource of revenue. Indeed, all tile 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.
2. Prohibitions of rival articles, or duties equivalent to prohibitions.
This is another and an efficacious means of encouraging national manufactures; Of duties equivalent to prohibitions, there are examples in the laws of the United States, but they are not numerous. It 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.
3. 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 tile 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.
4. Pecuniary bounties [Support Payments].
This has been found one of the most efficacious means of encouraging manufactures, and 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 expiration of dried and pickled fish and salted meat could be considered as a bounty), and though it is less favored by public opinion than some other modes, its advantages are these:
A. 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 attempts.
B. 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.
C. Bounties have not, like high protecting duties, a tendency to produce scarcity.
D. 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.
Pecuniary 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.
5. 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;
6. The exemption of the 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, hearing 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.
7. Drawbacks of the duties which are imposed on the materials of manufactures.
Such 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.
8. 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 w 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.
9. Judicious regulations for the inspection of manufactured commodities [Consumer Protections].
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…
10. The facilitating of pecuniary remittances from place to place [Banking] --
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.
11. The facilitating of the transportation of commodities [Infrastructure].
There is, perhaps, scarcely any thing which has been better calculated to assist the manufacturers of Great Britain, than the melioration of the public roads of that kingdom, and the great progress which has been of l3ate 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. "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 the town. They are, upon that account, the greatest of all improvement."
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
ii Washington’s American Made Inaugural Clothes, by Rosemary E. Bachelor, published at Suite 101, and educational site, http://americanhistory.suite101.com/article.cfm/washingtons-american-mad...
iii Defying Global Slump, China Has Labor Shortage By KEITH BRADSHER New York Times
Published: February 26, 2010 “As American workers struggle with near double-digit unemployment, unskilled factory workers here in China’s industrial heartland are being offered signing bonuses.
Factory wages have risen as much as 20 percent in recent months.”iv The New York Times, “Obama Wins More Food Aid but Presses African Nations on Corruption” by Peter Baker and Rachel Donadio, July 11, 2009.
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