Tariffs and the return of Made in America!

Trump's tariffs look less and less like an instrument for negotiation, of whatever they would allow to negotiate (some stuff is simply ludicrous, like the discussion on reducing fentanyl entry through Canada), and, at least rhetorically, he is using the language of bringing back manufacturing jobs to the United States. That would actually strengthen his populist credentials. Many trade union types were very happy, contrary to what most media outlets would make you believe, and certainly it should worry Dems.

However, whether this tariffs will bring back manufacturing jobs is far from clear. There have been a lot of jokes about the back-of-the-envelope calculations used to determine the level of the tariffs. At the end of the day, it seems that the actual decision was somewhat arbitrary, and mostly concerned with punishing countries with higher trade surpluses with the US.

I don't think this is clear yet, but average tariffs may go back to the levels of the 1930s, if these stick (which again, nobody knows, since some might negotiate side deals with the Don). And while there is a lot of debate about the effects that they will have in the economy in the short run (inflation, stagflation and so on), there has been little discussion of the historical precedent, and whether tariffs were instrumental for American industrialization, and whether the claim that they will bring back good jobs makes sense. Certainly, on the progressive side that is the common understanding, and a lot of that is associated to Alexander Hamilton, and his followers, less well-known figures like Mathew and Henry Carey, Friedrich List, and later Progressives like Simon Patten, during the Gilded Age. And tariffs were definitely high in the post-bellum period, when the US industrialized (see below, from Douglas Irwin's massive history of US trade policy).

It is certainly true that the bulk of industrialization happened when tariffs where high, even if some industrialization did happen in the ante-bellum period, when tariffs fluctuated quite a bit. The official economic historiography, Taussig, North and Irwin himself, to cite some of the more prominent authors, are somewhat skeptical of its role. Irwin, in particular, is very forceful in his views about the fiscal nature of the ante-bellum tariffs, and even, in terms of intellectual history, the notion that Hamilton was not a protectionist defending import substitution industrialization. I have problems with that interpretation, and I think a reading of Hamilton's Report on Manufactures shows that he is incorrect.

However, it is true that tariffs alone did not cause industrialization. Just as an example, tariffs by the end of the 19th century were higher in Latin America, on average, than in the US, and even though there was some increase in manufacturing in some countries in the region, they remained mostly commodity exporters during this period (see graph below from Coatsworth and Williamson).

So, if not tariffs, what allowed for the industrial boom in the post-bellum period, one may ask. First and foremost, the railroad boom, and the finishing of the transcontinental railroad in 1869,  the "Golden Spike" at Promontory Summit, Utah (I visited, and they do a recreation of the famous photo below), created a national market, that was only possible because of the Federal government. Republican governments in that era had an industrializing project, were protectionist, but more importantly provided subsidized land to railroad corporations, which otherwise would not have been able to finance these massive infrastructure projects. Land grants were central for the expansion of the economy, and suggest that the role of the government was much larger than if one looks simply at the level of spending in this period, which was modest, by modern standards.

In other words, protection did play a role, but it was not sufficient to explain the industrialization boom of the late 19th century. Government support for the expansion of the domestic market was key. I do not expect, and so far that has been the case, that the Trump administration will cut significantly spending. A lot of the money that they will spend, will certainly go to contracts for big corporations. In that sense, American corporations will continue to benefit from government largess, but I doubt jobs will come back in great quantities. Note that manufacturing jobs were constant up to the entry of China in the WTO, and then even when they collapsed in the early 2000s (explaining the Tea Party and Trumpism itself to a great extent), at least for a while, it went hand in hand with the expansion of manufacturing output. Only in the last 15 years, in the aftermath of the Great Recession did manufacturing production stalled, and that was during a period of relative modest government spending growth (the Obama-Trump lackluster recovery).

In my view, and this is admittedly impressionistic, cost of production in the US will remain too high, and alternatives will still be more attractive than moving production back to the US. Also, while I do think that the new Republican coalition is fractious, and some may really want to bring back manufacturing jobs, neither Trump, nor his main backers (mostly wealthy billionaires) are pro-workers or really concerned with bringing back good manufacturing jobs. He is dismantling unions (in the Federal bureaucracy) and has a very pro-business, anti-labor set of policies. Even in immigration that could strengthen labor to some extent, he has not deported more than Biden, at least not yet.

On the critical, progressive side, the most common critique is that tariffs will lead to a collapse of the global economy, like the Smoot-Hawley Tariff of the 1930s, and a significant acceleration of inflation. Perhaps even stagflation. I, obviously, think that fears (or hopes) here are also exaggerated. Smoot-Hawley did not cause, and did not even exacerbate the Depression (even if it did not help either), the latter a view that is probably in the minority these days. And as I noted repeatedly, while tariffs will have a short run effect on inflation, since they will affect the level of prices, they will not lead to persistent inflation, which will come down fast, as did it after the pandemic. The problem will be that workers this time will not have higher wage increases. In other words, tariffs will hurt some people in the economy for sure. But that is a matter for another discussion.

Cohen and DeLong on Hamilton's Report on Manufactures

Hamilton's Reports, posthumous 1821 edition

Stephen Cohen* and Brad DeLong, in their highly readable book Concrete Economics: The Hamilton Approach to Economic Growth and Policy (if you haven't, go buy a copy now), argue that “Alexander Hamilton [was a] major economic theorist. His theory of economic development, first set out in his famous Report on Manufactures (1791), not only reshaped America’s economy but was channeled by Frederich List half a century later to play a central role in Germany’s rapid industrialization, and still later became a canonical text in Japan." Further they suggest that: “This Hamiltonian project was contrary to Ricardo’s canons of comparative advantage as well as Smith’s free markets. It was bold. The direction of economic activity was not commanded, but it was not left unguided either."

While I generally agree with the main points of the book (my major issues are with the notion that technical change was driven by scarcity of labor, and the need to economize labor along marginalist lines), I would qualify a bit the argument on the break with the Smithian/Ricardian classical political economy (or surplus) approach to economics.

Certainly Hamilton is not Ricardian in the sense that he suggests that the pattern of specialization should not follow comparative advantage (a notion not fully developed until Ricardo's own work a few years later, and simultaneously and independently by Robert Torrens). But note that for Ricardo Free Trade was part of a strategy of reducing the rent of landlords, which resulted from the use of lands of lower quality which were the consequence of the embargo first, and then the Corn Laws. In that sense, Ricardian Free Trade was a strategy of industrialization for England (as much as Hamilton's project was for industrialization in the US). It is also true that Hamilton was breaking with the laissez faire tradition of Smith and classical authors in general. But he was not precisely Mercantilist or Cameralist, in the sense that a reading of the Report clearly shows he understood that the wealth of nations derived from the division of labor, and not from the accumulation of bullion and trade surpluses.++

Hamilton believed, not unreasonably, that manufactures were more prone to the adoption of machinery, and indicates that manufacturing countries are more opulent than merely agricultural countries. In other words, he seemed to believe that what is produced matters, and that manufacturing would further the division of labor that was at the heart of the wealth of nations. That is why there is some importance in the Cohen and DeLong book emphasis on Hamiltonian trade management, and the willingness to use tariffs and bounties (subsidies). Note that the conventional view among economists increasingly tries to deny that this was central for Hamilton. For example, Douglas Irwin argues that: "Although the report is often associated with protectionist trade policies, Hamilton’s proposed tariffs were quite modest, particularly in light of later experience. This reflected his emphasis on using tariffs to generate fiscal revenue to fund the public debt; indeed, the country’s finances were his top priority, not discouraging imports for the sake of domestic manufacturers."

However, the Report itself seems pretty concerned with the differences between agricultural societies and manufacturing ones, arguing that: "nations merely agricultural would not enjoy the same degree of opulence, in proportion to their numbers, as those which united manufactures with agriculture." He cites England and the Cotton Mill developed there as something to be emulated, and that it can only be done with a certain degree of trade management (on free trade versus managed trade see this).

Hamilton is explicit on a strategy that we would call today as import substitution industrialization, and argues that: “The substitution of foreign for domestic manufactures is a transfer to foreign nations of the advantages accruing from the employment of machinery, in the modes in which it is capable of being employed, with most utility and to the greatest extent. The cotton mill invented in England, within the last twenty years, is a signal illustration of the general proposition, which has been just advanced.” Interestingly, he does not cite the use of steam engines, which was still not prevalent, but notes the use of the water wheel, and the extensive use of female and child labor (the latter as a positive development). In this regard, he seems more au courant than Adam Smith, with his pin factory, about what would later be termed the Industrial Revolution.

Moreover, Hamilton suggest that manufacturing and agriculture should be complementary, and argues that manufacturers would provide an outlet for the production of the agricultural sector. The Smithian notion of a vent for surplus, but a domestic one is utilized by him. He argues that: “It is evident, that the exertions of the husbandman will be steady or fluctuating, vigorous or feeble, in proportion to the steadiness or fluctuation, adequateness, or inadequateness of the markets on which he must depend, for the vent of the surplus, which may be produced by his labor; and that such surplus in the ordinary course of things will be greater or less in the same proportion. For the purpose of this vent, a domestic market is greatly to be preferred to a foreign one; because it is in the nature of things, far more to be relied upon.”

The relevance of the ideas related to managed trade seem to be again on the agenda with the rise of right wing populist governments, in particular here in the United States, and the skepticism about Free Trade and Globalization.

* Stephen Cohen was the co-author with John Zysman of a very influential book in the 1980s called Manufacturing matters: the myth of the post-industrial economy which is also still worth reading.

++ In the Report on a National Bank he explicitly says that: “it is immaterial what serves the purpose of money, whether paper or gold and silver; that the effect of both upon industry is the same; and that the intrinsic wealth of a nation is to be measured, not by the abundance of the precious metals, contained in it, but by the quantity of the productions of its labor and industry.”