March 13, 2017    6 minute read

Protectionism in America: An Overview

Rebuilding Walls    March 13, 2017    6 minute read

Protectionism in America: An Overview

The concept of protectionism refers to economic policies that can be implemented by governments in order to limit trade across countries, whose primary goal is to promote fairer competition and help domestic companies by making their goods more competitive than foreign ones. Tariffs and other protectionist measures increase the price of imported products, making them appear relatively more expensive than local ones, and also affect the domestic jobs market. Protectionism has had a major role in the American political environment.

A History of US Protectionism

The new President of the United States, Donald Trump, put forth his protectionist ideas during his electoral campaign. He is firmly convinced that the implementation of these policies will “make America great again”. But despite what people tend to think, Trump is not the original promoter of American protectionism. In fact, as a Credit Suisse report (‘Getting over Globalisation’) demonstrated, the level of protectionism in the US was already very high before Tump’s appointment.

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Analysing America’s history, it is in fact possible to identify the Founding Fathers as promoters of protectionism. The aim that moved their thoughts, as does Trump’s, was the protection of local firms from foreign companies.

However, the American economic environment was far different then from today’s situation. The Founding Fathers wanted to protect America and its industry from Britain and its enormous power over its colonial territories. This power allowed British companies to use American raw materials without having to bear any burden of taxation on them and to deny its colonies any chance to built an independent manufacturing business.

Therefore protectionism was seen as the perfect tool with which achieve justice. The most notable example of American protectionism more recently was the Smoot-Hawley Tariff Act of 1930, with which the US imposed one of the highest tariffs in the history. American duties on imported goods increased by 50%.

This act can be taken as an example of the possible disastrous effects that protectionism can have. The purpose of the Smoot-Hawley Tariff Act was initially to safeguard US farmers from external agricultural products. However, the protective feeling spread, reaching other sectors and the aim of economic self-defence reached the entire US industry and all its workers.

Despite the good intentions behind it, the act did not end up well at all. American imports fell from $1.33bn in 1929 to $390m in 1932, and exports decreased from $2.34bn in 1929 to just $784m in 1932. The first phenomenon was caused by the higher level of American duties that increased foreign companies’ costs and consequently pushed up the price of their products. The latter was due to the retaliation of America’s trade partners, who increased their own tariffs on American goods – the subsequent fall in US exports led to fewer jobs in the USA.

World trade dropped by 66% from 1930 to 1934. Banks began to fail, mainly because of the difficulties for people (particularly farmers) to repay their loans. The contagion effect and bank runs caused further damages. Eventually, Roosevelt reduced the level of tariffs in 1934 with the Reciprocal Trade Agreements Act.

Moving on to today’s situation, Trump started his protectionist policies on his first day as US president. He exited the TPP (Trans-Pacific Partnership) and, even though this step was something of a formality as the deal had not yet been ratified, it marked Trump’s detachment from his immediate predecessors.

Moreover, he is attempting to redraw NAFTA (the North American Free Trade Agreement). Trump’s purpose is mainly to help US workers, raise the employment rate, and bring American industry back to the country. NAFTA played a significant part in the workforce’s shift to Mexico; this is why Trump has negative feelings about it. However, at the same time, a lot of jobs were created based on the relationship between Mexico and the USA. Choosing to weaken or tear up NAFTA would probably not help American workers as Trump believes.

Does Protectionism Work?

It can be said that protectionism has some benefits over the short-term. For instance, it can protect a new industry during its growth by not letting other competitors pressure and threaten its position, making domestic firms more competitive in a country’s internal market.

Moreover it can be used to increase a country’s employment rate, forcing firms to hire domestic labour by making it relatively more expensive to establish production abroad than establishing it within the country. However, it can have disastrous effects over the long term.

Protectionism inevitably damages well-built relationships among trade partner countries, as the example of the Smoot-Hawley Tariff Act shows, and makes domestic firms less competitive in the global market due to the higher costs faced by companies. It therefore has a negative consequence for the global economy and represents a cost for overall domestic production as well. Furthermore, the low degree of competition within the market brought by protectionism leads to lower levels of innovation.

So Why Is Protectionism Popular?

The incentives to implement protectionist policies can be very different and are mainly connected to its short-term effects. In addition to that, protectionism can be seen as a tool to defend the country in the event of a conflict or to protect consumers from potentially unsafe products.

Governments often like to exploit these practices near the election period as a strategy to obtain the majority of the popular vote. By analysing the behaviour of legislators in the US Congress, for example, it is possible to find out that the members of the House of Representatives are more in favour of protectionism than senators. Furthermore, focusing on the Senate, there are differences even in the way different generations of senators see protectionism.

A 2014 study conducted by three Italian economists (Conconi, Facchini and Zanardi) attempted to explain what motivates such differences, finding that the key concept is the short- or long-term view adopted by politicians. Members of the House face the election every two years, as do one-third of senators, while the remainders are elected every six years. The proximity to the election and the term length adopted is crucial. The firsts are more often under pressure for elections than the latter and therefore are more supportive towards protectionism rather than trade liberalisation.

An Uneasy Outlook

In conclusion, Trump is not the first American politician to try and use protectionism as a tool to increase overall domestic welfare. The goal fixed by the new President of the United States is praiseworthy: he mainly wants to help local workers. But 83% of respondents to a CNBC Fed survey hold a negative view on Donald Trump’s trade policies agenda.

But even if it gave great results during America’s early years, protectionism can have disastrous effects on economic growth and domestic production, which means it may not be the right way to ‘make America great again’. In addition to that, protectionism will probably have a significant effect on the stock market, due to the consequences that the closure of markets across countries can have on companies’ expected cash flows.

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