Free Trade Is Destroying the American Economy

The future of U.S. trade policy is likely to be a central issue in the 2008 presidential campaign, as the question has already appeared in almost every debate this election season.  And it couldn’t come at a better time, as the economy may be entering a very serious slowdown and our current trade policy is a main culprit.

For the past quarter of a century, the United States has been in a free trade frenzy, cutting every conceivable deal that can be made, regardless of what it does to our industrial base and our workers or whether or not our “partners“ live up to their end.  This process has been greatly accelerated under George W. Bush, as he has attempted to extend NAFTA throughout the Western Hemisphere.  And when that failed, he has quietly been assembling all the pieces one at a time.

And what has Bush’s free trade policies gotten us?  Over three million manufacturing jobs lost; a deficit with China of more than a $1 trillion since 2001; and a monthly trade deficit of $62 billion, as of February 2008, double what it was when he took office in January 2001.  Today our deficit is running over $700 billion a year.

What does a trade deficit mean?  I’ve heard many economists say it doesn’t really matter that much but it does.  In fact, before he retired, Alan Greenspan had become very concerned with the rising trade deficit, calling it “unsustainable.” 

Running a deficit in trade simply means we are importing more than we export.  As these foreign goods flow in, our dollars flow out to pay for them, and a lot of that is borrowed from the very ones we buy from.  Over $5 trillion has flooded the world market since 1992.  China, for example, holds several trillion dollars in U.S. currency reserves, threatening to dump them on the world market if we attempt any retaliation, which would totally collapse the dollar.  But the dollar is slowly devaluing precisely because we have so much of it in circulation here and abroad.  It’s simple economics, the law of supply and demand.  Trillions flowing out and that coupled with the Fed’s loose money policy, there are simply too many dollars in circulation.

To his credit, Bush has acted on a few occasions to institute corrective action when industries are imperiled by these trade deals, but its usually too little and at the first sign of resistance he bails.  Remember the steel tariffs that were supposed to last 3 years?  After a little more than a year of European barking, the president removed them.  So his “protectionist” measures seem to be more politically-motivated than any true desire to aid American manufacturing.

In a move reminiscent of this, his administration, last week, imposed a 5 percent tariff on imported cotton socks from Honduras that will remain in effect from July to December of this year.  Since passage of the much-touted Central American Free Trade Agreement, Honduras, following the path of other nations that have seen their tariffs dropped as a result of American generosity, began dumping socks into the U.S. market, an increase of nearly 100 percent over the past year that severely hurt the textile industry, which has already taken a serious beating from China. 

American sock manufacturers requested a tariff of 13.5 percent and felt the 5 percent rate was much too low.  The executive director of Made In USA Strategies called the action “pitiful.”  I would agree but it is good to see that some action has been taken though free traders are likely to scream protectionism, the new dirty word.

Protectionism, however, is as American as baseball and apple pie.  Academic economists rail against protectionism and mercantilism but Britain dominated the world economy using these practices for more than a century.  America did likewise, eventually surpassing Britain in economic output by the turn of the 20th century.  Both nations lost their lead and began a slide downward only after dumping protectionism for a policy of free trade.  In fact, the great Asian economies of today – the emerging Asian Century – were built, and are growing, with protectionist policies.  Yet the only argument free-trade economists have in response to these facts is that our great economic boom from 1860 until 1945 occurred despite protectionism! 

And if protectionism does not work, why then does the GATT rules allow exceptions for developing countries to impose tariffs and other restrictions?  Why is it that foreign nations scream the loudest when we impose protectionist measures if such measures only hurt ourselves?  The fact is protectionism does work and global free trade is not about building strong national economies.  It’s about global socialism. 

Ronald Reagan, the great conservative, used real protectionist methods to great effect, particularly against Japan.  He slapped tariffs on motorcycles to save Harley Davidson as well as imposing import quotas on steel, machine tools, and cars.  These actions did not hurt the American economy but helped strengthen it and save those vitally important industries. 

But many elites in this country, of both parties, are in favor of uninhibited free trade.  Victor Davis Hanson, famed military historian, recently wrote that “a traditional [classical] liberal position would be to defend free trade that lowers prices and increases choices for poorer American consumers — while helping foreign economies catch up with the United States.”  Helping foreign countries catch up!  Sounds a lot like socialism to me.  We transfer our wealth, technology, and jobs to poor foreign nations out of the goodness of our hearts while we get nothing but some cheap junk!  Perhaps Professor Hanson should stick to military history as a profession.

In the current presidential campaign both Democratic candidates have expressed concern over free trade policies and a desire to re-negotiate agreements that have not been in America’s best interest.  But as we have seen recently, both the Obama campaign and the Clinton camp have tried to re-assure our trading partners that it is only political rhetoric and no change in American trade policy will be forthcoming under a new Democratic administration.

Bill Clinton acted in precisely the same manner, supporting fair trade in his campaign in 1992, vowing to “stand up for American workers by standing up to countries that don‘t play by the rules of free and fair trade.”  But during his administration Mr. Clinton negotiated NAFTA and the GATT treaty which have been very harmful to American workers and the overall economy.   Furthermore he promised to “reevaluate” Most Favored Nation status for China, a designation that Congress had to approve each year.  But after re-naming it Normal Trade Relations, so it didn’t sound so threatening, Clinton made it permanent in 2000, undoubtedly a payoff for all the illegal money that poured into his re-election campaign in 1996.

So given President Clinton’s track record, and seeing the current campaigns employ similar tactics with regard to trade, we can’t realistically expect any different from Hillary or Barack.  Most of the Democratic Party, because of Bill Clinton, is now tied to free trade.

John McCain, however, is steadfast in his support of free trade and unapologetic in its defense.  The Republican nominee has voted in favor of every free trade deal proposed in Congress and has a 100 percent free trade rating by the Cato Institute’s Center for Trade Policy Studies.

In a Republican debate last fall in Michigan, McCain made some very outrageous remarks regarding U.S. trade policy.  “I’m a student of history,” he boasted.  “Every time the United States has become protectionist…we’ve paid a very heavy price.”  What price have we paid, Senator?  The years of our highest protectionist policies have also been the years of our greatest economic growth. 

The Senator continued the history lesson.  “The Smoot-Hawley Tariff Acts in the 1930s were direct contributors to World War II.”  This is another laughable liberal talking point.  Al Gore made a similar remark to Ross Perot in their 1994 debate on NAFTA.  But it is a totally false assertion and is really nothing more than fear-mongering to suggest that a tariff passed more than eight months after the stock market crash in 1929 and nearly a decade before Hitler invaded Poland caused the greatest war in world history!  Oh, and by the way Professor McCain, Smoot-Hawley was only one bill, not a series!

During the same debate McCain got into an exchange with Ron Paul on economics, which is not advisable given the fact that McCain has already stated on multiple occasions that the economy is not his strong suit.  He dished out some advice that he should take himself.  “Everybody is paying taxes and wealth creates wealth. And the fact is that I would commend to your reading, Ron, Wealth of Nations, because that’s what this is all about.”  Senator McCain has obviously not read Adam Smith’s major work for if he had he would not have the views on trade that he espouses. 

For instance, McCain told an audience in Des Moines in December that he would “open every market in the world to Iowa’s agricultural products.”  But how can you do this?  Through negotiations of more free trade deals?  That is precisely what we’ve been doing!  Politicians have promised open markets in exchange for access to ours but that is not what has happened.  Many foreign nations have continued to keep their markets closed to American products.  Adam Smith wrote of his solution in The Wealth of Nations, which McCain obviously has not read.  “Revenge in this case naturally dictates retaliation, and that we should impose the like duties [tariffs] and prohibitions [quotas] upon the importation of some or all of their manufactures into ours….”

Senator McCain has had several opportunities to vote for bills in the Senate that would impose Smith’s policy of retaliation for closed markets but chose not to support them.  For example he voted against a bill that would have imposed sanctions on Japan for restricting American automobiles and car parts in 1995.  In 1999 McCain told the National Press Club why such a policy was wrong.  “Embracing protectionism here to retaliate for it elsewhere is akin to a murder-suicide pact, and we should resist the temptation whether the product in question is bananas or sugar or steel.”  So much for Adam Smith and The Wealth of Nations.

This is precisely why true conservatives cannot listen to a guy who says economics is not his strong suit.

The fact is our industrial base, the great “arsenal of democracy” that won both world wars, is steadily deteriorating.  It is eroding because we are not protecting it and are leaving it vulnerable to foreign predators.  Today we could not duplicate the industrial might unleashed during World War II.  All the industrial losses at Pearl Harbor could be replaced in just a few days!  The American army, built to take on Germany and Japan, would eventually reach 90 divisions.  By contrast, the Soviet Union would build 350 divisions to fight Hitler.  The U.S. industrial economy, however, could produce enough materials to build and fully equip 1400 divisions!  More could be produced in a month in the United States alone than could be produced in Russia in one year!  It would not pay to fight America.  But could we do this today?  Not even close!

Senator James Webb of Virginia, former Navy Secretary under President Reagan, has recently expressed to World Net Daily editor Joseph Farah his concern that our industrial capacity has eroded to the point that it will be difficult to maintain our naval strength, a situation Webb calls “pretty precarious.”  This is truly a scary thought.  Adam Smith would agree and recommend imposing a “burden” on foreign imports that might threaten an industry “necessary for the defence of the country.”  Mr. McCain would not.  But how can you stake your campaign on protecting the country from terror but when it comes to protecting our industrial base then you say it is wrong?  It makes no sense to me.

Webb is also concerned about China and our reliance on that Communist nation to fund much of our debt.  “We basically have allowed the country [China], which potentially is our greatest strategic adversary, to also become our banker.  That’s an uncomfortable situation to be in.”  But certainly not for McCain.  In the Dearborn, Michigan debate, he had this to say about the situation with China:  “It sounds like a lot of fun to bash China and others, but free trade has been the engine of our economy. Free trade should be the continuing principle that guides this nation’s economy.”  So we will just stand by and let them overtake us!  Good strategy, Senator!

But Webb is right and McCain is dead wrong!  Our current fiscal troubles would be like a family who owns a large home, with a great pool, immaculately furnished, dressing in the finest attire, driving the latest expensive model cars, owning many “toys” like boats and ATVs, and taking extensive vacations every year, but being in debt up to their eyeballs, including multiple credit cards maxed to the limit.  So, in reality, how wealthy is this family?  Not very!  Their wealth is false, being debt-driven and financed.  They are one catastrophe away from bankruptcy.

Our nation is in the exact same boat.  Our economic growth is not real but false.  We borrow huge sums of money every year from foreign nations, like China, to buy goods they manufacture and export to us.  We have become a consumer collective and little else.

Whereas we were once the world’s greatest creditor nation, now we have become the globe’s leading debtor, all because we listened to a bunch of politicians tell us it was good for us!  And many of these are like John McCain, not understanding history or economics.

But John McCain’s hero, Theodore Roosevelt, certainly did.  TR didn’t think too highly of free traders, who he believed were nothing more than “professional counselors who have confined themselves to study in the closet” but the “actual working of the tariff has emphatically contradicted their theories.”  Doesn’t this sound like a perfect description of those academic economists showcased almost daily on the cable news networks?  “These forty odd years have been the most prosperous years this nation has ever seen,” TR wrote, “more prosperous years than any other nation has ever seen.  Every class of our people is benefited by the protective tariff.”  To Senator Henry Cabot Lodge he wrote in 1895, “Thank God I am not a free-trader. In this country pernicious indulgence in the doctrine of free trade seems inevitably to produce fatty degeneration of the moral fibre.”  If only McCain believed as TR did.

Listening to these “professional counselors” explain why free trade is good is to hear how consumers benefit from cheap imports.  That seems to be the overriding consideration.  But should it be?  What does it matter if we have cheap foreign imports but lose our major industries and the bulk of our good paying manufacturing jobs?  And, as Adam Smith noted, industry is vitally important to national security and should be protected.  Our Founders understood this well, as did the great statesman Henry Clay.  “If the governing consideration were cheapness, if national independence were to weigh nothing; if honor nothing; why not subsidize foreign powers to defend us; why not hire Swiss or Hessian armies to protect us?  Why not get our arms of all kinds, as we do, in part, the blankets and clothing of our soldiers, from abroad?”  Would anyone logically want to see our nation defended by foreigners?  The answer is obvious.

“No athlete ever consumed his way to an Olympic medal,” writes Pat Buchanan, “and no nation ever consumed its way to greatness or prosperity.”  But that is America’s attitude today, a materialistic society, increasingly narcissistic, with no regard for the future.  This mindset has turned us into economic slaves, for we are but a colony, as Buchanan has written, a “colony of the world.”  For the empires of old, colonies served several purposes, but the main reasons were for a source of raw materials and a market to sell manufactures.  We fit this bill perfectly.

We must soon begin to reverse the trend or all may be lost.  And we must do it smartly.  Blindly, and stupidly, throwing up a bunch of high protective tariffs to try and correct the problem might make it worse.  Tariffs are not the only means available to us.  Reagan used quotas and other import agreements to great effect.  Enforcing anti-dumping laws already on the books would also be a great help.

But we also have to aid our business community, not denigrate them.  Corporations outsource for a variety of reasons, but the main two are high taxation and over-regulation.  U.S. corporate tax rates are an outrageous 35 percent, higher than those in Europe, and unnecessary regulations are extremely costly and burdensome.  We should slash corporate taxes in half and rid the stranglehold of regulation.  This would give corporations more incentive to invest here.

A traditional 20 percent revenue tariff would bring in hundreds of billions in much needed funds, which could be used to cut corporate taxes and eliminate them altogether on small businesses.  Higher tariffs should be imposed on a case-by-case basis.  To help corporations stay home, taxes on capital gains, dividends, and savings should be abolished.  This would greatly increase investment.

These policies would allow us to create new, high-paying industrial jobs here at home where they are sorely needed.  I refuse to believe as McCain does that these jobs aren’t coming back.  They can with the right policies in place but will continue to leave our shores with the wrong ones.  We’ve seen this for far too long and its time to elect a president who will, in Warren Harding’s words, “prosper America first.”

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