April 6, 2018

Democrats Should Ignore Trump/Bernie on Trade. Look to FDR, Not Hoover

I always wonder how did the idea of protectionist trade policies become associated with left? We often hear that Democrats need to look to FDR to regain power. However, what about trade? One the key things FDR did was to reverse the protectionist trade policies of Herbert Hoover. Can you imagine if you had Bernie/Trump type supports back in the day attacking such free trade agreements?

http://rooseveltinstitute.org/fdrs-comprehensive-approach-freer-trade/

A far more significant indication of the strength of protectionist sentiment can be seen in the broad bipartisan support for Tuesday’s legislation aimed at punishing China for currency manipulation. Both Republican Senator Jeff Sessions and Democratic Senator Chuck Schumer, for example, have emerged as key champions of the bill. But other Republicans and Democrats have expressed strong reservations about the measure, noting that one possible outcome of the bill might be a trade war with China. In a recent editorial in the Wall Street Journal, Senator Robert Corker even went so far as to liken the bill with the passage of the 1930 Smoot-Hawley Tariff, which he argued resulted in a “deeper depression and a decade of increased joblessness.”

Corker’s reference to damage wrought by Smoot-Hawley is accurate. The passage of Smoot-Hawley did indeed touch off strong counter-measures among our trading partners, leading to the establishment — among other things — of the 1932 British system of Imperial Preference, which allowed goods within the British Empire to be traded with little or no tariff restriction, locking out American goods and commodities and in the process weakening the U.S. economy. What is missing from Senator Corker’s warning is any reference to the tremendous effort that emerged during the Roosevelt administration to do away with protectionism; an effort that would ultimately not only break down the Smoot-Hawley Tariff, but which would also pave the way for the creation of the multilateral global economy we live in today.

The driving force behind this effort was FDR’s Secretary of State, Cordell Hull, who considered the passage of Smoot-Hawley an unmitigated disaster. Hull had been arguing in favor of freer trade for decades, both as a Democratic congressman and later senator from Tennessee. Given the long-standing protectionist tendencies of Congress — which reached their zenith with the passage of Smoot-Hawley, the highest tariff in U.S. history — Hull faced an uphill struggle to accomplish this task. He also had to overcome FDR’s initial reluctance to embrace his ideas, as the president preferred the policies of the “economic nationalists” within his administration during his first year in office. By 1934, however, FDR’s attitude began to change, and in March of that year the president threw his support behind Hull’s proposed Reciprocal Trade Agreements Act — a landmark piece of legislation that fundamentally altered the way in which the United States carried out foreign economic policy.

Convinced that the country was not ready for a truly multilateral approach to freer trade, Hull’s legislation sought to establish a system of bilateral agreements through which the United States would seek reciprocal reductions in the duties imposed on specific commodities with other interested governments. These reductions would then be generalized by the application of the most-favored-nation principle, with the result that the reduction accorded to a commodity from one country would then be accorded to the same commodity when imported from other countries. Well aware of the lingering resistance to tariff reduction that remained in Congress, Hull insisted that the power to make these agreements must rest with the president alone, without the necessity of submitting them to the Senate for approval. Under the act, the president would be granted the power to decrease or increase existing rates by as much as 50 percent in return for reciprocal trade concessions granted by the other country.

The 1934 Act granted the president this authority for three years, but it was renewed in 1937 and 1940, and over the course of this period the United States negotiated 22 reciprocal trade agreements. Of these, the two most consequential were the agreements with Canada, signed in 1935, and Great Britain, signed in 1938, in part because they signaled a move away from Imperial Preference and hence protectionism, and in part because they were regarded as indicative of growing solidarity among the Atlantic powers on the eve of the Second World War. It is also important to note that Hull, like many of his contemporaries, including FDR, regarded protectionism as antithetical to the average worker — first, because in Hull’s view high tariffs shifted the burden of financing the government from the rich to the poor, and secondly, because Hull believed that high tariffs concentrated wealth in the hands of the industrial elite, who, as a consequence, wielded an undue or even corrupting influence in Washington. As such, both FDR and Hull saw the opening up of the world’s economy as a positive measure that would help alleviate global poverty, improve the lives of workers, reduce tensions among nations, and help usher in a new age of peace and prosperity. Indeed, by the time the U.S. entered the war, this conviction had intensified to the point where the two men concluded that the root cause of the war was economic depravity.