Democrats Should Steal Trump's Thunder On Trade (Demo)

On March 9, 2018, Thom Hartmann writes on AlterNet:

By preferring the support of domestic to that of foreign industry, “he [the entrepreneur] intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

— Adam Smith, Wealth of Nations, 1776 (emphasis added to rebut “free trade” misuse of this quote, as free-traders always drop the first 11 words)

There’s an old saying that even a broken clock is right twice a day. In that spirit, Donald Trump and his advisors are at least partly right about trade and tariffs.  

Ironically, he’s totally defying the entire Republican Party, as well as the Bill Clinton-corporate wing of the Democratic Party, and running with policies that progressive Democrats have been pushing for a century.  

While most progressive politicians will admit Trump is right on trade (and several have on my radio/TV show), there aren’t a lot of Democrats these days willing to enthusiastically acknowledge Trump might be right about anything so they’re not much popping up on network or cable TV.

Which is unfortunate: the Democratic Party should return to its progressive/protectionist/union roots and steal this issue right from Trump’s teeth, saying that he’s not doing it well enough or fast enough. They should run hard in 2020 on Bernie’s suggestion that we use protectionist policies to end our trade deficits and bring back home our jobs.

The disastrous trade deficits we’ve been running since the Reagan era are damaging to the future of America for a variety of reasons, from national security to where the profits from American companies end up, to the flattening of American working wages and benefits.

For example:

Thinking of going to a good-old-fashioned American movie at an American movie theater? The AMC chain is now Chinese-owned, and one of the largest producers of blockbuster Hollywood movies is Japanese-owned Sony. Have a Budweiser beer before the show? Budweiser is owned by the Belgians. Maybe some Ben & Jerry’s ice cream afterwards? They’re owned by the Dutch. Drive home in your Japanese or German car with Firestone (Japanese-owned) tires and stop at Burger King (Brazilian-owned), hit the 7-Eleven (Japanese-owned) to pick up some lottery tickets, get home to watch your Samsung or Sony (South Korea-, Japan-owned) TV, thankful that even if your cholesterol goes up too high your John Hancock (Canadian-owned) life insurance will protect your family.

Your family, by the way, would like to go out, so you stop at the Citgo (Venezuelan-owned) or Shell (Dutch-owned) or BP (British-owned) gas station, pick up some really great snacks at Trader Joes (German-owned), and stay overnight on the way to grandma’s at an all-American Holiday Inn (British-owned) where you can pick up some great Nestle (German-owned) snacks and feed your baby some Gerber (German-owned) baby food.

You take a quick shower and dry your hair with a GE Appliances (Chinese-owned) hairdryer, then, after feeding the dog some Purina (Swiss-owned) dog food you watch Jurassic Park (Chinese-owned) on the LG TV (Chinese-owned).  

The list could go on and on. Try to find an American-manufactured product at Walmart or Best Buys or even Macys? Good luck. Even the majority of hog operations in the US are Chinese-owned.

Sourcewatch notes that, as of eight years ago, top foreign ownership of US industrial sectors was:

• Sound recording industries – 97%
• Commodity contracts dealing and brokerage – 79%
• Motion picture and sound recording industries – 75%
• Metal ore mining – 65%
• Motion picture and video industries – 64%
• Wineries and distilleries – 64%
• Database, directory, and other publishers – 63%
• Book publishers – 63%
• Cement, concrete, lime, and gypsum product – 62%
• Engine, turbine and power transmission equipment – 57%
• Rubber product – 53%
• Nonmetallic mineral product manufacturing – 53%
• Plastics and rubber products manufacturing – 52%
• Plastics product – 51%
• Other insurance related activities – 51%
• Boiler, tank, and shipping container – 50%
• Glass and glass product – 48%
• Coal mining – 48%
• Sugar and confectionery product – 48%
• Nonmetallic mineral mining and quarrying – 47%
• Advertising and related services – 41%
• Pharmaceutical and medicine – 40%
• Clay, refractory, and other nonmetallic mineral products – 40%
• Securities brokerage – 38%

Where do foreign countries and companies and oligarchs get all these dollars to buy US goods? By and large, we gave them to them, in the form of $600 billion a year or so trade deficits that go back to the Reagan era that kicked off modern neoliberalism.  

When we buy more from, for example, China or Israel or Saudi Arabia, than they sell to us, we end up with a surplus of their consumer goods (which eventually end up in our landfills) or oil, while they end up with a surplus of US dollars (which they use to buy our companies, real estate, and increasingly since it was legalized by the Supreme Court in Citizens United, our politicians).

This was not how the Founders intended it.  

The Republicans rejected traditional American trade policies in the 1980s under Reagan, and then most Democrats rejected them with the rise of the DLC and Bill Clinton in 1992, and in both cases they turned their backs on over 200 years of American policy that turned us into the industrial powerhouse of the world.

The rise of American industry was no accident, as I noted in my book Rebooting The American Dream.

To start at the beginning:

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, showed 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.

It 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, and indeed, 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 turned 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) 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 (more on that later).

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 H.W. Bush, and Bill Clinton (and remain abandoned to this day). China, instead, implemented most of Hamilton’s plan, and has brought about a remarkable transformation of its nation in a single generation.

Obama/Biden and the Mistake of ‘Free Trade’

In 2010, the White House called me.

About a year after President Barack Obama took office, on the first anniversary of his major economic recovery legislation, his Administration was struggling to get the word out that the legislation was, in fact, quite a success story. As part of its get-out-the-word effort, I found myself invited to the White House as part of a small group of well-known authors and journalists to meet with a top administration economist.

So there I was at the White House, listening to the top economist, trying to figure out why this “stimulus bill” had not really stimulated much of anything, certainly not good PR for Obama. For example, four days later a front-page headline in the New York Times blared “Despite Signs of Recovery, Chronic Joblessness Rises.”

Among other things, the article reported that more than 6.3 million Americans had been jobless for more than six months, the largest number since government started tracking joblessness in 1948, and more than 15 million Americans were jobless in January 2010.

What happened to Keynes? How could hundreds of billions of dollars pumped into the economy fail to create jobs making things that working people could buy? If it worked so well in the 1930s and 1940s, why did it fail to go beyond just “stopping the bleeding” and move into the net creation of new manufacturing jobs in the US in the 2010s?

In fact, it hadn’t failed. It did create millions of jobs – probably tens of millions of jobs. The problem is that they were mostly in China.

The simple fact is that we no longer make computers or TVs or clothes or power tools or toys or pretty much anything in the USA, except military hardware, guns, processed food and frakked gas. So when we “stimulate” our economy by putting money into the pockets of working people, they go to Walmart and buy things made in Asia – creating jobs in that part of the world.  

The High Cost of Free Trade

During the 1930s, none of the “Asian powerhouse economies” had adopted American industrialization strategies, so when Roosevelt “stimulated the American economy by putting money into worker’s pockets 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 80 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.  He 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, 3,000 years ago.

Nonetheless, President Obama continued to follow his predecessors – Bush, Clinton, Bush, and Reagan – in the neo-religious belief that “free trade” would save us all.  

It’s nonsense.

Free trade is a guaranteed ticket to the poorhouse for any fully developed nation, and the evidence is overwhelming. King Henry VII, in fact, introduced the concept of free trade as something that England should encourageothercountries to do while it maintained protectionism.

In July 2009, with no evident irony or apparent 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 Timesreported: “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,” the Times opined. “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 brilliant 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 one of the world’s largest conglomerates by revenue and market capitalization ($254 billion in 2017).

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 1972-1979 the per capita income grew over five times. 

Then South Korean citizens adopted new protectionist slogans. For example, it was viewed as civic duty to publicly shame anyone caught smoking foreign cigarettes. All money made from exports went into developing industry. South Korea enacted import bans, high tariffs and excise taxes on thousands of products. 

In the ’80s, 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 subsidies, and only gradually opening itself to global completion. 

In addition, the government ran or heavily funded many of the larger industries, at least until they were globally competitive. The government ran or 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 government tightly controlled foreign investment in South Korea, and largely ignored enforcement of foreign patent laws. Korea focused on exporting basic goods to fuel and protect its high-tech industries with tariffs and subsidies.

Had South Korea adopted the “free trade” policies espoused by Friedman, Bill Clinton 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 1950s. 

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 presidents of the United States from Abraham Lincoln, George Washington, Andrew Jackson, Ulysses Grant or even Dwight Eisenhower applied for IMF loans, they would have been denied: All of them believed in high tariffs and a heavy control of foreign investment, and each considered “free trade” to be absurd.

But it was 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 Manufacturesin 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, subsidies, 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 20-35 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. Since 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 modern versions (often with different names) of high-import tariffs, but allow exports on the cheap – particularly China, Taiwan, Vietnam, 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.

First, Hamilton noted 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.

Adam Smith gave us the example that a tree branch laying on the ground had no essential value, but if a person applied labor to it and turned it into an ax handle, it represented part of the “wealth of the nation” that could last for generations.

Hamilton also noted 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 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 policy that favored the protection of 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.”

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 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.

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 steps mostly in 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 then 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.

Rebooting the Economy

So in my meeting in February 2010 at the White House, I pointed out to the administration economist that 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.  

We bought iron ore from other countries, and manufactured it into TVs and washing machines here that we then exported to the rest of the world. And when countries couldn’t afford to buy our manufactured goods, we loaned them the money.

After 37 years of Reaganomics, we’ve completely flipped this upside-down.  

Under neoliberal policies, 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. This, by the way, is the virtual definition of a third-world country.

I pointed out, at the White House, that 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 Japanese-only cars.

Although no fan of the Reagan Revolution, the Obama administration’s economic policy team was no fan of protectionism either. So, the senior economist in the West Wing meeting room reiterated the administration goal of creating “new jobs” here in the U.S. and rather sarcastically blew off my suggestion that we should re-embrace Hamilton’s principles.

The Congressional Progressive Caucus, however, knows how to do this, and apparently so does Donald Trump. It’s pretty straightforward, all the chatter from corporate Democrats and the talking heads on cable news notwithstanding.

First, charge an import tax – a tariff – on goods made overseas that compete with domestic manufacturers (particularly in essential industries), while keeping import taxes low on raw materials that domestic industries need.

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 20 cents worth of labor in China, then we’re going to charge you an 80-cent tariff when those shoes are imported into the United States. If you can make them with 50 cents of labor in Mexico, then our import tariff from Mexico is 50 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’re largely the policies that progressive Democrats like Bernie Sanders have been running and winning on for generations.  

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, like Trump with his Trump brand products, manufacture things 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.

And these corporations have newfound power, given the recent Citizens United vs. FEC decision of the U.S. Supreme Court asserting that corporations are persons with constitutional protections of things like free speech. Now they can freely carpet bomb politicians they either love or hate with cash during elections.

This poses a serious threat to any politician who pushes policies or legislation that is not in the financial interest of the corporations—even if it is in the economic interest of the USA.

Progressive Democrats have been pushing for protectionist policies ever since Bill Clinton split apart the party over the issue with his advocacy of NAFTA in the 1992 election.  

While there will always be a segment of the Party funded by transnational corporate interests, if the Democrats want to begin winning elections in a big way they need to take Trump’s rather timid efforts to dismantle neoliberal trade policies and run with them bigger, better, and harder.

Footnote

Parts of this were rewritten from my book Rebooting The American Dream, where you can find all the reference and source material.  For historical perspective, and because it’s largely lost in American History and Economic classes, here’s the prescriptive plan that Alexander Hamilton, the nation’s first Treasury Secretary, proposed in 1791 to foster American manufacturing. This 11-point plan put the U.S. on a path of developing its industrial base and generating the largest source of federal revenue (tariff income) for more than 100 years.

https://www.alternet.org/economy/democrats-should-steal-trumps-thunder-trade

Gary Reber Comments: