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Lincoln Was Wrong on Trade

Daniel R. Pearson

In his address to a joint session of Congress this week, President Trump quoted President Lincoln’s views on international trade: “The first Republican President, Abraham Lincoln, warned that the ‘abandonment of the protective policy by the American government [will] produce want and ruin among our people.’ Lincoln was right.”

Unfortunately, Lincoln was wrong on trade. He was a great president, a strong supporter of preserving the Union, and a wonderful wordsmith. But he never had a chance to absorb the concepts undergirding free trade that had been developed just a few decades earlier in the United Kingdom by Adam Smith and David Ricardo.

The economy of the United States in Lincoln’s time was very different than it is today. The most significant factor driving robust economic growth was not international trade, but rather free trade within the United States. The country was in an expansionary mode. New states were joining the country, which meant new resources were being added to the national economy.

The Constitution helpfully prevented states from imposing tariffs against products coming from other states. New York, for instance, was not allowed to restrict the importation of wheat from Ohio. Products that could be produced efficiently in one part of the country could be sold anywhere else in the country, as long as transportation costs were low enough. With so many opportunities to expand trade domestically, trading with foreign countries simply wasn’t as important.

Lincoln was a thoughtful man. If he was alive today, his views on trade likely would have evolved to reflect the economic experience of the intervening years.

Today the situation is very different. The United States still has a freely trading internal economy, but it no longer is expanding by adding large tracts of new territory. The best way for the U.S. economy to grow is to connect itself closely to parts of the world that are growing most rapidly. And that only can be done through international trade.

Lincoln likely saw Adam Smith’s “invisible hand” of the marketplace to be doing a fine job of allocating resources within the United States, so may not have perceived much additional benefit from allowing it to work across national borders. He likely never contemplated David Ricardo’s concept of “comparative advantage,” which explains that neither individuals nor nations should seek self-sufficiency, because not everyone or every country can do everything well. The better approach is for people to specialize in activities at which they are most productive, then trade to obtain other needed goods and services.

Nonetheless, Lincoln’s protectionist tendencies set the template for Republican thinking over the following decades. When Republicans controlled the government, they were inclined to set tariffs at relatively high levels. When Democrats took control, they would reduce tariffs. Democrats saw tariffs as a tax on everyday working men and women, as well as a form of crony capitalism that benefitted protected manufacturers at the expense of consumers. So tariffs went up and down throughout the latter half of the 19th century and the first years of the 20th century, depending on which party controlled Congress and the White House.

Then in 1930, things got out of hand. The Republican chairmen of the Senate Finance and House Ways and Means Committees, Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon, sponsored legislation that set tariffs at their highest levels in over 100 years. President Herbert Hoover signed the infamous “Smoot-Hawley” Tariff Act. Other countries adopted the same beggar-thy-neighbor approach and retaliated. Global trade responded by falling roughly two-thirds from its peak in 1929 to its low in 1934. Smoot-Hawley generally is given credit for helping to deepen and lengthen the Great Depression.

Interestingly, torpedoing international trade proved not to be an effective political strategy. Both Smoot and Hawley were defeated in their reelection bids in 1932. Hoover also lost that year to Franklin Roosevelt.

President Roosevelt set about repairing the damage to international trade. His secretary of state, Cordell Hull, actively pursued reciprocal tariff reductions with other countries. Those efforts laid the groundwork for trade liberalization in the post-WWII era.

President Truman joined with 22 other nations to create the General Agreement on Tariffs and Trade (GATT) in 1947. The GATT accomplished eight rounds of tariff reductions, the most recent being the Uruguay Round, which established the World Trade Organization (WTO) in 1995. This conscious effort to liberalize trade helped to boost the value of global merchandise exports by nearly 300 times, from an inflation-adjusted $58 billion in 1948 to $16.5 trillion in 2015.

Lincoln was a thoughtful man. If he was alive today, his views on trade likely would have evolved to reflect the economic experience of the intervening years. Perhaps he would even support the position articulated by another great Republican president, Ronald Reagan, in his 1983 State of the Union address: “As the leader of the West and as a country that has become great and rich because of economic freedom, America must be an unrelenting advocate of free trade.”

Daniel R. Pearson is a senior fellow in trade policy studies at the Cato Institute. He served a two-year term as chairman of the U.S. International Trade Commission during the George W. Bush administration.