Kennedy’s Blunder, or How Free Trade Turned Sour for America
Politics / US Politics Mar 16, 2011 - 05:11 AM GMTBy: Ian_Fletcher
How did America end up in its present trade pickle? NAFTA? No way. The WTO? I wish. To understand our present predicament, you need to go back much further than that.
In retrospect, America’s decisive wrong turn on trade was probably John F. Kennedy’s Trade Expansion Act of 1962.
Quantitatively, the so-called Kennedy Round of tariff cuts was large enough to be noticed, but not earth-shaking: as this legislation was phased in, our average duty on dutiable imports fell from 14.3 percent in 1967 to 9.9 percent in 1972.
But this was one of history’s small yet decisive turning points, occurring as it did at the same moment that America’s trading partners were getting into high gear economically and the 1944-71 Bretton Woods system of fixed exchange rates was beginning to falter.
And tariff cuts were exceptionally steep on high technology goods, increasing their impact. It mattered that we were letting Japan, for example, even further into our market for serious manufactured goods like cars and electronics.
Furthermore, the Trade Expansion Act should be evaluated not simply in terms of its before and after tariff levels, but contrasted with the alternative of turning back from free trade, which is what we should have done.
There were certainly warnings at the time. The famous liberal economist John Kenneth Galbraith bluntly told President Johnson in 1964,
“If we are screwed on tariffs, this will have an enduringly adverse effect on the balance of payments. It will be a serious problem for years to come.”
Prescient.
And, lo and behold, the first serious trade-related cracks in the American economy began to appear in the late 1960s. Black-and-white television production left for Japan. So did cameras, transistor radios, and toys.
Our trade went into deficit in 1971. We have not run a surplus since 1975.
There has, of course, been a simmering revolt against free trade ever since. Organized labor, which had actually supported the Kennedy tariff cuts when proposed in 1962, turned against free trade by the end of the decade.
In 1968, Senators Ernest Hollings (D-SC) and Norris Cotton (R-NH) managed to pass a protectionist trade bill in the Senate with 68 votes. President Johnson had it killed by House Ways and Means Committee chairman Wilbur Mills. 1969 saw the first consideration, by Commerce Secretary Maurice Stans, of creating an American agency to coordinate industrial policy. Nixon abandoned the effort for lack of Congressional support.
In 1971, a trade deficit of one-half of one percent of GDP (about a tenth of today’s level) was enough to frighten Nixon into imposing a temporary 10 percent surcharge tariff on all dutiable goods. In 1972, the AFL-CIO endorsed the Burke-Hartke bill, which would have imposed quotas on imports in threatened industries and restricted the export of capital by multinational corporations.
But free trade survived all these challenges. Fundamentally, protectionist forces in Congress fumbled the ball. In the words of one scholar describing the failure of the big protectionist push in the last days of the Nixon administration:
Even in Congress, protectionist industries failed to utilize their potential resources. During negotiations over general trade bills in Congress, protectionists exerted weak influence because they lacked an umbrella association to represent them. Instead, protectionists were divided along industrial lines, each promoting its own distinct objectives….The logic of selective protectionism did not encourage industries to cooperate with each other, since the chances for congressional support increased if protectionist bills were narrowly constructed. In addition, protectionist industries did not cooperate with organized labor. [Nitsan Chorev, Remaking U.S. Trade Policy]
The failure of this protectionist effort carries important lessons for tactical thinking about free trade today. Sen. Hollings tried again under President Carter, but Carter preferred the Cold War priority of free trade. Ronald Reagan vetoed two protectionist trade bills, in 1985 and 1988. George H.W. Bush vetoed one, in 1990.
It is not yet too late to turn back from our disastrous free trade experiment, but the longer we wait, the higher the cost will be.
Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933. He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.
© 2011 Copyright Ian Fletcher - All Rights Reserved
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