Protectionism’s Bad Economic History

By Vincent J. Geloso. He is a Research Fellow at the Independent Institute and an Assistant Professor of Economics at George Mason University. 

"Protectionism is currently in vogue, gaining support from both the left and the right. This isn’t the first time. As protectionism’s popularity ebbs and flows, it remains a constant presence. Each resurgence is driven by variations of the same argument, particularly the infant industry argument.

The argument is straightforward: protectionism, through tariffs or subsidies, helps young industries grow by shielding them from foreign competition until they can compete on their own, ultimately leading to more economic growth than would have occurred otherwise. As right-wing public intellectual Oren Cass recently summarized, “the way America went from colonial backwater to this globe-spanning industrial colossus was not free markets and free trade. It was aggressive protection of our domestic market.”

The problem is that, with each resurgence, the same replies can be made: the increase in domestic production of protected industries is not worth the lost welfare of consumers. In fact, there is not a bit of the statement made by Cass that squares with American economic history.

Let’s start with the last part of Cass’s comment that speaks to “aggressive protection of our domestic market”. By definition, protectionism should increase output in the protected industries. However, the scale of the increase, as seen in frequently cited case studies like the steel industry in American economic history, appears pretty small—smaller than what protectionists had promised when they initially called for tariffs. One reason this is the case is because tariffs can also increase the price of some inputs (such as capital inputs), which reduced productivity growth in the future. As such, there might have been a one-time bump in production but the trend was ultimately slowed down by the tariffs.

On the cost side, it’s important to recognize that tariffs, by raising the prices of certain inputs, also increase costs for industries that depend on these inputs. This is especially harmful to industries engaged in fierce international competition for export markets. Economic historian Douglas Irwin was able to show that this effect constituted, for postbellum America, what was effectively an export tax of 10%. All of this is without considering the cost borne to consumers. Returning to the case of steel protection (one of the frequently mentioned cases historically), we find that consumers were left worse off by significant proportions. In other words, the “aggressive protection” was a bad thing.

However, the first part of Cass’s comment is even more profoundly mistaken. America was far from being a “backwater” by the 18th century. Economic historians such as Jeffrey Williamson and Peter Lindert have shown that by 1774, the average American colonist enjoyed a significantly higher income than the average Englishman—a fact consistent with the large numbers of immigrants moving to America. My own research further demonstrates that America was at least 30% richer than the next wealthiest region in the Americas at the time, the French colonists in Quebec. Notably, this period before 1774 coincided with what was essentially the “freest” trade era of American economic history. From 1760 to 1775, following the conquest of Canada, the North Atlantic functioned as a free trade zone encompassing America, Canada, and Britain. Most protectionist legislation (such as the Navigation Acts) were either too small to matter or were widely ignored.

To make the claim he makes, Cass commits a common crime in economic history: focusing on growth during periods like 1790 to 1860 or 1865 to 1913 without considering the broader context. What these eras share is that they immediately followed highly destructive wars. The American Revolutionary War, for instance, erased America’s economic edge over Britain, with incomes dropping by roughly 20% due to destruction. Similarly, the American Civil War had a devastating impact on the economy. While both post-war periods did see impressive growth, this was largely “catch-up” growth—accelerated economic recovery as the nation rebuilt after the turmoil of war. Cass and other protectionists often cherry-pick periods of protectionism, attributing all observed growth to their favored policies. This tactic, much like a magician’s sleight of hand, is designed to dazzle the audience by masking the real factors at play.

The case for tariffs as a driver of economic growth has always been weak, and no amount of rebranding every few decades can change that fundamental flaw."