Steve Bannon’s Bad History
Immigration and rapid industrialization—not tariffs—made the 19th-century economy great.
By Douglas A. Irwin
So far, the Trump administration’s trade policy has seen an internal division among economic nationalists and “globalists” on the president’s senior staff. The economic nationalists, and the president himself, believe protectionism will strengthen the American economy. “Look at the 19th century,” said former White House chief strategist Steve Bannon in his recent “60 Minutes” interview. “What built America’s so called ‘American system,’ from Hamilton to Polk to Henry Clay to Lincoln to the Roosevelts? A system of protection of our manufacturing, financial system that lends to manufacturers, OK, and the control of our borders.”
In the nationalists’ narrative, high tariffs were responsible for America’s growth and industrialization in the 19th century. This is not only a misreading of history, it’s a bad policy prescription for the 21st century. A return to high tariffs would sap America’s economy today.
Mr. Bannon’s simple story is historically and economically off base. As Treasury secretary, Alexander Hamilton wanted moderate tariffs, not protectionist duties. In his day, tariffs accounted for nearly all federal revenue. He wanted to keep imports flowing so he could finance the federal government’s Revolutionary War debt and secure the young nation’s credit. President Polk, far from being a protectionist, was a small-government Democrat. He slashed tariffs dramatically in 1846.
Mr. Bannon even gets the Roosevelts wrong. Theodore Roosevelt recognized the need to reduce tariffs but was uncharacteristically afraid of crossing old-guard Republicans in Congress, leaving the dirty work to his Republican successor, William Howard Taft. And Franklin D. Roosevelt was a “globalist” who got Congress to delegate tariff authority to the executive so that import duties could be cut in trade agreements with other countries.
Economic nationalists always conveniently skip the story of the 1930 Smoot-Hawley tariff, probably because it doesn’t fit their narrative. Smoot-Hawley—passed by Republicans and signed by a Republican president—didn’t cause the Great Depression, but the trade wars it inspired certainly damaged the world economy and backfired badly against the United States.
More important, America didn’t boom during the 19th century because it was a closed economy. The U.S. industrialized rapidly between 1833 and 1860, when tariffs were being cut.
While tariffs were high after the Civil War, the U.S. was open to foreign capital inflows. It was also open to the best industrial technology from Britain and Germany, and—importantly given Mr. Bannon’s assertion that the U.S. had control of its borders back then—to massive immigration. The textile mills and steel furnaces of the late 19th century were largely staffed by foreign-born workers. As in our own era, many native-born Americans weren’t interested in doing tedious and grinding jobs at low wages.
Economic nationalists also ignore the more sordid history of American protectionism.
Clay—who served as a senator, House speaker and secretary of state—was a staunch advocate of protection, but he overplayed his hand. High tariffs meant high taxes, and Clay failed to anticipate how politically divisive they would be.
The South nearly revolted after the “Tariff of Abominations” in 1828, which was aimed at protecting industry in the Northern states. South Carolina threatened to secede from the Union.
The Compromise of 1833 defused the crisis, putting tariffs on a downward trend for nearly three decades. Post-Civil War tariffs were just as controversial because they bred political corruption. Producers lobbied Congress for higher tariffs on their foreign competitors, while other special interests wanted the revenue spent on pet projects. Protectionism didn’t drain the swamp; it created it.
The claim that protectionism made America’s economy great in the past, and can do so again today, is wrong. When the government boosts domestic steel prices to protect a few firms from foreign competition, it also hurts domestic steel users who need cheap inputs to remain competitive in a global marketplace. Making the U.S. a “high price island” for steel, semiconductors, sugar and solar panels favors some businesses at the expense of others.
Protectionism can even push manufacturers to leave the country in order to remain competitive. And protectionism hurts exporters—not just the many American farmers who sell to foreign markets, but big manufacturers, such as Boeing and General Electric , which produce goods for sale abroad.
Economic nationalists say their protectionist program will ignite an economic boom. In fact their poor understanding of history will damage the American economy and leave the country weaker.
Mr. Irwin is a professor of economics at Dartmouth and author of “Clashing over Commerce: A History of U.S. Trade Policy,” to be published in November by the University of Chicago Press.
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