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 the fathers of the United States like Abraham Lincoln, George Washington, Andrew Jackson or Ulysses Grant applied for IMF loans, they would have been denied: All of them believed in high tariffs and a heavy control of foreign investment, and considered "free trade" to be absurd.
But it was another Founding Father -- 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 Manufactures in 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, subsides, 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 30 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. After 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 high import tariffs but allow exports on the cheap -- particularly China 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.
It's high time we re-learned Alexander Hamilton's lessons for our nation.
The first third of Hamilton's report deals with Jefferson's objections to it (withdrawn later) which were primarily over the subsidies to industry as Jefferson favored America being an agricultural rather than an industrial power in 1791. After that, though, Hamilton gets to the rationale for, and the details of, his 11-point plan to turn America into an industrial power and build a strong manufacturing-based middle class.
First, Hamilton notes 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. Hamilton also notes 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 internal domestic 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 trade policy that protected American enterprises.