23: Did Protectionism Make America Great?

Episode Summary

Executive Summary: This episode examines Henry Clay’s “American system” and the infant industry argument, using U.S. trade history to assess whether tariffs really built American industry. Doug Irwin argues that protection often followed industrial growth rather than causing it, that many tariff-protected sectors never became competitive, and that U.S. growth owed more to openness, technology transfer, capital, and immigration than to tariffs.

Main Topics: Henry Clay and the American System (Priority: 5/5): The discussion begins with Clay’s 1824 vision that tariffs would strengthen U.S. manufacturing and the nation overall by shielding domestic producers from foreign competition. Infant Industry Argument (Priority: 5/5): Irwin explains the economic logic behind temporary protection for young industries, including external economies and learning-by-doing, while stressing the real-world risk that protection becomes permanent. Causality and Historical Testing (Priority: 5/5): The episode emphasizes that historians can observe correlations, but not the counterfactual. Irwin argues protection often responds to industry lobbying rather than creating new industries. Embargo and Early U.S. Industrialization (Priority: 4/5): The Jefferson embargo and War of 1812 temporarily boosted some import-competing sectors, but devastated export industries and caused a recession, making it a weak success story for protectionism. Late-19th-Century Tariffs and U.S. Growth (Priority: 5/5): Irwin disputes the claim that high tariffs caused U.S. industrial success, citing rapid growth during periods of low tariffs and the importance of broader economic forces. Policy Lessons: Tariffs vs. Subsidies (Priority: 4/5): The conversation concludes that subsidies are generally preferable to tariffs because they are more transparent, more targeted, and less distortionary for consumers and downstream industries. Modern Relevance and Intermediate Goods (Priority: 4/5): Irwin warns that today’s tariffs can disrupt integrated supply chains by raising costs for domestic producers, unlike some older final-goods protection cases.

Key Arguments: The American system was a recurring political idea in U.S. history, especially among Republicans after the Civil War, but its appeal rested more on ideology than clear evidence of success. The infant industry argument is theoretically plausible if protection helps firms learn, invest, and generate spillovers, but in practice protected industries often fail to mature. Historical evaluation is difficult because economists cannot observe the counterfactual; many industries would have grown without protection, and some only sought tariffs after becoming established interest groups. The Jefferson embargo did create some protected manufacturing activity, but it also collapsed exports and caused a severe economic shock, so it is not clean evidence that protection raised welfare. Late-19th-century U.S. growth cannot be credited mainly to tariffs because manufacturing also grew rapidly under low tariffs, and overall growth was driven by immigration, capital mobility, technology transfer, and services. Some industries, such as cotton textiles, were already mature by the time protection was reduced, so tariff cuts had little effect on their output. The tinplate industry is presented as one of the rare cases of time-limited, targeted protection that may have helped, though falling steel input costs likely mattered more than the tariff itself. Steel rails are cited as a possible learning-by-doing case where protection may have aided competitiveness, but even this remains debated. Subsidies are usually a better policy tool than tariffs because they target the market failure directly and do not raise consumer prices as much. Modern tariffs are especially harmful because many goods cross borders multiple times, so duties on intermediates function like placing a wall in the middle of a factory.

Data Points: Trade share of GDP (during Jefferson embargo era): 5% to 10% - Irwin describes how shutting off foreign commerce during the embargo was a major macroeconomic shock. Estimated GDP shock from embargo: about 5% of GDP over six months - The embargo is said to have caused a recession-sized decline in economic activity. Tariff on imported cotton textiles after 1846 cut: from about 70% to 20% - Used to show that a tariff reduction had virtually no impact on the domestic textile industry. Period of low tariffs and rapid manufacturing growth: 1840 to 1860 - Irwin says U.S. manufacturing expanded quickly even before the Civil War when tariffs were low. Embargo duration: over a year - The Jefferson embargo closed U.S. ports to foreign commerce for more than one year. Time-limited protection for tinplate: five years - A rare example of targeted infant-industry protection aimed at jump-starting domestic tinplate production.

Pivotal Quotes: "the only means which the wisdom of nations has yet discovered to be effectual, by adequate protection against the otherwise overwhelming influence of foreigners" — Henry Clay: Read at the start of the episode as the historical foundation for the American system. "protection becomes self-perpetuating" — Doug Irwin: Describing the main risk that an infant industry never actually matures and remains dependent on tariffs. "imposing tariffs today is like putting up a wall in the middle of a factory" — Richard Baldwin (quoted by Doug Irwin): Used to explain why modern supply chains make tariffs on intermediate goods especially damaging.

Implications: The episode suggests tariffs rarely create durable winners and often protect lobbying interests instead. For modern economies, openness, innovation, and targeted support are more effective than broad import barriers, especially in supply-chain-based production.