The National-Security Argument for Protectionism
by Pierre Lemieux
I suggest that Adam Smith was still a bit too trustful of the state and that he would be more prudent if he were to come back to life in our times.
On March 1, President Donald Trump announced his intention to impose special tariffs on steel and aluminum for reasons of national security. David Henderson and Scott Summer have already weighed in on the issue, but I would like to discuss the specific national-security argument.
The argument that national security justifies exceptions to free trade has some economic credentials: in his defense of free trade in The Wealth of Nations, Adam Smith made a few exceptions “when some particular sort of industry is necessary for the defence of the country.” He argued that the Navigation Acts, which prohibited imports on foreign ships, were useful for keeping ships and sailors ready for possible wars. He thought it was “perhaps” justifiable to subsidize some strategic domestic industries such as gunpowder manufacturing if necessary to maintain domestic suppliers.
I think this argument is generally invalid, at least in peacetime. First, it can justify a lot of protectionism, if not complete autarky. National defense and homeland security combined consume only 3% of American steel and, many other things are necessary to a warring state as well. Computers, robots, and electronic components are certainly as important nowadays as hard metals. Clothing is certainly a necessity lest soldiers or citizens risk wardrobe malfunctions. Looking at short and emaciated North Korean soldiers, food must be important, too. If a warring government is to maintain public support, a measure of self-sufficiency in many consumer goods should be guaranteed. The population will be less war-tolerant without wine, toys for children, etc.
As I was putting the last hand on this post, the Wall Street Journal of March 6 announced a surprising intervention by a federal agency, the Committee on Foreign Investment in the U.S. (CFIUS), for which “there are few if any recent public precedents.” On grounds of national security, the CFIUS ordered a delay in a shareholders’ meeting of Qualcomm, a San Diego company, which was due to consider a takeover bid by Broadcom Ltd., based in Singapore. Both companies are in the business of chip making, wireless technology, and telecommunications networking. Broadcom had recently promised to relocate to the United States, a move that won the lavish praise of the newly elected President. Last November, President Trump said that Broadcom was “one of the really great, great companies” and its chief executive, “a great, great executive.”
If it is justifiable to limit the importation of goods that could be useful in a future war or to prevent the shareholders of an American company from selling their shares to a company listed on NASDAQ, would it not be justifiable to constrain, if not forbid, the emigration of individuals valuable for national defense? In the late 17th and early 18th century, the British government prohibited the emigration of skilled artisans, under penalty of loss of citizenship and property. The reason was straight protectionism, that is, to prevent such skilled immigrants from helping foreign competitors build machines similar to those used by British producers–in textile manufacturing, for example. (An interesting article on this subject by historian David Jeremy can be found in the Spring 1977 issue of the Business History Review.) Adam Smith did not agree with these restrictions; he wrote:
It is unnecessary, I imagine, to observe, how contrary such regulations are to the boasted liberty of the subject, of which we affect to be so very jealous.
But note how the national-security excuse could be used for banning the emigration or foreign travel of, say, aeronautical engineers, AI experts, or the executives of Boston Dynamics. These individuals would certainly be as useful to a war effort as metals that can be found in large quantity in North America.
A second, related reason for questioning the national-security argument for protectionism is that it can be too easily used as a mere excuse for straight protectionism. The 1920 Jones Act, which limits cabotage (shipping between American ports) to American built, owned, and crewed ships, provides a good example of a measure that has been fed by both national security excuses and protectionist reasons. The result is that the American ocean fleet is older, more expensive, and less safe, as reported by Thomas Grennes in the Fall 2017 issue of Regulation. It has also been decimated by its lack of competitiveness. The Economist of October 5, 2017 notes:
Between 2000 and 2016 the fleet of private-sector Jones-Act ships fell from 193 to 91. Britain binned its Jones-Act equivalent in 1849. Its fleet today has over three times the tonnage of America’s. Marc Levinson, an economic historian (and former journalist at The Economist) notes that the laws also made American container lines less able to compete on international routes.
As for the argument that the surviving American ships and crewmen could be conscripted as transport ships during a war, one wonders why the Navy should not be obliged to pay to hire men or equipment on the market.
It is obvious that national security is merely an excuse for the proposed new tariffs on steel and aluminum. According to the Commerce Department, 18% of the imported steel and 46% of imported primary aluminum (in volume) come from Canada. How would Canadian-made steel and aluminum be a problem for American security? Much of the remaining imports, especially in the case of steel, originate from other American allies or friends. Moreover, some 70% of the steel used in the U.S. is produced domestically; the proportion is about a third in the case of aluminum.
That the tariffs against steel and aluminum announced are just an excuse for protectionism was confirmed by both Peter Navarro, Mr. Trump’s protectionist advisor, and by Trump himself. Navarro declared:
[T]he mission here is to preserve our steel and aluminum industries for national and economic security.
The law invoked by the government to introduce such tariffs, Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. Â§1862), does not once mention “economic security.” On March 5, Trump admitted that the new tariffs were a protectionist measure when he said he was willing to abandon or modify the project if some other protectionist measures were included in a renegotiated NAFTA; he tweeted:
Tariffs on Steel and Aluminum will only come off if new & fair Nafta agreement is signed.
I suggest that Adam Smith was still a bit too trustful of the state and that he would be more prudent if he were to come back to life in our times.
Which leads me to a more general reason for questioning national-security protectionism. It is at least unclear how “national security” could justify measures that would contradict its avowed purpose. If part of the economy is practically nationalized for national-security reasons, what is the point of national security? To protect our freedom? Turning America into a war economy during peacetime would have the contrary effect.
Mar 7 2018 at 6:16pm
Yes, the stated purpose of the tariffs is protectionism. To protect U.S. domestic metals production at a minimum capacity to ensure economic national security. Is this not the case or not really necessary?
From the Commerce Department report that justifies the tariffs:
Each of these remedies is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry. Each remedy applies measures to all countries and all steel products to prevent circumvention.
From the DoD memo endorsing the tariffs:
Regarding the December 15, 2017 reports on steel and aluminum, DoD believes that the systematic use of unfair trade practices to intentionally erode our innovation and manufacturing industrial base poses a risk to our national security. As such, DoD concurs with the Department of Commerce’s conclusion that imports of foreign steel and aluminum based on unfair trading practices impair the national security.
From an article in The National Interest describing the economic national security rationale for the tariffs:
The goal of the tariffs proposed by Commerce and endorsed by the president isnâ€™t to punish Chinese dumping or put an end to free trade. Itâ€™s to ensure that the United States retains any domestic steel and aluminum production at all. Like President Barack Obamaâ€™s controversial auto industry bailout in 2009, these tariffs are about keeping an industry for the future, not about making it profitable today.
Mar 7 2018 at 6:30pm
I’ve no qualms with the majority of your argument, but I do want to push back on your comment regarding Adam Smith.
His discussions on possible national defense exceptions to free trade is very qualified. he doesn’t shut the door entirely, but his description of events necessary is very long. We see this thought Book IV, but primarily in Chapters 2 and 5. In fact, he makes a point to say that prohibitions in the name of national defense may actually make the nation less secure by inflaming national prejudices, beggaring ourselves and our neighbors, and weakening ties among nations (I can’t give exact page citations at this point as I am running off to class, but I believe he makes the arguments I mention in Book IV, Chapters 2 and 3).
I disagree that Smith was too trusting. I’d say people just ignore his advice.
Mar 7 2018 at 9:24pm
@Jon: The exceptions I mentioned are taken from Book 4, Chap. 2 and 5. Perhaps he can be interpreted differently, but I think I have read him charitably. Any counter-argument is of course welcome.
On your second point, there is no doubt that Smith is very surprising. One could say that he anticipated the theory of public choice and collective action. The exportation of raw hides and tanned leather was prohibited, he explained, in order to push down their prices for the benefit of leather goods manufacturers. How could the latter win such a privilege? Domestic graziers, Smith cleverly observed, are â€œseparated from each one another, and dispersed through all the different corners of the country,â€ and thus â€œcannot, without great difficulty, combine togetherâ€ to defend their interests, while â€œmanufacturers of all kinds, collected together in numerous bodies in all great cities, easily can.â€ I still think he did not realize how dangerous a mild and democratic government can become.
Mar 7 2018 at 10:12pm
@Mike: The argument invoked by the government can justify virtually any form of protectionism for national security reasons. As I suggested, a production capacity for civilian clothes and perhaps wine and toys should also be maintained. The productive capacity for AI would include the AI experts. Interestingly (and a bit laughingly), a productive capacity is already maintained for the clothes and booths of army personnel, at a great cost for the Pentagon (and the taxpayer); there is an interesting Economist story illustrating this here. Such expenses protect domestic producers but impose large costs. What is sacrificed in the military budget? Computers? Training?
Mar 7 2018 at 11:42pm
@ Pierre Lemieux
Forgive me; I didn’t mean to imply a lack of reading on your part.
I think any disagreement we may have is a matter of degree rather than substance. I’d be happy to get together a more comprehensive counterargument with citations if you’d like, but it’d take time to prepare.
Mar 8 2018 at 12:05am
@Jon: Don’t worry. That is not how I interpreted your comment. And yes, it is not impossible that my interpretation of Smith on this is not correct although, as you said, it would be a matter of nuance. A counter-argument with citations would be welcome when you have time to put it together. It would even be a nice topic for a possible paper or at least a post!
Mar 8 2018 at 5:20am
As a practical matter, I think this incident shows that Congress should establish some procedures a President can impose tariffs for “national security” or anything else. If reasonable, the procedures ought to prevent almost all such interventions.
Mar 8 2018 at 9:56am
Thaomas makes an excellent point. Congress could push back on the President’s power to impose tariffs from the executive branch when not in a time of war. Tariffs should be set by the legislative branch. There might be some reason to have some executive input for national security interests, but that doesn’t have to include direct authority to impose tariffs by fiat.
Mar 8 2018 at 10:02am
How ironic, using one of President Obama’s few economic mistakes, going along with the Bush policy of supporting the automobile industry, as a precedent for “national security” protection.
Mar 8 2018 at 10:32am
Each of these remedies is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry.
How are these numbers determined? Who says the steel industry isn’t viable unless it’s operating at 80% capacity? Steel industry insiders? Isn’t this exactly how regulatory capture works?
Mar 8 2018 at 12:10pm
“How are these numbers determined? Who says the steel industry isn’t viable unless it’s operating at 80% capacity? Steel industry insiders? Isn’t this exactly how regulatory capture works?”
80% capacity is an optimal standard used across all industries as a gauge of industrial health.
Mar 8 2018 at 12:13pm
In that case, maybe they should retire some capacity. That’s another way to increase production as a percentage of capacity.
Mar 8 2018 at 1:22pm
I would side with Hazel’s points.
Mar 9 2018 at 9:57am
The argument invoked by the government can justify virtually any form of protectionism for national security reasons.
The argument invoked by the government can also be a valid future national security threat. Trivializing that argument by comparing strategic resources and production capacities (e.g., petroleum and metals) to military clothing is just not convincing.
Mar 9 2018 at 11:54am
The argument invoked by the government can also be a valid future national security threat.
Sure, but so what? Aliens could invade. That would be a valid future national security threat. Also extremely low probability. How much of our wealth should we sacrifice to protect against an alien invasion?
Besides, if we’re afraid of external threats, the last thing we should do is alienate allies by punishing them for supplying us with strategic material. A bully finds he has no friends when he needs them the most.
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