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Edward L. Glaeser

Building walls with US trading partners

By Edward L. Glaeser
March 6, 2009
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FREE TRADE is a child of economic confidence; protectionism is pessimism's progeny. In today's fearful economic climate, policy-makers have again cried "buy American," and embraced interventions that support domestic producers at the expense of our trading partners. Protectionism is bad economics and worse foreign policy, for many of our trading partners have only a tenuous link to peaceful democracy. To avoid the terrible path of the 1930s that led to prolonged depression and global conflict, the United States must maintain its commitment to globalization.

My father was born in Berlin in 1930, at the start of an earlier global downturn, when democracy still held sway over most of Central and Western Europe. The United States had adopted the Smoot-Hawley Tariff, setting off a global tariff war. Between 1929 and 1934, world trade declined by two-thirds. In the dark years that followed, thuggish dictators snuffed out nascent republics and Europe descended into the madness of war. Today as we contemplate an international recession, it is worth remembering that worse terrors than double-digit unemployment have stalked human history.

Few findings in social science are more robust than the fact that democracies almost never fight one another. If the current downturn causes democracies to become dictatorships, then the probability of conflict between those places and our own democracy will increase. Since dictators are far more likely to slaughter their own people, America may be faced with the awful choice of military intervention or standing by and watching the deaths mount.

Democracy is bolstered by prosperity and damaged by downturns. Since the pioneering work of Martin Lipset 50 years ago, social scientists have tried to understand why democracies and wealth go together. My colleague Robert Barro found that this link exists not because democracies increase prosperity, but because prosperity supports democracy. The appeal of democracy's enemies increases when democracies, like the Weimar Republic, are unable to deliver economic success.

Trade is crucial for the prosperity of the world's poorer countries, especially during a downturn. My own research finds little connection between trade and economic growth among rich or middle-income countries, but in the poorest places, where democracies are least stable, a 20 percent drop in the ratio of trade to GDP is associated with per capita incomes growing by 1 percent less per year. Reductions in trade had a devastating impact on Argentina in the 1930s, ending decades of democracy and ushering in a long period of dictatorship and political turmoil.

Free trade brings prosperity to the world's poorer countries, strengthening their transitions to democracy and making their citizens, and us, safer. But the United States is now contemplating policies that threaten our ability to argue that an economically connected world is stronger and safer. The Recovery Act's "Buy American" clause forbids spending on public works "unless all of the iron, steel, and manufactured goods used in the project are produced in the United States." That clause sends a terrible message to our trading partners.

Last week, President Obama committed the country to a "retooled, reimagined auto industry that can compete and win." For years, America has made the case against other nations' industrial policies that subsidize particular sectors. Such subsidies hurt our exporters, stifled competition, and reduced the benefits that come from specialization and trade. Now, we are embracing an industrial policy that encourages other countries to bolster their own domestic industries and shut out foreign producers.

During the primary campaign, Obama called the North American Free Trade Agreement "devastating" and a "big mistake." Today, Congress, in a protectionist mood, is considering ending a program, mandated by that treaty, that allows Mexican trucks to enter the United States. The Mexican ambassador has raised the possibility of "retaliation," which presumably means a trade war.

Other countries provide us with clothes, cars, markets for exports, and lending for the government and banks. Shutting our markets will make life more expensive for us and hurt the rest of the world. In the 1930s, legislators embraced high tariffs, but putting America first led to a devastating world war. Today, US lawmakers need to choose hope over fear, and stick with free trade.

Edward L. Glaeser, a professor of economics at Harvard University, is director of the Rappaport Institute for Greater Boston.

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