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Steel Tariffs: What’s an American System Approach to Saving U.S. Industry?

By Nancy Spannaus

March 8, 2018—President Trump’s announcement of his intent to impose 25% tariffs on U.S. steel imports, and 10% tariffs on aluminum imports, has stirred up an essential debate: What will it take to save the U.S. manufacturing sector? Is it even desirable for the government to exercise its authority to attempt to revive steel or other heavy industry?

 

Steel Tariffs: What's an American System Approach to Saving U.S. Industry?

American production of pig iron and steel over the decade. (U.S. Geological Survey)

For the Wall Street financiers, the answer is clear. Having presided over the destruction of the U.S. industrial economy for the last 40 years, these economic “experts” are perfectly content to see the productive sectors of the economy and workforce be further reduced, in favor of a globalized system which is content to see wages and living conditions sink. For them, tariffs are illegitimate not only because they would allegedly raise prices for other sectors of the U.S. economy, but because their goal, as famously stated by U.S. Steel Corporation president Edgar Speer in 1977, is to “make profits, not steel.” Speer at that time outright rejected the idea of modernizing the U.S. steel industry with new technologies, and the industry has declined accordingly, not even able to produce some high-quality products. U.S. manufacturing workers have seen their ranks drastically reduced (along with their wages and pensions) since the 1970s, even as production capacity has also been literally blown up.

This outlook is most directly expressed in recent reports by international institutions such as the World Bank, which complain of “overcapacity” in the steel industry, especially in China.

But for sane Americans, oriented to creating a livable future, the starting point of the discussion is clearly that this productive core of the U.S. industrial economy must not only be saved, but revived on a higher level of technology. U.S. steel production peaked in 1973, and while it has revived from its historic low in April 2009, it remains way below the needs of the physical economy. The necessary investments in rebuilding U.S. infrastructure from its dilapidated state would require millions of more tons of steel output a year, beyond today’s approximately 87 million tons a year. If one were to add in the requirements for other parts of the world, which need to be jump-started into the industrial era and building their own industries, the demand would be much higher.

Yet, the economic “experts” insist that capacity be reduced to fit the current “market”—the demand that is determined by a financial system which deprives the economy of the long-term, low-interest credit which it needs in order to invest in new high-speed rail, modern water treatment, nuclear power plants, the space program, and more. That is unacceptable, and a plan for saving and building up the steel (and aluminum) sectors must be developed.

The Question of Tariffs

Which brings us to the question of tariffs.

Historically, according to the American System, the tool of choice for protecting this vital industry and its workforce has been the tariff. While originally imposed by Alexander Hamilton and his successors as a revenue source for the Federal government, the tariff throughout the 19th Century became a means for protecting American manufactures from the British imperial “free trade” policy of “strangling” infant U.S. industries in their cradle. Tariffs on vital industries frequently went over 50% during the latter part of the 19th Century, when the United States moved to become the world’s top steel producer (among other areas).

Steel Tariffs: What's an American System Approach to Saving U.S. Industry?

The declining input of innovative technologies in U.S. investment (Venture Capital Investment)

But tariffs were not a “magic bullet” for defending and building U.S. industry. To accomplish their aim, the United States also needed to have a long-term, low-interest source of credit, support for research and development of new technologies, and an increasingly modern infrastructure to maintain the industry. Shortages had to be guarded against. Nor could the decisions for tariffs in one industry be taken without consideration of their effect on other sectors (i.e. the economy as a whole). If the policy were implemented correctly, it would—as Hamilton argued in his Report on Manufactures—ultimately lead to lower prices at home, in addition to increased employment in the industry involved.

It should be noted as well, that Hamilton’s promotion of tariffs as a means of ensuring that the new United States had all the basic industries it needed in order to provide for its security, was simply one among a whole list of Federal government measures he proposed. His preferred tool was the granting of “pecuniary bounties” to the relevant industries, as a means of supporting their investment in expansion and modernization. That, of course, means Federal monies being expended in the general welfare.

Hamilton directly answered the major complaint being raised today against tariffs—that they will raise the price of the product for U.S. consumers. His argument in the Report on Manufactures is worth quoting at some length:

There is a degree of prejudice against bounties from an appearance of giving away the public money without an immediate consideration, and from a supposition that they serve to enrich particular classes, at the expense of the Community.

But neither of these sources of dislike will bear a serious examination. There is no purpose to which public money can be more beneficially applied than to the acquisition of a new and useful branch of industry; no Consideration more valuable than a permanent addition to the general stock of productive labour.

As the second source of objection it equally lies against other modes of encouragement, which are admitted to be eligible. As often as a duty upon a foreign article makes an addition to its price, it causes an extra expense to the Community for the benefit of the domestic manufacturer. A bounty does not more. But it is the Interest of the society in each case, to submit to the temporary expense, which is more than compensated, by an increase of industry and Wealth, by an augmentation of resources and independence, & by the circumstance of eventual cheapness, which has been noticed in another place.

Note that Hamilton is talking about supporting the modernization of an industry, not protecting backward modes of production. Hence the need for a competent credit policy to go with a protectionist trade policy.

 

Steel Tariffs: What's an American System Approach to Saving U.S. Industry?

Part of Bethlehem Steel, once a premier American producer, now demolished for a gambling casino. (Wikicommons)

Hamilton’s policy comes right up against that of today’s international institutions, starting with the World Trade Organization (WTO) and the IMF and World Bank. Indeed, it is government support and subsidies for industries like steel by nations such as China, India, South Korea, and Japan that have led them to be labelled “cheaters” by the WTO, which now could be characterized as the enforcer of a British imperial free trade policy.

Sadly, the U.S. labor movement and many of its supporters have bought into this counterproductive argument. The problem today is not that China and others are supporting and modernizing their steel industries, but that the United States has failed to protect, modernize, and support its own!   The United States government has acquiesced in a Wall Street-dominated system which starves research and development, and denies credit to those industries that are vital for building the economy. This failure of investment in upgrading industry technologically has resulted in the current abysmal level of total factor productivity in the U.S. economy as a whole, along with all the social ills that entails.

A Hamiltonian Solution

In light of all these considerations, a solution to the current uproar begins to emerge. Tariffs of the relatively moderate size proposed by President Trump might indeed be called for, but they will only be successful if they are carried out in the context of a total overthrow of the Wall Street-City of London dictatorship which has created the destruction of the steel and aluminum industries.

Steel Tariffs: What's an American System Approach to Saving U.S. Industry?

Alexander Hamilton

As Hamilton (echoing Gottfried Leibniz, by the way) stated: “Not only the wealth, but the independence and security of a Country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself all the essentials of national supply. These comprise the means of Subsistence, habitation, clothing, and defence.” The United States must have viable steel and aluminum industry—not to mention agriculture and other branches of vital supply.

But to accomplish this, the Federal government must cut off support for Wall Street speculation by re-implementing Glass-Steagall banking separation, thereby cutting off U.S. government support for gamblers, and rescinding other laws which provide that support. A new credit institution which provides funds for retooling and innovation, as well as plant re-openings and expansion, must be established. A massive upgrading of U.S. infrastructure, especially in transportation and electrical power generation, must be initiated as a Federal great project, thus radically improving the environment for industrial growth and progress throughout the nation.

So the answer to the questions we posed at the beginning is in sight. Yes, the Federal government here (and in other countries) has the responsibility to “intervene into the economy” to ensure its prosperity. And this must be done through a comprehensive program of national banking, protection (including wages), and internal improvements, starting now!

 

4 Comments

  1. Glenn Mesaros says:

    Harley’s article on Gary Cohn leaving Trump administration shows that the tariffs have split Wall Street away from Trump. Yes, he has to follow up with Glass Steagall and OBOR; however, Trump moves in erratic and chaotic ways but he does stay the course eventually. The key part of tariffs is reciprocity agreements with nation states to permit lower or no tariffs for certain products.

    • The question is whether the tariff policy is part of a perspective for the growth of the economy as a whole, especially in terms of science and technology, in my view. That’s why understanding Hamilton’s perspective is so important.

  2. Mark Fairchild says:

    Nancy,

    Congratulations on an excellent article! We have a small group which has been meeting weekly to read Hamilton’s writings together. We’ve read all four of his reports to Congress. We will shortly begin reading the Hamilton biography by Forrest McDonald.

    I would like to see an article which explains more fully the concept of a “bounty”.
    How was it used by Hamilton, and what are examples of how they could be applied today? Perhaps something like JFK’s investment tax credit?

    What’s your view on the extent to which people currently (July 2018) around Trump understand what you’ve written about tariffs as merely one tool in an overall arsenal of economic measures? Do you think Trump himself has any understanding of this?

    Also, have you followed the activities of the “Public Banking” group, which advocates for city and state banks modeled on the Bank of North Dakota? What do you think of their efforts?

    Thanks for keeping the flame of the American System burning!

    • I have no way of knowing if anyone in the Administration understands the overall concept of the American System. Certainly, the bulk of the policies–the failure to act on Glass-Steagall and infrastructure, the moves to privatization of even our crown jewels like the space program, and threats to the social safety net–would indicate that if anyone does understand, he or she doesn’t have any power. I have not followed the “Public Banking” group, but I hope you share some of the blog work with them. I may get a chance to look at it soon. On bounties, I don’t think Hamilton had a chance to implement that policy. I’ll consider how to answer your question more fully in the future.

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