The "Buy American" Myth

From Lew Rockwell.com;

The 'Buy America' Myth


by Thomas J. DiLorenzo





In response to the publication of my book, The Real Lincoln, I’ve had quite a few letters from admirers of Pat Buchanan’s book, A Republic, Not An Empire, who tell me that they are persuaded by my argument that America began its transformation from a constitutional republic to an empire in 1865. But they disagree with my criticisms of the hyper-protectionist policies of Abraham Lincoln and the Republican Party of the mid and late nineteenth century. The letter writers seem to sincerely believe that protectionist policies that force Americans to "buy American" are not only patriotic, but good for the US economy.



These correspondents seem totally unaware of the truth that import quotas or tariffs can only, at best, "help" some Americans by harming other Americans. There is nothing inherently just or patriotic about that. Indeed, protectionism is the quintessential example of the kind of special-interest policy that James Madison railed against ("the violence of faction") in his famous Federalist #10 essay. Judged by the standards of Madison, the "father" of the American Constitution, protectionism is patently un-American. It was always part and parcel of the corrupt European mercantilist system that so many of the American pilgrims fled from.





Higher prices caused by tariffs harm all consumers, and impose especially severe burdens on American businesses that are compelled to purchase higher-priced inputs into their production processes. Thus, President Bush’s steep increase in steel tariffs, enacted into law last year, will harm steel-using industries like the American automobile industry, which will be forced to lay off some American workers since its products will be somewhat less competitive in international markets.



A more subtle explanation for how protectionism harms Americans comes from an understanding of what international trade economists call the "pass-through effect" of a tariff. As explained by Wilson Brown and Jan Hogendorn in their text, International Economics (p. 119), as tariffs cause prices to rise,





Importers pass on [most of] their costs to buyers, and industrial buyers pass those costs on in the form of higher prices. . . . Consumers, hit directly or indirectly, include the inflationary price increases in their wage and salary demands. Everybody tries to pass the tax to someone else. The only group that is powerless to pass the costs on further are the exporters, who have to sell at world prices, and swallow those costs. In essence, a tax on imports becomes a tax on exports (emphasis added).



A tax on imports harms American exporters the most of all. This in fact was a major cause of the War Between the States, as I argue in The Real Lincoln and elsewhere (see "Lincoln’s Tariff War" and "Gods, Generals, and Tariffs," on www.mises.org). As of 1860 the Southern states exported about three fourths of what they produced, mainly cotton and tobacco and other agricultural products, and used the proceeds of those sales to purchase manufactured goods either from Europeans or Northern manufacturers. Since they were not able to pass on any significant portion of their own higher costs, they were uniquely discriminated against by the tariff, which the Republican Party managed to more than double in 1861 and then triple shortly thereafter, from the low, 1857 average rate of 15 percent to more than 47 percent. As Murray Rothbard explained:



One of the central grievances of the South . . . was the tariff that Northerners imposed on Southerners whose major income came from exporting cotton abroad. The tariff at one and the same time drove up prices of manufactured goods, forced Southerners and other Americans to pay more for such goods, and threatened to cut down Southern exports (in "Two Just Wars: 1776 and 1861" in John Denson, ed., The Costs of War, p. 127).



Charles Adams pointed out in his history of taxation, For Good and Evil: The Impact of Taxes on the Course of Civilization (2nd ed., p. 333) that because of the pass-through effect of the tariff, and because the South was so export dependant, it "paid about three quarters of all federal taxes, most of which was spent in the North. The injustice of this arrangement dominated Southern hostilities toward the North."



Southerners clearly understood that they were being made into tax slaves by the North, and by Lincoln, who announced in a February 15 1861 speech in Pittsburgh, Pennsylvania, that "The tariff is to the government what a meal is to the family." John C. Calhoun had long been a crusader for free trade and his ideas, drawn from Adam Smith and the great classical economists, were widely accepted in the South (see my article, "Calhoun’s Cause: Free Trade," on Mises.org). As he explained 1828, as part of his protest of the "Tariff of Abominations":



Almost every man to the North, let his employment be what it may, manufacturer, labourer, farmer, capitalist, land holder, &c. &C. hopes to receive more from the Tariff by the increased price of his labour, or his property than what he pays in duties as a consumer. The very object is a protection to what is called the home industry. But what is our case. Our industry tho’ at home, by our own hands and on our own soil, is engaged in cultivating the great staples of the country for a foreign market, in a market where we can receive no protection, and where we cannot receive one cent more to indemnify us for the heavy duties we have to pay as consumers (in Clyde Wilson, ed., The Essential Calhoun, p. 190).



Thus, because of the "pass-through effect" of tariffs it doesn’t really matter where the tariff is collected – New York, Boston, Charleston, or New Orleans – in determining the incidence of the tariff. It is the economic effects of the tariff that are important, not the collection point. (Some critics of The Real Lincoln have incorrectly argued that since there was more shipping coming in and out of Northern ports than Southern ones in 1861, the export-dependent South was not being exploited by the tariff. Such arguments ignore economics altogether and rely instead on a trivial and irrelevant statistic).



In 1861 the Southern states, which represented 10 million Americans, were disproportionately harmed by the tariff, as were Northern exporters, especially those in New York City. The city’s mayor, Fernando Wood, advocated secession from both state and federal governments and the formation of a "free city" that could engage in unobstructed commerce with the world. (If Murray Rothbard had been alive at the time and living in his beloved New York City, he surely would have been a Woodian.)



Pat Buchanan’s supporters are right to oppose the American empire that Pat has so eloquently described (and warned against) in his writing. But at the same time, they could not be more wrong in their misguided belief that protectionism is "good for America." Indeed, Lincoln and the Republicans viewed the tariff, along with a central bank, as the means to finance the very empire that the Buchananites are so fearful of.



April 16, 2003



Thomas J. DiLorenzo [send him mail] is the author of the LRC #1 bestseller, The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War (Forum/Random House, 2002) and professor of economics at Loyola College in Maryland.



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