The U.S. should stop shooting itself in the foot by undermining its dominant position in global markets with petty protectionism.
Opponents of free trade reliably invoke national security to justify their views. Of course, there are situations where free trade should not be allowed. Sanctions and embargoes can be part of an effective national-defense policy. We don’t want free trade in nuclear weapons technology. But arguments for national-security exceptions to free trade are often flimsy.
One such case is steel protectionism, which is nearly always justified, at least in part, with national-security reasoning. As William Greenwalt, a former deputy undersecretary of defense for industrial policy, wrote earlier this year, steel protectionism actually hurts defense readiness and makes it harder for the Pentagon to acquire the steel it needs.
Samuel Gregg has a new paper for the American Institute for Economic Research that illustrates how free trade boosts U.S. national security and how protectionism undermines it.
Gregg points out that the U.S. pursued trade liberalization as a component of its national-security strategy after World War II. Free trade was one of the tools the U.S. used to get the non-communist world onside during the Cold War. The need to do so again with respect to China has been hindered by protectionist efforts in the past several years. The U.S. only has one free-trade agreement with a NATO member (Canada) and has instead been waging a low-grade trade war on its European allies. In Asia, the U.S. stopped pursuing the Trans-Pacific Partnership, which would have been a non-China trading bloc.
Economic growth is also in the U.S. national interest for security reasons. A growing economy can better finance its defense spending. “A state with a higher GDP than its opponents can expend more economic resources on its defense than its rivals,” Gregg writes. The U.S. victory in the Cold War is a recent example of this phenomenon working out in the U.S.’s favor.
This is also why, for example, former chairman of the Joint Chiefs of Staff Michael Mullen said the greatest threat to U.S. national security is the national debt. Faster economic growth increases government revenue and reduces the debt-to-GDP ratio, making it less economically damaging to spend more on defense.
Trade is ultimately done by people, not by countries. “Americans engage in cross-border trade because they believe that they will economically gain from such transactions. Without that confidence, these exchanges would not occur,” Gregg writes. When government prohibits those transactions, it also prohibits the greater economic growth that results from them.
Free trade also benefits other countries, which could include U.S. adversaries. Sometimes protectionism is justified as a means to deny economic growth to rivals. But Gregg points out that logic does not consider the second-order effects, which could make it a net negative to the country imposing the protectionism:
First, if State A decides to try and obstruct trade with State B as a way of impeding State B’s economic growth, it imposes higher costs upon State A’s domestic production. This translates into higher consumer costs and slower growth for State A, and thus potentially fewer resources to resource its national
security needs.Second, State A’s choice to obstruct trade with State B may push State B towards a more belligerent view of State A, or seek closer relations with State A’s rivals, or pursue less peaceful ways of obtaining what it wants. This is especially the case if State B believes that trade restrictions imposed by State A will diminish State B’s long-term economic growth and thus weaken its ability to realize its national security goals.
On the other hand, Gregg writes, “trade openness . . . motivates other states to regard America’s well-being as being in their own self-interest.” As a more general matter:
If State A is wealthy, has a big consumer market, and makes it easy for foreigners to trade with its citizens, the more attractive is State A’s economy for foreign businesses and investors. That translates into more growth for State A’s economy which can be drawn upon for national security needs as well as more employment and lower prices for State A’s citizens. Moreover, as growing number of foreigners and foreign businesses invest in State A’s economy, their interest in State A’s security grows.
Conversely, if State A embraces protectionism, it discourages foreigners from trading with and investing in it. That translates into less economic growth for State A, fewer potential resources to expend on national security, and lower interest by other states in State A’s well-being. State A’s protectionism also signals its inward turn to the rest of the world. This provides an opening for State B to develop closer economic and political relations with State A’s allies, who resent State A’s penalization of imports into its economy.
Gregg is aware of exceptions to this idea as well and says that “the argument that growing trade between states fosters more peaceful relations between them thus needs to be expressed in probabilistic rather than definitive terms.” But reducing the probability of conflict is usually the best policy-makers can do in the real world, and free trade can be one avenue to achieve that.
In U.S. history, tariff policies have hurt national security. Gregg points to the Morrill Tariff against the United Kingdom in 1861. It was a large part of the reason that the U.K. was neutral during the Civil War, despite its abolitionist policy that should have led it to support the Union. That law, and other tariffs against the U.K., persisted long after the Civil War was over, worsening relations between two countries that share interests, language, and culture.
Frivolous national-security claims in the trade sphere undermine national security by turning national security into a joke or an exercise in cronyism. The Trump administration, with the support of former steel lobbyist Robert Lighthizer as trade representative, instituted national-security tariffs on steel “despite Defense Department advice that the US military only needed 3 percent of total domestic steel and aluminum production, and that broad-based import restrictions were unnecessary,” Gregg writes.
Most steel imports come from U.S. allies anyway, and in 2019, the administration admitted that the tariffs did not change China’s trade practices. In its report justifying these supposedly national-security tariffs, the Department of Commerce pointed to outsourcing in the automobile industry to support its policy. “In the end, the report was reduced to claiming that ‘the “displacement of domestic products by excessive imports” — in particular, the displacement of automobiles and certain automobile parts manufactured by American-owned firms’ weakened America’s domestic economy, which might ‘impair national security,'” Gregg writes.
This sort of hand-waving cheapens the entire idea of national security and makes it harder for Americans to discover opportunities for economic growth through trade, further weakening the U.S. economy on which defense relies. “If protectionist measures are thus systematically applied to more industries across a state’s economy, the same inefficiencies and inflexibility will emerge everywhere, thereby weakening that economy and therefore a state’s ability to resource its national security needs,” Gregg writes.
Global supply chains generally strengthen resilience by providing more alternatives in the case of failures or shortages in one country. And autarky doesn’t make countries safer. Gregg writes:
Any state that cuts itself from foreign trade must try to produce everything itself. That means being willing to give up all the benefits of capitalizing on its comparative advantages and paying a high opportunity cost for doing so. It also involves eschewing the improvements sparked by foreign competition, the efficiencies associated with specialization within the international division of labor, and the economic growth driven by specialization. Yet another cost of autarky is that, absent access to the full range of raw materials of which no state possesses a full and endless domestic supply, even a state with considerable resources of labor and capital will fall behind those states that do have such access.
Restrictions on dual-use technologies can be sound in principle, but in practice they often don’t work. Gregg argues that the only way they can work is if the U.S. “is prepared to restrict all transfers of a particular dual-use technology to all states.” That’s because there’s no way of knowing what another someone in another state will do with it once he purchases it, even if that other state is an ally. Since restrictions on dual-use technologies are almost never that broad or strongly enforced, they aren’t usually effective and adversaries gain access to the technologies anyway. It’s also difficult to determine what “dual-use” actually means, and that can be another opportunity for cronyism and flimsy national-security justifications for special-interest protectionism.
The U.S. has also in recent years increased government oversight of foreign direct investment (FDI), supposedly in response to China. Gregg points out that Chinese investment in the U.S. has been in decline since 2018, and “when one adds to this the fact that of the total $5.25 trillion FDI in the US in 2022, only $28.66 billion consisted of Chinese FDI in American firms (i.e., less than half of one percent of total FDI), it is reasonable to ask whether some of the policy changes making FDI in the United States a considerably more complicated exercise will turn out to be of net long-term benefit to America in either economic or national security terms.” The U.S. is the top destination in the world for FDI, and this is a tremendous benefit. Most other countries have to beg for FDI; the U.S. is a natural magnet for it.
Just like it did in the past, openness to global commerce would benefit U.S. security interests today. Many national-security justifications for protectionism are spurious at best and corrupt at worst. The U.S. should stop shooting itself in the foot by undermining its dominant position in global markets with petty protectionism.