The New American System: Trade for Workers in the 21st Century

The following is adapted from remarks that former Ambassador Robert E. Lighthizer delivered at the Intercollegiate Studies Institute’s “American Economic Forum” at the Omni Shoreham Hotel in Washington, D.C., on July 29, 2022. Lighthizer served as the 18th United States Trade Representative (USTR) in the Donald Trump administration.

It is an honor to be there. Our institutions being destroyed by extreme liberalism are one of the greatest crises we face today. It is notable and admirable that the Intercollegiate Studies Institute has been working to reverse this trend. For almost 70 years the ISI has been on the front lines in defense of freedom and American values and I am honored to be here to speak to you today. It is a proud honor to have been able to help you retake the country.

I am the same age as William F. Buckley. His works were my favorite, and I listened to his debates on TV. I also enjoyed his humor. His wisdom and humor were a rare combination. The debates I had with Gore Vidal are vividly recalled. Is there a better foil to a conservative champion than Gore Vidal? These performances were entertaining and educational. They were, as so many things in life, about confirmation bias. As a young conservative, I was always more confident of my beliefs.

We all have our favourite Bill Buckley quotes. Perhaps my single favorite was during his 1965 campaign for mayor of New York City. He ran against John Lindsay, a Republican liberal congressman, and Abraham Beame (a plain liberal Democrat). It was a quixotic campaign. Buckley was never given a chance. He ran to support conservative ideas, and, I think, also to promote William F. Buckley. Buckley pointed out that Lindsay was taller than Beame when asked about the differences between them. Buckley said that the differences between his two opponents were more biological than ideological. Buckley’s quip was when he was asked about what he would do in case he won. Buckley famously said that he would “demand a recount.” This became the line that defined Bill Buckley’s campaign.

Buckley received about 13 percent of the vote, a significant number that tipped the victory to the Republican Lindsay. Buckley received the strongest support from white workers who are unionized, blue-collar workers and did not have a college education. They were fed up with liberal snobbery, and the harmful effects of liberal government. It was perhaps this that the Reagan Democrats saw and, ultimately, voted for Donald Trump.

Everyone here knows that the great struggle we’re all involved in began with God at Yale . Everybody in this room is aware that Buckley may have wondered what he would think of the state of Yale and higher education throughout the United States. That seems to be the golden age for academic freedom, even though secularism and censorship were bad in Buckley’s time. I can remember my time at Georgetown in the late 60s. We thought that all of our institutions were under siege, and I guess they were, but that seems placid compared to today. One reason could be because the radicals I debated back then are many of your current professors. The future looks bright when I look at the people around me. We are grateful that you have taken up the fight for conservative values.

But, I wasn’t here to discuss that. Because I’m a trader, I wanted to speak to you about international and trade economics. Also about failed policies and how to revive the patriotic economy. While the left was consolidating American universities’ supremacy in extreme liberalism, economics departments at these same schools were equally committed to the promotion of the doctrine of free trading. There was not much debate, as there is in academia. All of the smart people believed that free trade was the best course. But they were mistaken and the result was that millions of American workers paid the price.

I want to question the views of many people about trade. Conservatives shouldn’t be blind supporters of free trade theology. This creed has failed the nation for many decades. Our policy must shift away from globalism, price optimization and corporate profits. Instead, it should be focused on workers and their families.

Before making any policy decision in this area, we need to consider first the impact it will have upon our producers as well as members of families and community. We need a worker-focused trade policy, not a corporate/price-centered one, and we need to take every step necessary to eliminate the trade deficits that are bleeding our country to death and achieve balanced trade. This is exactly what I and President Trump did over four years and it was amazing.

All the smart people believed that free trade was the best way to go. But they were mistaken and thousands of American workers paid the price.

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Donald Trump ran for president in 2016 for several reasons, but perhaps most importantly because he felt unbalanced, unfair international trade deals were hurting our workers and destroying their communities and the American way of life. One could almost see his movement as a natural reaction to the failed policies of the previous 25 years.

The 1990s brought us the dial-up internet, searching the web, sitcoms like Friends and Seinfeld and one William Jefferson Clinton. Clinton and his crew believed they could overcome the failures of the Cold War and were all-knowing and infallible. It was now the turn of history. One of the ideas they adopted was ultra-free trade.

They increased their efforts to reverse this disastrous policy. The House and Senate passed the North American Free Trade Agreement. The two of them helped to create the World Trade Organization. In his last months, Clinton made the final concession to China. Clinton convinced Congress to give them the permanent tariffs of most-favored nations and they were allowed into WTO. It was the worst policy and three historical mistakes that resulted in our workers, families and communities suffering.

In the following years, we saw millions of jobs disappear and tens to thousands of factories closing. The stagnation in wages was something we witnessed. Our country saw an increase in economic inequality at an alarming pace. Many people fell from the middle class as the rich became more wealthy. We ran up trillions of dollars in trade deficits–essentially shipping our wealth overseas and making our children poorer. Amazingly, a large portion of the wealth transfer was made to China’s People Republic, which is best described as a strategic enemy.

This economic turmoil contributed significantly to the collapse of society. This economic upheaval caused many to lose their communities and displace families. It also contributed greatly to the rise of opioid addiction and other “deaths” of despair. While I don’t claim that extremist-free trade caused these crises in isolation, I do believe it played a significant role.

We all recall the wisdom of Adam Smith, David Ricardo and others. Both the English and Portuguese would be better off if they exchange their cloths for Portuguese wine. This is known as the comparative advantage. They were probably correct in their day, although capital rarely crossed national boundaries. In those days, there was no China-sized mercantilist nation, so it wasn’t possible for any country to have decades of large continuous trade deficits.

To be clear, trade is not something I oppose. Although I believe trade is healthy and beneficial, more must be done. It should also be fair and equitable for our workers. And above all, it needs to be balanced. In the 25 years before Donald Trump, we let trade get wildly unfair and dangerously out of balance. The purpose of economic policies is to promote people. It is not about things.

I chose as the title for this talk “The New American System: Trade for Workers in the 21^st Century.” Donald Trump ran for president to change decades of disastrous trade policy. Trump felt deep sympathy for all those left behind by free trade. He won because these people supported him. He did not disappoint them for four years. To help workers, we challenged free trade. We used threats, tariffs and industrial policies to challenge the established wisdom. We weren’t the only ones to try this. Our country has a proud history of embracing the principles of this policy.

In March of 1824 Henry Clay, then a congressman from Kentucky, made a speech which famously referred to “the American System.” Clay was a distinguished professional who, along with Webster, Calhoun and Calhoun were part of the Great Triumvirate. He advocated for tariffs and a national bank. Also, subsidies to support infrastructure development and growth. His ideas were rooted in the writings of Alexander Hamilton, who used the term in number 11 of The Federalist Papers.

Andrew Jackson and a rural Democratic Party managed to thwart much of Clay’s agenda during his lifetime but by the time of Abraham Lincoln, who greatly admired Clay, and for 60 years afterwards, the American System transformed our country. This combination of tariffs and infrastructure subsides was crucial to our becoming the largest economy in the world by 1890. This helped to create a great middle class, farmers, and led to the creation of vibrant communities throughout the country.

Indeed. Tariffs were relatively high up until the Second World War, and a lot of our economic growth was based on government subsidies. The Erie Canal and our network of railroads were transformed by public-works subsidies. This was due to the fact that the government gave large areas of federal land to companies. Also, Eisenhower interstate highway systems, Kennedy’s space program and Reagan’s military buildup made it possible for them all. They all facilitated commerce, and provided essential technology for our economy.

President Trump was the inheritor of this tradition. In some ways, the American System is an ancestor to America First. We need it more now than ever. Strategically, tariffs should be used to prevent unfair trade and eliminate trade deficits. Not only do we need to spend more on infrastructure, but also for the fierce competition in high-tech. China and Europe spend hundreds of billions to be competitive in areas such as robotics, artificial intelligence and advanced materials. It is our responsibility to do the same. We must also invest in semiconductor manufacturing with government funds. We can’t continue to be two generations behind in cutting-edge logic chips and to rely on imports for 87 percent of our needs.

Many people may think, “You’re conservatives and you support free trade.” Free trade is not conservative. Who are they conserving? The philosophy of free trade and its elevation is materialism. Materialism encourages the destruction of value. This is exactly the opposite of conservatism. Conserving what’s best about our traditions and institutions is the core of conservatism. This is all about the values that materialists want us to ignore.

Free traders are interested in price optimization. We are only considered consumers by them and they want to increase consumption. This means lots of imports. Americans, I think, are the first consumers and no nation is great by eating. All of them became great producers.

Many economists believe we need a free trade policy to produce the least expensive goods. Then we should implement programs such as welfare and unemployment payments to address the adverse effects on citizens and the country. This is exactly what we believe. We believe that policies should have the primary goal of building strong American communities and families as well as creating productive, high-paying jobs. This should not be a cheap goal. We should never make a choice between American jobs and corporate profits.

We should not forget the intrinsic value of work and how it can bring us pride in supporting our families. It is this pride that builds communities, and should not be lost for TVs or t-shirts. Conservatism is all about this. Making America great is what patriotism stands for. Our goal is to preserve American values and strengthen communities. Ronald Reagan was adamant about this. This is what Donald Trump stood for.

Indeed Alexander Hamilton was not a free trader. He is widely considered to be the father of American conservatism. He supported industrial policies and tariffs throughout his entire life. In truth, both Republicans and conservatives were not free traders in our early history. There were 12 Republican presidents before Eisenhower and every one promoted using tariffs to build American industry. All of them supported the American System implicitly or explicitly.

Teddy Roosevelt once famously stated, “Thank God that I’m not a Free Trader.” Pernicious indulgence with the doctrine of free trade in this country seems to inevitably produce fatty degradation of the moral fibre.”

After World War Two President Eisenhower became less interested in building American industry. The world’s only major economy, ours was important. Eisenhower wanted Europe and Asia to be rebuilt and democratic governments established. He also desired the end of communism. Nixon supported market economics. However, when the world was experiencing a trade deficit and an increase in gold prices, Nixon placed tariffs on all imports. This was until his trading partners agreed that they would raise the gold-dollar value.

We should not forget the intrinsic value of work and the pride we get from helping our families.

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Ronald Reagan advocated free trade but insisted that there be a limit on how many Japanese vehicles could enter the United States. He protected our semiconductor industry. He demanded limits on steel imports and defended Harley Davidson motorcycles. One libertarian group claimed that Obama was the most protectionist president since Hoover. No Republican president was really a free trader with the possible except of the Bushes, and even 43 put tariffs on steel imports to save our industry.

Let me end by asking you this question. Many of you took economics classes in college. Most likely, your professors believed in free trade. Ask yourself: Were any of their professors conservative?

Another myth states that trade is good for democracy and peace in the world. It’s a common belief. This view was the common wisdom for the cognoscenti in the 1990s. President Clinton and his free-trade crowd used this myth to sell their China policy. They argued that China could become an even larger version of Switzerland if it had access to the market. Thomas Friedman published a book arguing that countries who trade do not make war. He still doesn’t believe this anymore.

The main problem with this proposal is its lack of historical support. World trade was an astonishing 21 percent of global GDP in 1913 and that sure didn’t stop the Great War from beginning. Before Pearl Harbor, Japan and the United States had significant trade. Before the American Civil War, the South and North had huge trade. Of course, Russia and Ukraine had many trade connections and were still under attack by Putin.

Let us look at another myth. Trade deficits are not important, as we were told. This is something we have been hearing from journalists and economists for years. You can have a deficit and then a surplus in the same year. This is true. It is unlikely that a surplus in one country will be the same as a deficit in another. This isn’t what America has done. For decades, we have had deficits in the hundreds of millions of dollars each year. This trillions of dollars are returned in the form foreigners owning American assets permanently.

There’s a stat called net international investment position. The net international investment position is the sum of all assets that Americans have abroad, including equity, debt and real estate. This compares to how many foreign nationals own America. The United States’s net international investment is an astonishing negative $16 trillion. Foreigners own $16 trillion more here than we own around the world. There is also a negative compounding. These assets are owned by foreigners, including China. They also have the potential income. The wealth of our country and the ownership of equity, debt, and property is being traded for Christmas lights, toys, and tennis shoes, as well as garden tools and gardening equipment. Self-inflicted wounds are causing us to die. So, do massive, consecutive trade deficits matter? If you are concerned about who controls and owns your country.

There is another myth. America is considered postindustrial. We don’t need manufacturing. The services economy will be our future. This is also a balderdash. The United States has the largest economy. It is essential to create and grow new products. It is true that manufacturing jobs are only about 11 percent of our employment, but these jobs in turn spin off millions of other jobs in the services sector–think accounting, advertising, transportation.

Further, innovation, productivity gains, and exports outnumber services. Manufacturing accounts for sixty-five percent in research and development. Ninety-two percent of exports are from this sector and 42 percent of productivity growth is in manufacturing, compared to just 24 percent for the services sector.

And generally speaking, the wages for manufacturing jobs are higher. The median manufacturing job pays $22. 50 an hour. The equivalent number for retail is $14.30. For hospitality, $13.70. For administrative services, $17.50. Manufacturing workers are more likely to receive higher wages and remain in the same job for longer periods of time. 60 percent of American workers have only a high-school education. Manufacturing is their best route to the middle class. We need strong communities as well as an innovative economy. This sector is responsible for creating manufacturing jobs. Ask Japan, Germany France Korea and China if you have any doubts.

Trump was determined to change the existing trade policy, and he achieved great success. U.S. workers were protected and businesses were pressured to return to America. To encourage the production of cars and other goods here, we rewrote NAFTA. We included a sunset clause in NAFTA for the first time. This means that the deal will automatically expire if it is not renewed. If the balance is again off, this allowed future negotiations. To ensure fair competition, we included enforceable labor laws and environmental regulations. To rebalance trade, we made agreements with Japan and Korea. We increased tariffs to combat unfair trade with China and others. To help farmers and workers, we also used laws that were not in force for many decades.

This America-first trade policy combined with tax cuts, regulatory reform and tax reductions was an incredible success. Millions of new jobs were created. The factories came back. Manufacturing jobs were back in their hundreds of thousands. Did President Obama say that those jobs were not coming back? To get those jobs back, you’d have to use a magic wand. Well, in Trump’s first 26 months, manufacturing-jobs growth was four times Obama’s last 26 months. It turns out that economic and sensible trade policy were a magical wand. In four quarters prior to Covid, our global trade deficit for goods increased year-over-year. The most important thing is that the median income of families rose 6.8 per cent, which was their highest level in many decades. Americans are now working in better-paying positions. The recovery was good for families and communities.

Trump made a second significant contribution to trade and economic policy. Six years ago, it is hard to recall what the general perception of China was six years ago. Many considered China a friend, an economic partner, a co-inventor in technological innovation and a market that would be interested in American products. Trump challenged this perception.

We are often told America is postindustrial. We don’t need manufacturing. The services economy will be our future. This is also a balderdash.

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To begin, he asked one question: Is China friend or foe? The answer is the foundation of every policy decision. Six years later, everyone who fails to see that China poses a threat to America’s values and our way of living is either ignorant or bought. They are clearly an enemy.

Let’s review. China is home to the largest army and its growth rate is alarming. China has the largest navy and is currently building more ships than us. The South China Sea is being militarized at an unprecedented rate since the Second World War. It aggressively claims land within its borders, and is building a huge naval base at the Spratly Islands. It’s threatening international shipping routes. Numerous new nuclear silos are being built. The Belt-and-Road Initiative, worth trillions of dollars, is designed to increase its global influence and give it intelligence and military bases in Africa and South America. The so-called “wolf fighters” in its diplomatic corps are strongly anti-American. It’s responsible for the majority of the fentanyl that is imported into this country, and its killing of our communities. The FBI engages in constant spying on the country. The FBI opens a Chinese-espionage case every 12 hours. The FBI is currently enslaving millions Uighurs. It is also spending huge amounts to influence politicians, business leaders and universities.

China’s economic aggression has been ongoing for many years. China has pursued a mercantilist strategy to grow its economy at the cost of all others. This was done through a closed market, massive subsidies, and a highly closed system. It stole our technology and manipulated its currency. China accounts for 80 percent of all counterfeits coming into America, and their I.P. theft alone had been estimates to cost us $300 billion annually. It has waged economic war on the West for many decades.

As a consequence of these and our foolish trade policies of the past we have lost many millions of jobs, as well as much of our technological leadership and transferred trillions to them. This huge trade deficit has helped to build their army and develop their technology and industry. Their economy has grown from about $1.2 trillion in 2000 when ours was $10 trillion, to about $16 trillion now when ours is about $22 trillion. Our cumulative trade deficit in goods between them and us has reached $6 trillion. The United States has not faced a foe with economic power this close to our own size in 130 years, and there are predictions that their economy will surpass ours very soon. A country cannot transfer so much wealth to its adversary in a rational world.

The Trump Administration faced this challenge head on. The core of our policy was an obscure trade statute called Section 301. It allowed the USTR, the president, to levy tariffs against products from foreign countries that engage in “unjustified unreasonable or discriminatory” practices and that harm the U.S. Economy. We conducted the necessary investigation for eight months, issued an extensive report and began to raise tariffs in the summer of 2018. We reached the so-called Phase One Agreement after a year long of negotiations and escalation. This agreement, which was important, maintained our tariffs, allowed for systemic changes and ensured large future purchases. Covid intervened to affect the purchase, but it was mostly successful due to the fact that the tariffs were kept.

There were three reasons for tariffs. They were first used to offset the unfair advantage Chinese goods had on our market in terms of economic competition with ours. They also helped to reduce our trade deficit and, most importantly, started the strategic decoupling process between our economies.

While I’m not in favour of total decoupling yet, I believe we must strategically seperate. Trade and economic integration should be balanced on terms that benefit America’s workers and must not cause harm to our economy. For example, we should not tie our tech sectors together. We also should not have any trade or industrial cooperation within the security and joint-use technology sectors. China’s investment in America must be limited and outward Chinese investments to China should be controlled. To achieve balance trade we should impose tariffs on any products from China. We must also insist that Chinese buyers buy our products in order to gain access to our markets.

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Now Chinese officials may claim that we want to slow down their growth, but it is false. It is China’s business to do what it wants economically, but we have the right to decide how they affect our lives. They are the aggressor, and we are the aggrieved.

We are in an intense competition with China over the future of the planet. This will decide whether totalitarian communism or free democracy is the best system for the future. There is also a battle within the country for those who will sell our future to make short-term gains. People who think consumption is more important that production. They believe that jobs are less important than imports. And that people are more important that things.

As conservatives we have to work together to protect the American values that make America great. These values include families, communities, and dignity at work. A new American System is needed to rebuild the country, preserve American values, and protect workers and communities. You are welcome to join me in this battle. Your generation has the biggest stakes and the best chance to succeed. We are grateful.