Trade Policy and America’s Standard of Living: An Historical Perspective*

2ABSTRACT The U.S. has not always been a pro-free trade country. Before the Great Depression, the U.S. went through waves of protection and liberalization, as the federal government’s demands for revenue and industry pressure for protection waxed and waned. Some advocates of protection then as now argued that it would enhance economic development: translated into the language of modern economics, they argued that protection shifted American economic activity toward manufacturing, and that increasing returns to scale and externalities made specialization in manufacturing uniquely valuable for economic development. But even if protection generated endogenous productivity growth by increasing economic activity in the externality-generating manufacturing sector, it slowed the rate of growth of wages because high tariffs on imported capital goods retarded capital deepening and delayed the development of capital-intensive infrastructure and industry. For plausible magnitudes, this second effect dominates: whatever Americans gained in faster mastery of technology as a result of protection in the late 19th century, they lost more because the higher price of—imported—capital goods made it more difficult and costly to build America’s transportation network and industrial base