Revitalizing the American System

In today’s age of hyper-globalization, America often finds itself at the mercy of international trade whims. Part of this stems from policymakers long chasing a naive dream—America achieving prosperity by exporting goods to countries with low wages and poor consumers. But that never happens. Instead, the United States continues to be exploited by the same mercantilist tactics that colonial Europe once used, through which countries seek to dominate global trade at the expense of others.

Realistically, the dream of mutual, open trade has never materialized. And now, Washington must learn from the past—from Congressman Henry Clay’s “American System” of the 1820s. Clay understood 200 years ago that prioritizing domestic growth and self-sufficiency—and putting America’s home market first—could strengthen national industries and boost wages. It was a policy that Washington embraced for several decades.

Clay did not believe the U.S. should pursue an export-oriented strategy. Policymakers are relearning that lesson now that Washington is starting to reject the twentieth-century free-trade focus on overseas market access. Instead, Washington is finally recognizing that the most profitable marketplace to tap is right here at home—America’s affluent consumers.

That’s what Clay’s American System teaches us, with its emphasis on a broad industrial base and strong consumer purchasing power. The approach Clay devised in 1824 built on Alexander Hamilton’s 1791 Report on the Subject of Manufactures, which outlined an economic policy of tariffs, subsidies, and infrastructure development. Clay realized that exporting to fickle and often hostile European countries could not sustain America’s future growth. He was right. Under his system, the United States built a strong manufacturing base. Good wages and robust consumption of domestically manufactured goods soon followed. Essentially, the United States built its own market, with robust demand for the goods made in America’s burgeoning factories.

Notably, Clay and Hamilton emphasized tariffs to shield American industries from foreign competition. That helped domestic manufacturers thrive at home rather than be undercut by foreign producers. The result was an America that could boast the world’s largest middle class by the late 1800s.

Clay and Hamilton also considered a stable currency and a robust credit system essential to economic growth. They established a national bank to facilitate commerce and provide financial stability. This helped the federal government invest in roads, canals, and railroads—connecting our internal market while expanding employment.

Clay’s lessons were clear. His focus was on enriching the nation by selling to America’s growing middle class. But that’s vastly different from the export-focused mercantilism that China has pursued over the past thirty years. 

Beijing has taken the path of building a world-leading manufacturing base by selling to America’s consumers. Unlike the United States, China’s central government views its working population as mere cogs for the needs of national industry. As a result, China has a relatively low household consumption rate compared to other large economies. Beijing simply prioritizes national resources for overproduction rather than increasing the wages of its citizens.

China has been following the colonial mercantilist prescription quite closely. And America’s domestic producers have been on the losing end. For three decades, they’ve been told, “Don’t worry, you’ll soon be selling tons of products to other countries.” But that hasn’t happened. Instead, the trade agreements intended to spur domestic growth have helped China and other countries sell more in the U.S. market. In fact, the Coalition for a Prosperous America’s “Domestic Market Share Index” shows that the United States keeps losing more and more of its home market. And the volume of this loss is staggering—equal to all of America’s exports to China, Germany, Mexico, and Canada combined.

This policy mistake has made America too reliant on imports, particularly from China, for everything from medicines to military hardware. Clearly, the United States hasn’t grown its economy by expanding sales to overseas consumers.

Things are changing, though. In recent years, the Trump and Biden administrations have pursued parts of Clay’s American System. President Trump’s tariffs and President Biden’s legislative incentives have both aimed to protect the U.S. market for domestic producers rather than emphasize overseas sales.

To really move forward, however, Washington must address the currency issue that Clay considered so important. The dollar remains too expensive, making U.S. exports far too costly in the global arena. This overvalued dollar also makes imports much cheaper in the U.S. market. Such a lopsided exchange rate can easily negate the intended benefits of tariffs and incentives. Henry Clay would urge us to manage the dollar’s exchange rate actively—to ensure that imports do not further displace American-made goods and labor.

It’s time to stop being embarrassed about developing our country. The U.S. consumer market should no longer be traded away by the futile hope that other nations will emulate American economic policy. Instead, we need to protect our industrial base, invest in infrastructure, and sell more in our wealthy home market. A twenty-first-century version of the American System isn’t just desirable—it’s essential.

Michael Stumo is CEO of the Coalition for a Prosperous America. Follow him at @michael_stumo.

Image: Songquan Deng / Shutterstock.com.