As Prepared for Delivery on January 20, 2026
The Hamiltonian Economic System That Too Many Have Forgotten
It is great to be here at the Davos USA House with you all. Thank you for joining me—and braving the cold Swiss winds—to hear about the historic American approach to international economic policy. As you will see, the default position for most of U.S. history has been a pragmatic mix of tariffs, state involvement, and optimizing trade arrangements. President Trump has revived this approach with great effect. I will also describe in some detail the influence that approach had on development strategies around the world and the post-war global order. And, of course, I will provide my views on how all of this is relevant as we face challenges in the international economic system. After reviewing all of this, you will likely agree that the problems and solutions of the past look a lot like the problems and solutions of today. This may get a little dense as we walk through American history, so stay with me!
We should start at the beginning. On another cold day—December 5, 1791—America’s first Treasury Secretary, Alexander Hamilton, delivered his Report on Manufactures to Congress. In that report, Hamilton articulated a plan for the United States to shake off its economic dependency on the British Empire.
Hamilton argued for strong economic policy that would allow America to become an industrial power. He called for a combination of tariffs and subsidies to incentivize industrialization. Hamilton believed that such measures were necessary to promote the development of industries, like textiles, that needed protection from dominant foreign producers to develop the scale that would allow them to supply U.S. needs and be globally competitive. This vision, as I will discuss, laid the foundation for American, and even global, prosperity in the 19th and 20th centuries.
Hamilton immediately shifted from words to action. He created the “Society for Establishing Useful Manufactures,” and founded the city of Paterson, New Jersey to sustain it. This government-backed industrial organization made large investments in textile infrastructure that soon blossomed into a massive and durable industry. The growth continued unabated for almost two centuries, and by the 1890s nearly half of all silk in the United States was processed in this tiny city of less than nine square miles.
The manufacturing ecosystem that emerged in Paterson made it a hub of activity far beyond textiles. New factories kept springing up in the city—making railcars, pipelines, and weather balloons. A prototype submarine was developed there in the 19th century. By the 20th century, Paterson had become an aerospace hub. The Curtiss-Wright Corporation turned out engines that powered aviation pioneers such as Amelia Earhart, as well as the iconic B-17s and B-25s that helped achieve victory against fascism in World War II.
But, as the twentieth century came to a close, the industrial might of Paterson began grinding to a halt. Other nations had learned Hamilton’s lessons, while American leaders slowly forgot them. As the United States chose to favor more imports and mothball its original industrial toolkit, countries across Europe and Asia doubled down on that toolkit. While American policymakers decided to abandon manufacturing and production, our trading partners pushed for dominance in sectors we failed to prioritize or even voluntarily abandoned.
New Jersey lost almost 47 percent of its manufacturing jobs after 1994, in the period after the United States entered the World Trade Organization, the North American Free Trade Agreement, and granting China Permanent Normal Trade Relations. Paterson became one of the poorest cities in the United States. The project that Hamilton began was undone by a U.S. experiment in so-called free trade—one that tied America’s hands behind its back while failing to address the practices of countries that had weaponized our methods.
Paterson is a good example of what has gone right and wrong with American trade policy. I want to walk you through more of our history so you can understand how we became an industrial power, how we lost our way, and the path back to pragmatic trade policy.
The American Project
As I mentioned, Alexander Hamilton called for using tariffs and subsidies to develop America into an independent manufacturing power. Hamilton tragically died before his 50th birthday, but others continued to pursue his vision.
A Kentucky senator named Henry Clay took up Hamilton’s cause. The economic dependency on the British Empire that concerned Alexander Hamilton continued to loom over the United States. Following the War of 1812, Clay convinced Congress that we needed to take bold action in order to reverse this, and allow the United States to develop into an industrial power in its own right.
Over decades in Congress, he crafted consensus around what he called the “American System.” This program combined high tariffs and state support for industry with a belief in the power of a large, internal, free market. In other words, the U.S. Constitution was our most important free trade agreement, and countries outside the Constitution were not entitled to the same benefits of freedom of commerce. Trade between the states would be free and seamless, but access from other countries was carefully limited to encourage the development of a robust American industrial commons. Government helped build canals and railroads, and promoted competition within the country. The formula worked. Towns like Paterson, New Jersey, thrived.
By the time of the Civil War, the American System had built up the beginnings of the American industrial machine. American per capita industrial output increased 525 percent from 1750 to 1860, eclipsing all other major countries other than the UK. However, American ingenuity and productivity was held back by Southern slavery—which kept the country tied to an exploitative and backwards planter class that pushed ceaselessly for free trade. Southern millionaires wanted to sell the cotton that their slaves grew to the British and buy cheap foreign manufactured goods in return, and had no interest in supporting American industry, or any idea of a broader American project. The South at that time preferred a colonial model for its own economy, playing the role of commodity-producer for European empires.
Therefore, it will come as no surprise that President Abraham Lincoln was a strong proponent of tariffs. Or, in President Lincoln’s own words: “My politics are short and sweet, like the old woman's dance. I am in favor of a national bank. I am in favor of the internal improvement system, and a high protective tariff.”
Henry Carey was an influential advisor to Lincoln. He did more than anyone, arguably even Hamilton, in laying out the rationale for America’s developmental agenda—and as I will discuss later—inspiring much of the rest of the world to copy it. He had two core arguments, and they are worth considering today.
First, Carey argued that tariffs were essential to create what he called a “Harmony of Interests.” In his view, growth in the domestic market should create more and better jobs for regular people, who then spend their newfound money on domestically produced goods, which then further grows the economy in a positive cycle. Carey argued that the resulting diversified economy would be more resilient, and would actually grow faster by creating network effects across sectors and better tapping the diverse talents of entrepreneurs and workers. It was not a policy to curtail consumption, but was designed to promote consumption of domestic goods produced by Americans.
Second, Carey believed in the dignity of labor and was a passionate opponent of poverty and exploitation. His work for the Union cause helped dismantle slavery at home, but Carey realized that American abolition was not enough. He argued that the United States needed tariffs to counteract the effects of abusive labor, environmental, and other practices around the world. Carey attacked the colonialism of European empires like Britain, France, and Spain. He explained that the United States needed to protect its workers from having to compete against abusive regimes that did not value the dignity of the people they mercilessly ruled. He argued that this was essential to allow American citizens to progress and assert their rights, and he saw that the alternative was a downwards race to the bottom.
The Union won the civil war, and took Carey’s advice. America raised its tariffs on the world, and economic development surged even faster. By 1913, U.S. per capita industrial output was the greatest in the world, 10 percent greater than that of the United Kingdom, and 600 percent larger than it was in 1860. According to one study, total American industrial production soared by 1,030 percent from 1860 to 1910. However, this growth came with a negative side effect. Industrial magnates worked to capture the gains for themselves at the expense of the nation, and formed cartels and monopolies to better exploit both workers and consumers.
President Teddy Roosevelt, who was in office in the first decade of the 20th century, realized that the American developmental project could not continue to be successful without a return to robust competition. For tariffs and protection to drive investment, firms in the domestic market must feel competitive pressure to invest – and not just raise prices and capture rents.
President Roosevelt did something about it and went to war with the trusts. In the process, he created the foundation for the antitrust law that regulates our market today. At the same time, Roosevelt doubled down on protection and American industrial development. In what may be my favorite quote, he once wrote that “[i]n this country pernicious indulgence in the doctrine of free trade seems inevitably to produce fatty degeneration of the moral fibre.” He did not mince words.
As the Great Depression set in two decades later, Congress famously (or perhaps infamously) raised tariffs through the Smoot Hawley bill. Although that law is the bane of many high school economics teachers (those of you who have seen the movie “Ferris Bueller’s Day Off” will know what I mean), most economists—including Barry Eichengreen and Paul Krugman—have actually shown that the tariffs did little to worsen the crisis, and may have even had a slight expansionary effect. Which makes sense, as America had been maintaining high tariffs for much of the previous century. Smoot Hawley simply raised the average tariff rate from 40 percent to 46 percent. Tariffs are not a magic wand, and did not help prevent or reverse the Great Depression—but they did not make the crisis noticeably worse.
That is why President Franklin Delano Roosevelt did not fundamentally change the tariff landscape when he implemented his transformational New Deal program – despite shaking most other pillars of American society. The 1936 Democratic Party platform emphasized that FDR’s Administration would, and I quote, “continue as in the past to give adequate protection to our farmers and manufacturers against unfair competition or the dumping on our shores of commodities and goods produced abroad by cheap labor or subsidized by foreign governments.”
FDR also decided to pursue limited, reciprocal trade deals. That might sound familiar to some of you, especially if any trade ministers who I have had the pleasure of negotiating with are here today.
Under these New Deal-era Reciprocal Trade Agreements, the United States lowered tariffs for countries that removed what Secretary of State Cordell Hull called “discriminations and obstructions,” but continued to put restrictions on unfairly traded imports that threatened our workers and producers. This made good sense, especially from America’s position of post-war industrial dominance and given the desire to rebuild the world’s economies after the war.
Through the middle of the twentieth century, American presidents were not shy to take bold trade action when necessary. Lyndon Johnson imposed 25 percent tariffs on pickup trucks, that we still have to this day, in a trade dispute with Europe about American chicken exports (a dispute that—I hate to tell you—we also continue to have with the EU 60 years later). President Nixon put a 10 percent tariff on the world in 1971 in response to an emerging—but tiny, by contemporary standards—trade deficit.
Through it all, America pursued the industrial strategy that Alexander Hamilton had laid out more than two hundred years ago. We protected our industry from foreign competition where that was necessary to unlock growth or to counteract unfair production conditions abroad. The American project was pragmatic and multifaceted, combining the power of market competition with appropriate government policy action to encourage economic development.
We leveraged the same playbook when we faced the challenge of a large trade deficit back in the 1980s due to non-market policies in a resurgent Japan. Through quotas on autos, tariffs on steel, currency adjustment, and innovative industrial policy programs—such as the “Sematech” semiconductor research program—we reversed course and powered into the 1990s with an unrivaled industrial base and innovation engine.
At the end of the Cold War, as many reveled in what they thought was the “end of history,” American policymakers largely jettisoned our historic and pragmatic approach to trade—or perhaps grew complacent on the assumption of endless prosperity. We pursued hyperglobalization regardless of the consequences, and we bound our hands with NAFTA and the World Trade Organization in ways that made it impossible for the United States to effectively respond to foreign practices and defend our industrial production.
Global Impact of American Developmental Thought
Other countries, on the other hand, never forgot the American playbook.
They had shaped their economic systems to learn from the United States, and were not foolish enough to stop when the U.S. decided to pursue globalization as an end in itself. The American System had become a global economic system—shaping the structures of economies far beyond our borders.
In the middle of the 19th century, a German economist named Friedrich List read Alexander Hamilton’s work. He was inspired by it, and developed a comprehensive and influential theory of economic development that helped spread the American System around the world.
List emphasized the importance of strategic trade measures to cultivate what he called the aggregate “productive powers” of a country over time. Like Alexander Hamilton and Henry Clay, List emphasized the need for tariffs to counteract the advantages enjoyed by powerful foreign firms—such as subsidies and entrenched economies of scale. He also echoed the American call for robust domestic competition to promote productive investment, and became a champion of strategic state support for development.
List’s propagation of the American System had a potent effect on industrial development worldwide. For example, influenced by these ideas, Otto von Bismark raised German tariffs in 1879, shortly after he unified Germany into one powerful country. The Germans who promoted this shift were explicitly influenced by Henry Carey and the American System.
When he was speaking with industrialist Wilhelm von Kardorff, a prominent German advocate of Henry Carey’s arguments, Bismark apologized for his earlier support for free trade. He told Kardorff that, and I quote, “now I am a complete convert and want to make good my earlier errors.” For better or worse, Bismark’s experiment worked, and set the model for Germany’s rapid economic development into an industrial powerhouse over the next century and a half.
The American project also influence trade and economic policy in Japan. American ideas aligned well with the approach to economic development promoted by Meiji statesmen such as Okubo Toshimichi and intellectuals such as Fukuzawa Yukichi. The pioneering late 19th century finance minister, Matsukata Masayoshi, often invoked List and Hamilton when he successfully pushed for higher tariffs, a strong central bank, and government support for industry. The result was unprecedently fast state-backed industrialization. Japan became one of the world’s great manufacturing nations – and its American-style model continued to power its economy in the post-war period.
All the great economies of the world learned from the American example. Canada’s 1879 National Policy, which significantly raised tariffs to promote Canadian industrial development, was strongly influenced by Henry Carey’s thought. Much later, to address Canada’s trade deficit, the 1965 U.S.-Canada auto pact required U.S. automakers to produce more cars in Canada. In Australia, leaders in in the state of Victoria cited Carey and other American thinkers in promoting a series of tariff increases from the 1860s to the 1890s. It is not a coincidence that Victoria remains Australia’s premier manufacturing state to this day.
The Chinese nationalist leader Sun Yat-sen also emphasized developmentalist ideas—such as trade protection, subsidies, and state-backed financing—that later inspired Deng Xiaoping and helped create the Chinese industrial juggernaut. And in Taiwan, “Science City” clusters supported by the government provide the research, development, and manufacturing ecosystems for the world’s greatest semiconductor manufacturing zone.
Wherever we dig into stories of successful economic development, we see Hamilton and his successors at work. That much is clear.
What Got Lost in the Post-War Global Order?
After the end of World War II, everyone assumed that Hamiltonian economic policy was the default among nations. The negotiators at Bretton Woods and other economic conferences wrote new rules around it, and baked tariffs and trade measures into the post-war international economic order. That makes sense, because all major nations used tariffs and industrial policy to support their economic development.
The question for the international trading system, to quote Friedrich List from back in 1837, was “how the common interests of the various nations can best be served and how opposing interests could be reconciled.” This was particularly important to a world reeling from World War II. The Allies desired to create institutions to resolve economic conflicts amongst themselves, while allowing different countries to pursue their own development agendas towards the goal of reconstruction. This was not an easy task, and solutions were not obvious.
John Maynard Keynes—the great British economist and the British representative to the Bretton Woods conference—had an idea for how this could be done. He argued that the international economic system needed to be organized around the principle of balance. Nations could pursue what Keynes called “national self-sufficiency” through different models of economic development, but a requirement of long-term balanced trade would protect everyone against so-called “beggar-thy-neighbor” tactics.
Keynes—and his contemporaries like Joan Robinson—argued that, in most circumstances, a country’s persistent global trade surplus is very strong evidence that it is pursuing economic growth at the expense of its trade partners. In other words, a country that is structurally exporting more than it is importing likely is harming the rest of the world to fuel its own growth. It is not producing to meet its needs or trade for import: it is trying to have a short cut to growth at others’ expense. To put it even more clearly—a country should export in order to import, and if that is not happening then it is a clear sign that something is wrong.
Many of Keynes’ most creative ideas for how to deal with this problem, including a proposed global currency, were left on the cutting room floor at Bretton Woods. The system that emerged did not include structural mechanisms to discourage countries from accumulating persistent trade surpluses. If I am being honest, the fact that the United States was running a massive trade surplus at the time may have had something to do with it. That is unfortunate, and we all have to deal with the results today.
But Keynes’ arguments were not completely lost. The trade rules written at the time still reflected a healthy dose of reality and incorporated the lessons of history.
The General Agreement on Tariffs and Trade (called the GATT) was signed in 1947. It is worth noting that the GATT is still the legal text underpinning the WTO. The arguments of Hamilton and Clay and Carey are all over the GATT. That agreement explicitly acknowledges the legitimacy of tariffs as a tool for economic development and the importance of balanced trade.
For example, Article 18, which is literally called “Governmental Assistance to Economic Development,” explicitly states that “it may be necessary … in order to implement programmes and policies of economic development designed to raise the general standard of living … to take protective or other measures affecting imports…”
The GATT says such tariffs should only be used by countries looking for “progressive development of their economies.” But aren’t all countries seeking progressive economic development?
These days, the lawyers in Geneva have interpreted that section to apply only to self-declared “developing” nations. However, at its core, the GATT acknowledges the legitimacy of precisely the same strategies that the so-called “developed” nations have always used—and which many continue to use—to gain and maintain their prosperity.
The GATT also incorporated tools that countries can use to push back against imbalanced trade and its harmful effects. Article 12 says that countries that have a persistent trade deficit can impose tariffs to protect the “balance of payments.” This means that deficit countries can use tariffs to protect their citizens from harmful effects, such as excessive debt or currency devaluation, that would otherwise be transmitted to them by the policies of persistent surplus nations. In other words, it stops countries from externalizing their own overproduction or lack of domestic demand to other countries.
Henry Carey’s arguments about protecting workers from bad practices abroad are reflected in GATT Article 6. That section says that countries can raise tariffs to respond to foreign subsidies or dumping. All developed economies regularly use this mechanism to impose tariffs against countries that are undercutting their domestic producers through unfair practices.
The list goes on and on. The international trade rules, as originally written after World War II, do not promote free trade as an end in itself. They acknowledge that countries use tariffs and other forms of intervention to build their economies and protect themselves against unfair competition. They acknowledge that deficit countries have to respond to harms caused by persistent surplus economies.
The GATT rules were intended to be flexible. They allowed countries to use the methods they need to support their economy while resolving the conflicts that inevitably emerged.
But these original goals and principles were rejected as the Cold War ended. With the WTO, we created a rigid dispute settlement system, filled by unaccountable bureaucrats in Geneva, that interpreted the rules so narrowly that they lost much of their intended flexibility. The United States changed our laws based on the outcomes of these disputes, even if it was contrary to our negotiated rights under the GATT or WTO agreements or against our national interest. We allowed large non-market economies into the world trading system, gave them the same tariff treatment as we did our closest friends, and did not hold them accountable to the commitments they made in the process.
Most importantly, the United States unilaterally disarmed. We slashed our tariffs below the rates of nearly all our trade partners, and opened our borders to unprecedented, and nearly unlimited, flows of foreign labor, capital, goods, and services. Meanwhile, other countries continued to use the tools that America had innovated in full force to protect its industry, but these were often hidden behind non-tariff barriers like unfair standards or restrictions addressing contrived regulatory concerns. They implemented these measures in order to drive non-economic production capacity and distort global markets. Non-market economies used the full force of their state budget and regulatory apparatus to build massive export capacity disconnected from the market realities of profit, capital allocation, and consumer demand. And the United States let them do it.
But that era is over. The United States is now moving forward to fix historic problems with historic solutions. As Americans take active steps to rebalance our own trade, our partners are free to join with us to build a new international economic system adapted to today’s challenges.
Building a New International Economic System
This time around, the goal of the international economic system must be to prioritize and protect national interests, while ensuring balance and fairness.
Of course, we continue to benefit from detailed rules across many areas, including IP and services, to sustain the modern economy and enable effective international business cooperation.
However, we cannot allow our national interests to be boxed in by outdated frameworks that no longer serve their purpose—if they ever did.
We must make sure that the new system builds in the flexibilities we need to address economic vulnerabilities, prevent exposure to economic coercion, and unlock productivity gains in our domestic markets.
Most importantly, such a system must address structural imbalances head-on, and make long-term balance a cornerstone of international economic policy.
For the United States—the world’s consumer of last resort—this new system will require a long-term reset to higher average tariff rates, while for other countries it will require opening long-closed markets, shifting to greater domestic consumption, and reining in overcapacity. We are already well along this path, as President Trump has increased tariff rates and secured trade arrangements designed to reduce America’s massive global trade deficit. This approach – combined with sensible energy, tax, and regulatory policy – has resulted in increased GDP, reversed the trend in our trade deficit, and boosted wages, particularly for blue-collar workers.
The United States is disrupting the status quo and taking the action needed to protect American interests. The system that has operated for the past three decades required the United States to absorb the ever-rising trade surpluses of other nations. We bought ever-larger amounts of artificially cheap goods funded by constantly growing piles of debt. That approach was not sustainable—economically or politically. Americans have repeatedly chosen to reject it at the ballot box. The new system that is emerging is in the interest of American workers, producers, farmers, and ranchers.
However, the people of Europe, the United Kingdom, Mexico, and other economies are also vulnerable to non-market practices and overcapacity. More and more, workers in those countries are seeing their own livelihoods disappear underneath them due to floods of cheap imports. A balanced international economic order is in their interest as well. If their politicians do not yet understand that they face the same pressures as America, then their voters will soon explain it to them.
Wise leaders must remember the lessons of their past, and use them to adapt to the realities of the present.
I hope our partners across the world, who once studied and replicated the American System on their path to development, will recognize the need to recast the international trading system based on fairness, balance, and national interests.
Thank you, and I look forward to your questions.
