Clashing Over Commerce: A History of US Trade Policy (Markets and Governments in Economic History)

by Douglas A. Irwin

US trade policy has been directed toward achieving three principal objectives: raising revenue for the government by levying duties on imports, restricting imports to protect domestic producers from foreign competition, and concluding reciprocity agreements to reduce trade barriers and expand exports. These three Rs—revenue, restriction, and reciprocity—have been the main purposes of US trade policy. While all three have been important throughout history, US trade policy can be divided into three eras in which one of them has taken priority. In the first era, from the establishment of the federal government until the Civil War, revenue was the key objective of trade policy. In the second era, from the Civil War until the Great Depression, the restriction of imports to protect domestic producers was the primary goal of trade policy. In the third era, from the Great Depression to the present, reciprocal trade agreements to reduce tariff and non-tariff barriers to trade have been the main priority.

This political equilibrium was disrupted by the Civil War, which shifted political power from the low-tariff Democrats in the South to the high-tariff Republicans in the North. During this second era, from 1860 until 1934, the primary goal of trade policy was the restriction of imports to protect certain industries from foreign competition.

From 1860 to 1913, import duties generated about half of the government’s revenue; after the introduction of the income tax in 1913, only a small fraction of government revenue has come from import duties. From

This political equilibrium was disrupted by the Great Depression, which shifted political power to the low-tariff Democrats in the election of 1932. In the third era, from 1934 to the present, reciprocity became the principle objective of trade policy, with the goal of opening up foreign markets for US exports. Reciprocity involves the negotiation of agreements with other countries to reduce trade barriers; that is, the United States agrees to reduce its tariff on foreign goods in exchange for foreign tariff reductions on US goods.

Because high foreign trade barriers were imposed during the Great Depression and were detrimental to US exports, Congress delegated such powers to the president in the Reciprocal Trade Agreements Act of 1934.

Partly as a result of such agreements, tariffs have fallen to historically low levels. After collapsing in the 1940s, largely due to rising import prices during and after World War II, the average tariff on dutiable imports stood at about 10 percent by the early 1950s and then declined to about 5 percent by the late 1970s, about where it stands today.

The policy outcomes reflect compromises and trade-offs between many different considerations (domestic and foreign) and objectives (political and economic). As House Speaker Thomas Reed (R-ME) quipped, “the only place you can pass a perfectly balanced tariff is in your mind: Congress will never pass one.”12

In terms of economic geography, the production of goods that can be traded across countries—the cultivation of agricultural crops, the extraction of mineral resources, and production of manufactured goods—tend to be located in certain parts of the country, where they can remain for decades, if not centuries. The composition of trade—the types of goods exported and imported—also tends to be stable over time. This means that the nation’s farmers, miners, and manufacturers have long-standing but conflicting interests over trade: some export to foreign markets and want relatively open trade, while others face foreign competition and want protective tariffs to keep imports out of the domestic market. Thus, different regions of the country, with their different producer interests, tend to have fairly stable preferences for certain trade policies. Because members of Congress usually reflect the interests of their constituents, Congressional voting patterns also show continuity over time.

The most important economic interests that influence trade policy are domestic producers—namely, firms and the workers they employ. It is often said that the United States has a “producer-driven” trade policy, in that members of Congress and executive branch officials are particularly responsive to the nation’s farmers, miners, and manufacturers.

A proposition known as the Lerner Symmetry Theorem holds that a tax on imports is equivalent to a tax on exports. In effect, by levying a tax to restrict imports, policymakers are also levying a tax that restricts exports.

Madison and the framers of the Constitution designed American political institutions to make it difficult to enact large policy changes. They divided power within the federal government to provide checks and balances on the ability of any group to dominate the system. Power was dispersed across three entities—the House of Representatives, the Senate, and the executive—each of which represented a different constituency and would have to approve legislation before it became law. By creating three potential roadblocks (or veto points) to the enactment of legislation, the framers built into the political system a strong status-quo bias. This constitutes another reason for the stability of policy over time.

Vilfredo Pareto (1971 [1909], 379) pointed out long ago, “A protectionist measure provides large benefits to a small number of people, and causes a very great number of consumers a slight loss.” This makes it relatively easy to impose import duties, as does the legislative practice of logrolling, or vote trading.23 Furthermore, once in place, import restrictions are difficult to remove. A reduction in a tariff will bring certain harm to particular groups and uncertain gains for others. As a result, those facing large capital losses will fight against such a policy change much more vigorously than the many potential beneficiaries will fight for the policy change.24 This makes it difficult for members of Congress to vote for lower tariffs; it has been said that doing so is an “unnatural act” for any politician.

Loss aversion works at society level in the same way ift works at an individual level

Presidents tend to view international trade based on how it affects the nation as a whole and often use trade policy to achieve foreign-policy goals. As a result, they usually aim to expand trade and see trade agreements as a way of projecting America’s power and influence around the world. At the same time, presidents do occasionally support import restrictions for domestic political purposes.

The infrequency with which one party replaces another in controlling government is an important factor in explaining the persistence of existing policies. In fact, about 40 percent of the seventy-seven Congresses since the end of the Civil War have been under divided government, during which time major policy changes were nearly impossible.30

The writer Ambrose Bierce (1911, 258) once defined politics as “a strife of interests masquerading as a contest of principles.” Even Alexis de Tocqueville (2004 [1848], 202) supported this interpretation in writing that a politician “first tries to identify his own interests and find out what similar interests might be joined with this. He then casts about to discover whether there might not by chance exist some doctrine or principle around which this new association might be organized, so that it may present itself to the world and gain ready acceptance.”

True for politics and so much of corporate life also

Similarly, the outbreak of World War I led a congressman from Tennessee to believe that governments fighting over markets and scrambling to create colonial trade blocs had been an important cause of the conflict. He became convinced that freer world trade could make a positive contribution to world peace. That congressman, Cordell Hull, eventually became Secretary of State (serving from 1933–44) and worked tirelessly to help reduce trade barriers around the world. His purpose was both political (world peace) as well as economic (world prosperity). More than any other individual, Hull was the driving force behind the reciprocal trade agreements program, the framework that guides US trade policy to this day.

The American farmers at the outset of the Revolution were utterly dependent, therefore, for their growth and prosperity, on the sale of farm produce in overseas markets, as were American fishermen and lumbermen. Any proper economic map of America at the beginning of the Revolution would show America as a mere fringe between the Atlantic Ocean and the Appalachian Mountains, with a network of lines crisscrossing the Atlantic between America and the West Indies, Africa, the Mediterranean, and the British Isles. Most Americans of the eighteenth century understood this, and they were more concerned with what went on in those areas than they were with what went on a hundred miles inland from the ocean, for it was in the far-flung seaports scattered around the Atlantic Ocean that Americans marketed their surpluses of tobacco, rice, indigo, wheat, and Indian corn. Hence it was that American newspapers were filled with political news, and crop and weather conditions even in such far-away places as Turkey and Russia, for what happened there might well affect the price of American wheat and corn.

Explains why USA has historically taken so much interest in global affairs, especially Europe

The importance of foreign trade in an economy is commonly measured by the ratio of exports or imports to gross domestic product (GDP). In

However, most non-British imports, whether from Europe or Asia, first had to be shipped through Britain. About 20 percent of the colonies’ imports from Britain consisted of foreign goods that originally came from Asia, mainly tea and pepper, or from Europe. This artificial routing through Britain involved extra fees, commissions, warehouse rents, and transportation costs and is estimated to have raised the costs of imports of European and Asian goods by about 20 percent.8

Extra fees by middlemen has a long history

At the same time, such trade regulations did adversely affect certain groups, particularly tobacco farmers. They and others were to become among the most vocal proponents of independence and played a catalytic role in the drive for national sovereignty.

The falloff in North American orders was keenly felt in Britain, which was also experiencing an economic downturn, and British merchants flooded Parliament with petitions describing the hardship and loss of employment arising from the cancellation of American orders for their goods.19 Even if the economic impact of non-importation was modest compared to the recession, the political impact was large enough that the protesters achieved their objective: pressure from British manufacturers was an important factor in Parliament’s decision to repeal the Stamp Act. Recognizing that the Stamp Act and sugar duties were generating little revenue and much ill will, Parliament repealed both measures in March 1766. The non-importation movement quickly collapsed once word of the repeal arrived in the colonies.

The revenue implications of bringing the smuggled tea into legal channels of trade and taxing it were enormous.24 Even though Britain was actually reducing the price of legal tea imports, colonial merchants—many of whom were probably complicit in the illegal smuggling—protested the granting of a monopoly privilege to the East India Company and the payment of duty. They succeeded in riling up other colonists against the British action and, in the fall of 1773, American ports began turning away East India ships loaded with tea. In Boston, several ships landed but were not permitted to unload. At the instigation of local merchants who profited from smuggled tea, crowds gathered near the docks on December 16, 1773. About one hundred fifty people stormed an East India Company ship and dumped 342 chests of tea (about 90,000 pounds) into the harbor. Thus, the famous Boston Tea Party was not a protest about an unfair tax increase, since the duty was actually being reduced, but about a British attempt to make the smuggling of tea unprofitable so that the East India Company could gain control of the trade.

Furthermore, article 9 of the Articles of Confederation explicitly stated that “no treaty of commerce shall be made whereby the legislative power of the respective States shall be restrained from imposing such imposts and duties on foreigners, as their own people are subjected to, or from prohibiting the exportation or importation of any species of goods or commodities whatsoever.” Thus, the government lacked any capacity to respond to British commercial regulations. There could be no national trade policy because there were thirteen state trade policies.

Writing to Jefferson, Adams said, “We must not, my Friend, be the Bubbles of our own Liberal Sentiments. If We cannot obtain reciprocal Liberality, We must adopt reciprocal Prohibitions, Exclusions, Monopolies, and Imposts—our offers have been fair—more than fair. If they are rejected, We must not be the Dupes.”

The complete ban on export taxes then passed by a vote of 7–4, with the South voting as a bloc in favor (Maryland, Virginia, North Carolina, South Carolina, and Georgia, joined by Massachusetts and Connecticut), with New Hampshire, New Jersey, Pennsylvania, and Delaware opposed. As a result, article 1, section 9, of the Constitution states that “no tax or duty shall be laid on articles exported from any state.”

As students of the Enlightenment and opponents of British mercantilism, the Founding Fathers favored free and open commerce among nations and the abolition of all restraints and preferences that inhibited trade.1 “It is perhaps an erroneous opinion,” Benjamin Franklin wrote in 1781, “but I find myself rather inclined to adopt that modern one, which supposes it is best for every country to leave its trade entirely free from all encumbrances.”2 Thomas Jefferson also extolled the benefits of free commerce. “I think all the world would gain by setting commerce at perfect liberty,” he wrote in 1785.

During this period, the term free trade did not mean zero tariffs and the absence of any government restrictions on trade. It was generally understood that governments would need to tax trade for revenue purposes. Instead, free trade meant the freedom of a country’s merchants to trade anywhere they wanted without encountering discriminatory prohibitions or colonial preferences as long as they paid the required duties. Free trade could be more accurately characterized as open trade in which countries could impose import duties and regulate shipping but did so in a non-discriminatory manner.

Hence, the nation’s policymakers faced two critical questions: Should the United States enact its own navigation laws to favor American shipping over foreign carriers? And should the United States respond in kind to foreign trade barriers and discriminatory policies that adversely affected its own exports and shipping? Most believed the answer to both questions was an unqualified yes, although there was a spirited debate about how such policies should be designed. Thus, while the founding fathers favored free and open trade in principle, they were also deeply concerned about national defense and foreign discrimination against American commerce.

By contrast, Jefferson and James Madison saw the United States as remaining a largely rural country, primarily devoted to agriculture. Jefferson famously held that “those who labour the earth are the chosen people of God” and were the most virtuous, the most wedded to liberty, and the one’s whose interests were most bound to that of their country. They were suspicious of merchants, who lacked loyalty and virtue, and wanted to avoid manufacturing, which gave rise to workers living in impoverished urban slums where republican virtues would fail to take hold.

As George Washington stated, “It has long been a speculative question among Philosophers and wise men whether foreign Commerce is of real advantage to any Country—that is, whether the luxury, effeminacy, & corruption which are introduced by it, are counterbalanced by the conveniences and wealth of which it is productive.” But, Washington added, the answer is of “very little importance to us” because “the spirit for Trade which pervades these States is not to be restrained.”14 This reality forced Jefferson, with some reluctance, to conclude that “our people have a decided taste for navigation and commerce. They take this from their mother country, and their servants are in duty bound to calculate all their measures on this datum.”

As this exchange demonstrates, within just a few days of the opening of Congress, the great debate over trade policy was joined. That perennial debate revolves around the proper objective of import duties: to raise revenue, to restrict imports in order to protect domestic manufacturers, or to achieve reciprocity—or some combination of the three.

President George Washington signed the tariff bill on July 4, 1789, making it the second law enacted by the new federal government. The duties went into effect on August 1, 1789. By later standards, Congress had acted quickly, but not as fast as Madison had wanted to get revenue from the spring importation.

Finally, the law established drawbacks, a provision for the rebate of import duties paid on goods that were subsequently reexported to another destination.

This was a significant achievement, given the almost complete dependence of the federal government on customs for its revenue. In 1792, for example, customs duties (both on imported merchandise and shipping tonnage) accounted for $3.4 million of the $3.7 million of total government receipts. In

Thus, although the average tariff was initially around 12 percent in 1790 and 1791, subsequent revisions quickly brought it up to about 20 percent by the mid-1790s, as Figure I.1 showed.

In Hamilton’s view, this last factor—the artificial encouragements in other countries—constituted the greatest obstacle. This meant that domestic manufacturers not only had to contend with the “natural disadvantages of a new undertaking” but also “the gratuities and remunerations which other governments bestow” on their own producers. “To maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable,” he declared. “The disparity in the one, or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government.”

Less than a month after Hamilton’s report was issued, Madison complained that it “broaches a new constitutional doctrine of vast consequence . . . I consider it myself as subverting the fundamental and characteristic principle of the Government, as contrary to the true & fair, as well as the received construction, and as bidding defiance to the sense in which the Constitution is known to have been proposed, advocated and adopted. If Congress can do whatever in their discretion can be done by money, and will promote the general welfare, the Government is no longer a limited one possessing enumerated powers, but an indefinite one subject to particular exceptions.”

Limiting the power of government is not a new trope

The Report on Manufactures would influence the public debate over trade policy and government’s role in promoting manufactures for many decades to come. The report was frequently cited to justify high tariffs to protect domestic manufacturers from foreign competition. Yet Hamilton was much less of an advocate of “protectionism” than he was later made out to be.49 Because revenue considerations were absolutely paramount to him, Hamilton preferred modest duties on imports, not excessively high duties. Moderate duties would keep imports flowing into the country, providing the essential tax base that would produce a reliable stream of revenue to fund government expenditures and establish the public credit. “Experience has shown that moderate duties are more productive [of revenue] than high ones,” Hamilton observed in 1782.

“The key word in Hamilton’s conception was encouragement, not protection” for manufacturers.

This divergence of views led to the emergence of two opposing political factions, the Federalists, led by Washington and Hamilton, and the Republicans, led by Jefferson and Madison. (In the 1830s, the Jeffersonian Republicans became known as the Democrats and the Federalists had become the Whigs and then the Republicans in the 1850s.)

the end, Jefferson believed that he had little choice but to opt for an embargo. “The alternative was between [the embargo] and war, and, in fact, it is the last card we have to play, short of war.”89 On December 18, 1807, Jefferson called on Congress to ban all American ships from departing to foreign ports.90 In effect, the president was calling for a stop to all foreign trade. The ostensible reason for doing so was to protect the country’s ships and sailors from British and French encroachments and deprive the belligerents of American goods, forcing them to change their policies. The decision to impose a trade embargo had its roots in the belief—which, as we saw in chapter 1, was only partially true—that the non-importation movement in the 1760s and 1770s had succeeded in changing British policy toward America. As they had in the early 1790s, Jefferson and Madison continued to believe that the United States possessed sufficient economic leverage to influence British policies.

The South also suffered enormously from the loss of commodity exports, although many of its staples could be stored, and cultivators held out hopes that their goods could be exported later in the year or in 1809. Despite the hardship, the South supported the embargo as a necessary burden. One South Carolinian noted that it is “difficult to imagine the pecuniary effect and the individual distress, occasioned by the embargo. . . . Yet, notwithstanding this distress, . . . there is everywhere an acquiescence in the measure proceeding from a confidence in the government.”96 The South still deeply resented Britain and remained loyal to Jefferson and the Republicans. Unlike New England, there were virtually no anti-embargo meetings or protests from Virginia to Georgia, although planters hoped the embargo would work and be lifted quickly.

Interesting to see that this trend of tolerating short term pain by trade wars continued to hold up in the same way in the South in the original trade war of 1807 as now with China in 2019

These discussions led Story to believe that Jefferson was determined on protracting the embargo for an indefinite period, even for years. I was well satisfied, that such a course would not and could not be borne by New England, and would bring on a direct rebellion. It would be ruin to the whole country. Yet Mr. Jefferson, with his usual visionary obstinacy, was determined to maintain it; and the New England Republicans were to be made the instruments. Mr. Bacon and myself resisted, and measures were concerted by us, with the aid of Pennsylvania, to compel him to abandon his mad scheme. For this he never forgave me. (187)117

Yet Jefferson steadfastly maintained that economic pressure on Britain could have succeeded if it had been given more time. Shortly after leaving office, Jefferson held that the embargo “would have saved us had it been honestly executed a few weeks longer.” In 1815, Jefferson insisted that “a continuance of the embargo for two months longer would have prevented our war” of 1812. And just months before his death, Jefferson referred to the embargo as “a measure which persevered in a little longer . . . would have effected its object completely.” Yet there is no evidence to support these views.118

Trade embargoes work muchb better in theory than in reality as Jefferson learned.

Alexander Hamilton, although no longer alive, was one person who almost perfectly anticipated the trade and revenue effects of the embargo, and even its domestic political repercussions. In 1794, Hamilton argued against any embargo against Britain and predicted: “The consequences of so great and so sudden a disturbance of our Trade which must affect our exports as well as our Imports are not to be calculated. An excessive rise in the price of foreign commodities—a proportional decrease of price and demand for our own commodities—the derangement of our revenue and credit—these circumstances united may occasion the most dangerous dissatisfaction & disorders in the community and may drive the government to a disgraceful retreat—independent of foreign causes.”119 With the except for the derangement of credit, which was more firmly established in 1808 than it had been in 1794, each one of Hamilton’s predictions came true.

Hamilton was the boss

As the United States moved toward war, Britain was showing the first signs of weakening. Unlike Jefferson’s embargo three years earlier, the non-importation policy starting in March 1811 coincided with an economic slump in Britain. Although the extent to which the ban on imports exacerbated the recession is uncertain, British manufacturers believed that ending non-importation would increase demand for their goods. Unemployed workers in Manchester, Liverpool, Birmingham, and other industrial cities sent dozens of petitions to Parliament demanding repeal of the Orders in Council so that the United States would end its non-importation policy.131 Already suffering under heavy taxes due to the war against France, Britain did not welcome the prospect of another war in North America. The weak economy and pressure from labor and industry helped persuade the British government to relax its policy toward neutral shipping. On June 23, 1812, Foreign Secretary Lord Castlereagh announced the suspension of the Orders in Council that had been an irritant to Anglo-American relations for so long. As Castlereagh conceded in his diary, “One does not like to own that we are forced to give way to our manufacturers.”132 The apparent vindication of the Republican policy of commercial pressure was an illusion, to some extent, because the policy worked only when it coincided with a recession in Britain that was not itself the result of US trade policies.133

Great example of correlation is not causation

Thus, on June 19, 1812, just two days after the British government announced that it was suspending the Orders in Council, the United States formally declared war on Britain. Later that month, somewhere in the north Atlantic, the ship from Britain bringing news of the Orders in Council suspension passed the ship from the United States bringing news of the declaration of war. Had there been more rapid means of communication, the conflict might have been averted. “Madison later indicated that the declaration of war ‘would have been stayed’ if he had known about the repeal of the Orders,” Hickey (1989, 42) writes. “But without a [transatlantic] cable, it took weeks for the news to reach America, and by then the die was cast.”

Wow, sounds dramatic now that faster comms may have prevented a war

The wartime embargo proved to be very short-lived. In April 1814, following the initial British victory against Napoleon, European ports were reopened to US shipping. A large majority in Congress voted to repeal both the embargo and non-importation, but this made little difference to trade. With Napoleon no longer a threat, Britain shifted its military forces across the Atlantic to confront the United States. The Royal Navy tightened its blockade, extended it to New England ports as well, and managed to sail up the Potomac River and burn the White House and Capitol building.

“parties appeared almost to switch positions on the issue of manufacturing and the role of the federal government in the economy. . . . A British traveler to Philadelphia at this time observed that the Federalist and Republican parties were respectively ‘merely other terms for importers and manufacturers.’”

Thus, the tumultuous experience of dealing with British trade policies after independence had transformed Thomas Jefferson and his fellow Republicans. In 1785, Jefferson lauded farmers as the chosen people of God and pleaded, “Let our workshops remain in Europe.” In 1813, Jefferson now wrote that “out of the evils of impressment and of the orders in council, a great blessing for us will grow. I have not formerly been an advocate for great manufactories. I doubted whether our labor, employed in agriculture, and aided by the spontaneous energies of the earth, would not procure us more than we could make ourselves of other necessaries. But other considerations entering into the question, have settled my doubts.”142 Three years later, Jefferson was even more enthusiastic: “Within the thirty years that have elapsed [since the publication of Notes on Virginia], how are circumstances changed! To be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of a agriculturalist. . . . . Experience has taught me that manufactures are now as necessary to our independence as to our comfort.”143

I wonder whether Indian independence leaders read about this change in view of Jefferson. For a few decades after independence, India had a similar view of considering agriculture superior to manufacturing