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.

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.

The average tariff is usually set to achieve one of the three objectives of trade policy (the three Rs): revenue for the government, restriction of imports to protect domestic producers from foreign competition, and reciprocity to open foreign markets to exports.

Tariffs can take the form of ad valorem duties (a percentage of the imported good’s value, such as 30 percent) or specific duties (a fixed charge per unit of the imported good, such as $1 per pound or per unit). An important feature of specific duties is that their percentage (ad valorem) equivalent cannot be determined without reference to the price of the imported good. For example, if a specific duty happens to be $5 per imported shirt, then the ad valorem equivalent is 50 percent on a $10 shirt and 10 percent on a $50 shirt. Thus, the ad valorem equivalent of a specific duty is inversely related to the good’s price. Because many tariffs are specific duties, wide swings in import prices have been responsible for large movements in the average tariff during certain periods in history.

Figure I.1. Average tariff on imports, total and dutiable, 1790–2015. (US Bureau of the Census 1975, series U-211–12 for 1790–1970; US International Trade Commission, “U.S. Imports for Consumption, Duties Collected, and Ratio of Duties to Value, 1891–2015,” March 2016, for 1970–2015.)

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. Up to this point, trade agreements had not been feasible, in general, because Congress wanted to maintain control of the tariff schedule and was reluctant to give negotiating authority to the president. 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.

Thus, over the long sweep of history, there have been only two ruptures that have led to major shifts in US trade policy: the Civil War, which marked the transition from revenue to restriction, and the Great Depression, which marked the transition from restriction to reciprocity. The former was associated with a shift in political power between different regions of the country; the latter was associated with a political realignment along with an important institutional change in the trade policymaking process.

The continuity of trade policy is rooted in the country’s stable economic geography (the economic interests located in various regions) along with its stable political geography (the representation of those interests in Congress).

shall see throughout this book how this pattern plays out time and again, making it difficult to change existing policies unless a large shock—such as the Civil War or the Great Depression—comes along and produces a major shift in political power.

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.

since the 1970s, Congress has voted on trade agreements, not tariff rates.

As 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.”

For more than a century after the advent of the Second Party system in the 1830s, Democrats advocated low import tariffs, and Whigs and Republicans advocated high protective tariffs.

In June 1930, a petition signed by more than one thousand economists urged President Herbert Hoover not to sign the Hawley-Smoot tariff bill, but of course he signed it anyway.

With the colonies generally prospering under British rule, something must have changed to bring about the resistance that ultimately led to revolution. That change began after the end of the Seven Years War in 1763, when Britain attempted to institute new policies that the colonists believed would threaten their comfortable state. After 1763, British policy aimed to extract revenue from the colonies to pay for the defense costs incurred on their behalf during the war.

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.

The leader of the high-tariff faction was Henry Clay. He wanted “thorough and decided protection by ample duties” for home manufacturers with the objective of encouraging industrial growth by displacing imports from the domestic market. The country’s national security depended on ending foreign dependence on critical supplies, such as boots and clothing, arms and munitions, Clay insisted, but he also touted the broader economic benefits from encouraging domestic production of manufactures.

competition. The direction of causality is important: Congress did not deliberately create the infant industries through policy measures; the industries emerged and then compelled Congress to enact higher tariffs for their benefit. In other words, Congress was not farsighted in shaping the future path of the economy but simply reacted to the political pressures that it faced.

In 1793, Eli Whitney introduced a new invention, the cotton gin, which led to an astonishing improvement in productivity. It used to take a farmhand one day to remove seed from one pound of cotton fiber, but with the cotton gin the same person could separate the seed from three hundred pounds of cotton fiber per day. In 1793, the United States produced 10,000 bales of cotton, just 1 percent of world production. By 1830, the country produced 732,000 bales of cotton, about half of the world’s production.13

In 1792, the year before the introduction of the cotton gin, the United States exported 138,328 pounds of raw cotton. Just two years later, cotton exports were 1.6 million pounds. By 1800, the United States exported 17.8 million pounds. By 1821, cotton alone comprised almost half of total exports. Cotton was the largest single commodity export of the United States throughout the nineteenth century and remained so as late as 1929, when it alone comprised 18 percent of total exports. The expansion of cotton production reinforced the South’s position as an export-oriented region and strengthened its opposition to high tariffs. The cotton gin also entrenched the South’s attachment to the “peculiar institution” of slavery, because harvesting cotton was so labor-intensive.

From 1817 to 1826, its average annual dividend was nearly 19 percent.16

This created an excess of paper currency that came to a painful end as banks began to demand repayment in specie, which led to the Panic of 1819. The panic and subsequent financial contraction led to plummeting land prices and a rash of bank failures. The economy suffered through a severe deflation and recession. Consumer prices dropped 11 percent between 1819 and 1821, and the price of cotton fell almost 60 percent over the same period.

Analogies to crypto - use of unproven currencies subject to flight to quality.

The campaign for higher import duties was strong because it was well organized and benefited from nationwide publicity. A Philadelphia printer named Mathew Carey helped establish the Philadelphia Society for the Promotion of National Industry that joined other groups in sending memorials and petitions to Congress asking for greater protection for domestic industries. Carey played a key role in spreading the agitation for a higher tariff outside of Pennsylvania to the nation at large.20 Carey’s argument was simple: free trade led to a drain in specie, the decay of industry, and the rise in unemployment, while tariffs would secure the home market for industries and their workers and thereby strengthen the economy. Hezekiah Niles, the editor of the influential Weekly Register, also published an endless stream of editorials extolling the benefits of higher tariffs in protecting domestic industries from foreign competition.

Clay’s “American System” address was a landmark in US trade policy. The vision set out in the speech was much greater than the particular duties he proposed. Clay was an economic nationalist who believed that the federal government should take an active role in strengthening the economy by promoting manufacturing industries, establishing a national banking system, and financing internal improvements to create a transportation network of roads, bridges, and canals that would bind the nation together.

This failure convinced woolens manufacturers that they had to strengthen their political position by joining with other producers of raw materials in demanding greater protection from imports. They helped organize the Harrisburg Convention in August 1827, which was attended by manufacturers, newspaper editors, politicians, and pamphleteers who supported protective tariffs.48 The Harrisburg convention received nationwide publicity and marked the high point of the antebellum protectionist movement.

Samuel Smith of Maryland, who supported higher tariffs for manufacturers, dubbed the measure a “bill of abominations,” and the label stuck.55 The bill was so lopsided that many began to suspect that it was designed to be defeated by the New England delegation or elicit a presidential veto.

John Tyler, a Virginia senator who later became president, succinctly summarized the region’s perspective: “The protective tariff is the cause of our calamities and our decay. We buy dear, and sell cheap. That is the simple secret. The tariff raises the price of all that we buy, and diminishes the demands for our products abroad by diminishing the power of foreign nations to buy them.”

In 1860, the aggregate value of slaves as property was $3 billion, nearly 20 percent of the nation’s wealth. The value of slaves was more than 50 percent greater than the capital invested in railroads and manufacturing combined, a calculation that excludes the value of land in southern plantations. Slavery generated a stream of income that enabled overall white per capita income in the South to approximate that of northern whites. In the seven cotton states, nearly a third of white income came from slave labor. Thus, slavery was essential to the prosperity and standard of living of many southern whites.93

The Nullification Crisis was defused by the Compromise of 1833, which ushered in a quarter-century of gradually declining tariffs. From its peak of 62 percent in 1830, the average tariff fell to less than 20 percent by 1859.

The House delayed passage of the Walker tariff to see if Britain was actually going to repeal the Corn Laws, which it did in May 1846.31

Several factors helped Midwestern farmers achieve greater access to foreign markets and thereby increase their export orientation. The dramatic decline in transportation costs due to internal improvements, particularly the rapid expansion of railroad networks in the 1850s, helped fuel exports from the Midwest. The repeal of the Corn Laws by Britain in 1846 and the Crimean War in the early 1850s also boosted foreign demand for American grains. As a result, the Midwest’s hopes of selling more to foreign markets were fulfilled as wheat and flour exports surged, increasing from 6 percent of total exports in the late 1830s to 11 percent in the late 1850s. Thus, the Midwest’s latent economic interest in exporting became operative during this period.34

Customs receipts still accounted for roughly 90 percent of federal government revenue throughout the antebellum period.

Having largely defeated the movement for protective tariffs, Democrats reestablished the idea of a “tariff for revenue only” as the guiding principle of trade policy. For example, in December 1854, Democratic President Franklin Pierce declared that a tariff for “revenue, and not protection, may now be regarded as the settled policy of the country.”45 Under this standard, import duties were to be imposed only to raise funds for economical government expenditures; any tariff rates above 20–30 percent were considered excessive, and any significant budget surplus called for a reduction in duties. Because import duties raised almost all of the government’s revenue, there was little scope for alternative commercial policies, such as reciprocity agreements with other countries. Indeed, Congress did not encourage the president to undertake negotiations that might lead to such agreements.46

Before the war, about 90 percent of federal income came from customs revenue; after the war, the scope of domestic taxation, particularly excise taxes on alcohol and tobacco, had expanded so much that only about half of federal revenue came from customs duties.

The Confederacy faced much graver financial problems than the North because its economy was much smaller and more dependent upon foreign commerce, giving it a limited domestic tax base on which to finance wartime expenditures. In his first report, Confederate Treasury Secretary Christopher Memminger expected that a 12.5 percent average import duty would raise $25 million in revenue annually. In fact, the Confederacy raised just $3.4 million in customs duties over the entire war. During the war, the Confederate government collected only $258 million in taxes and loans but spent $1.5 billion, resorting to monetary inflation to make up the difference.73

In 1860, the South’s per capita income was 72 percent of the national average; in 1880 it was 51 percent of the national average. The South took nearly a century to recover its prewar economic position

In September 1872, Jay Cooke & Co., the country’s preeminent investment bank, closed its doors after becoming overextended in financing the Northern Pacific Railroad. This triggered the Panic of 1873, and the economy plunged into a recession.

The election of 1876 stands out as one of the most disreputable in American history. Democrat Samuel Tilden won 51.0 percent of the vote to Republican Rutherford B. Hayes’s 47.9 percent, but lost the Electoral College by a single vote.

The era’s leading economist, John Stuart Mill, took Carey seriously as “the only writer, of any reputation as a political economist, who now [1865] adheres to the Protectionist doctrine.” But Mill pointed out basic errors in Carey’s analysis and concluded that his argument for protection was “totally invalid”; privately, Mill wrote that Carey’s Principles was “about the worst book on political economy I ever read.”52

Mills gave the opening speech for the Democrats and argued that the protective tariffs should be reformed because they taxed the consumption of the great masses of people instead of the income of the wealthy few, created trusts and monopolies that exploited consumers, and generated excessive revenues at a time when the budget surplus needed to be reduced.

The election of 1888 was a national referendum on the country’s tariff policy.87 Although the issue was as much one of excessive taxation as excessive trade protection, the outcome would determine the fate of tariff reform and the protective system. Republicans tried to paint the president and his party as “free traders,” something Cleveland (1933, 189) dismissed as a “pure unadulterated fabrication.” Still, despite their recent political gains, the Democrats lacked the aggressiveness and resourcefulness of the well-organized Republicans. The election is also considered to be one of the most corrupt in American history, with reports of vote-buying and other irregularities, particularly in the pivotal swing states of New York and Indiana.88

The House debate opened in January 1894, but it unexpectedly morphed into a discussion about an income tax.31 Populist Democrats from the Midwest had long supported an income tax as a way of shifting the tax burden from consumers of imported goods to rich industrialists, such as the Vanderbilts, Rockefellers, and Carnegies.

House Speaker Charles Crisp (D-GA) maintained that consumers paid the import tax, not foreigners, as Republicans alleged, and that consumers deserved relief from a system that favored the wealthy Eastern elites: “Whilst there may be here and there some monopolists or gentlemen of large wealth who will criticize and condemn us, yet all over the country, in the homes of the farmers, in the homes of the workers, and in the homes of the men employed in every industry in the United States, there will be rejoicing and happiness.”

Even the income tax passed by the Democrats proved to be a failure. In January 1895, the Supreme Court struck down the law, holding that the income tax was a direct tax and therefore unconstitutional because it was not apportioned according to population.40

The case of sugar illustrates how America’s commercial expansion came with new foreign policy entanglements. In 1876, the United States signed a limited reciprocity treaty with Hawaii (for political not commercial reasons) that gave preferential access to its sugar in the United States in exchange for Hawaiian preferences for selected American products. Bilateral trade soared after the treaty and transformed Hawaiian politics, enriching the islands’ planter class, which had made large investments in sugar production. The McKinley tariff of 1890, however, granted duty-free access to all imported sugar. Having lost its preferential access to the US market, Hawaii plunged into a deep recession. This led to political instability, and a group of Americans on the island overthrew the Hawaiian monarch in 1893. A few years later the United States annexed the territory.50 Meanwhile, Cuba benefited from having been granted duty-free access for its sugar under the McKinley tariff. But when Congress reimposed duties on imported sugar (except from Hawaii) in 1894, Cuba’s sugar production plummeted. The collapse of the Cuban economy led to an insurrection against Spanish rule in 1895, which Spain brutally suppressed. Eventually this led to US military intervention in the Spanish-American War of 1898.51 Thus, the tariff on just one commodity—sugar—deeply embroiled the United States in the domestic politics of two island territories.

Foreign discrimination against US exports also became more pronounced in the 1890s, adding to concerns about whether American goods were treated fairly in foreign markets. Over that decade, Germany concluded many bilateral trade agreements that included tariff concessions that were not extended to the United States. France’s Meline tariff in 1892 created a two-tiered, maximum-minimum schedule of import duties; US goods were subject to the maximum duties because the two countries did not have a trade agreement. And countries of the British Empire began granting preferences to one another. In 1897, for example, Canada gave a 25 percent tariff preference to British goods, a margin that increased to 33 percent three years later. The discrimination against the United States by a large, neighboring market held back the growth of exports.

Ida Tarbell, the muckraking journalist, was the person most responsible for driving this message home. In a six-part series entitled “The Tariff in Our Times,” published in the periodical The American in 1906–7 and later as a book, Tarbell sought to expose the corrupt politics and special interests that operated behind the scenes and influenced Congress in setting the tariff. In 1909, Tarbell published two widely noted articles—“Where Every Penny Counts” and “Where the Shoe Is Pinched”—in which she popularized the notion that protection inflated the profits of manufacturers while raising the cost of living and reducing the standard of living of working families. For the working class, “every penny added to the cost of food, of coal, of common articles of clothing means simply less food, less warmth, less covering.” She noted that the buying and mending of shoes accounted for a quarter of consumer spending on clothing. “It was hard enough for the poor to buy shoes ten years ago before the Dingley tariff, but with every year since it has been harder,”