by Ian Fletcher
11. “The facilitating of the transportation of commodities.” (Good infrastructure.)
Hamilton set forth his case in his Report on Manufactures, submitted to Congress in 1791.439 Due in large part to the domination of Congress by Southern planters, who favored free trade, Hamilton’s policies were not adopted in toto right away. It took the War of 1812, which created a surge of anti-British feeling, disrupted normal trade, and drastically increased the government’s need for revenue, to push America firmly into the protectionist camp. But when war broke out, Congress immediately doubled the tariff to an average of 25 percent.440
After the war, British manufacturers undertook one of the world’s first well-documented cases of predatory dumping, whose purpose was, in the words of one Member of Parliament, to “stifle in the cradle, those rising manufactures in the United States, which the war had forced into existence.”441 In reaction, the American industrial interests that had blossomed because of the tariff lobbied to keep it, and had it raised to 35 percent in 1816. The public approved, and by 1820, America’s average tariff was up to 40 percent.442
Fast-forward a few years. Gloss over a number of important tariff-related political struggles, such as the South Carolina Nullification Crisis of 1832, one of the precursors of the Civil War, in which South Carolina tried to reject a federal tariff. There was a brief free trade episode starting in 1846, coinciding with the aforementioned zenith of classical liberalism in Europe, during which America’s tariffs were lowered. But this was followed by a series of recessions, ending in the Panic of 1857, which brought demands for a higher tariff so intense that President James Buchanan—the last free-trade president for two generations—gave in and signed one two days before Abraham Lincoln took office in 1861.443
SLAVERY VS. THE TARIFF
The next big protectionist event in American history is the rise of the Republican party, spurred into being by the conflict over slavery but inheriting from its Whig party antecedent an agenda of aggressive government support for economic development. The new party favored a number of policies to this end, including hard money (deflation, the preference of creditors), subsidies for railroads, free land for homesteaders, and higher tariffs. In office from 1861, the Republicans lost no time raising tariffs, using the excuse of funding the Civil War and conveniently not having free-trade Southern Democrats in office. President Lincoln’s economic guru was a Philadelphia economist named Henry Carey—forgotten in our day but world-famous in his own.444
It would be an exaggeration to say that the Civil War was “about” the tariff, as some Southern partisans claim, eager to shed the opprobrium of the South’s having fought for slavery. But slavery and free trade are intimately connected as economic policies because free trade is, in fact, the ideal policy for a nation which actually wants to be an agricultural slave state. Because slaves are unsuitable for industrial work, slave states from Rome onward have failed to industrialize.445 Because they have no hope of developing comparative advantage in manufacturing, their best move is to optimize the comparative advantage in slave-based agriculture they are stuck with and import most everything else. Classic Ricardian free trade fits this strategy to a “t.” The antebellum South, having little manufacturing industry to protect, derived little benefit from the tariff. Economically, it was still a part of the British Empire that bought its cotton, America’s leading export before 1870.446 As the tariff was the main source of federal revenue in those pre-income tax days, the South also bore a disproportionate share of the nation’s tax burden. No wonder it was in favor of free trade (which the Confederate constitution eventually mandated).447
There is a larger lesson here, reaching beyond American history. Almost all nations that have failed to break into modern industry have a common characteristic: in terms of U.S. history, their equivalents of the South won their civil wars. These were not all actual wars, of course, some being merely struggles of interest group politics, but the pattern is consistent: agricultural or raw-materials interests won a battle with rising manufacturing interests and biased the economic policy of the state to favor themselves. Sometimes this outcome was imposed by a colonial overlord, but it was often self-inflicted. This pattern goes far back, predating the industrial revolution by centuries. In Spain, for example, the key moment was arguably the Guerra do los Comuneros of 1520-21, in which aristocratic agricultural interests, embodied in such groups as the sheep owners’ organization La Mesta, won control of economic policy after a failed insurrection against the Habsburg monarchy.448 So instead of protecting its manufacturing, Spain protected agricultural products like olive oil and wine. As a result, Spanish industrialization actually went backwards and Spain gradually deindustrialized for the remainder of the century. Then came the easy pickings of New World empire, and a flood of silver and gold caused Spain to lose interest in industrialization completely. Its economy has only converged with the level of its European peers in the last 20 years.
THE GOLDEN AGE OF AMERICAN INDUSTRY
After the Civil War, tariffs stayed high during the long Republican hegemony from 1865 to 1932. Reading the speeches of 19th-century Republican politicians today, with their expressions of concern for the wages of the American working man, one finds oneself wondering how the party slipped to its present day let-them-eat-cake position. (One can dismiss these sentiments as fraud, but the tariff was real enough.) Republicans of the robber-baron era were no angels, but they did believe that American capitalism depended upon class harmony—in contrast, as they saw it, to unstable revolutionary Europe.449 Without a significant welfare state, America had to do something to smooth the rougher edges of capitalism, and the tariff was a way to unite the interests of American workers and American capitalists.
The country at large generally supported this policy, though the left- and right-wing extremists of the day naturally dissented. Extreme right wing Social Darwinists like William Graham Sumner—who published a fuming book in 1885 entitled Protectionism, the Ism That Teaches That Waste Makes Wealth—saw protectionism as a subsidy for the incompetent and an interference with the divine justice of the free market and the survival of the fittest.450 Karl Marx, on the other hand, wanted to see American capitalism break down and therefore favored free trade for its destructive potential. He wrote that:
The protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.451
The Democrats of this era, who generally supported free trade, were not Marxists, of course. But they saw the tariff as either a tax on the non-industrial regions of the country (like the South, solidly agrarian and solidly Democratic during this period) or as a racket for the benefit of big business. In the 1913 words of Democratic Congressman (later the famous House Speaker) Sam Rayburn of Texas:
The system of protective tariffs built up under the Republican misrule has worked to make the rich richer and the poor poorer. The protective tariff has been justly called the mother of trusts [monopolies]. It takes from the pockets of those least able to pay and puts into the pockets of those most able to pay. The two great parties in the long past took distinct positions upon the tariff question—the Democratic party of the masses on the one side and the Republican party of the classes on the other side.452
America’s tariff regime in this era was not especially sophisticated. One searches the historical record in vain for complex theories about what the tariff should be or for the elaborate technocratic institutions that managed it. There were neither. Tariff policy was mostly set by not-entirely-uncorrupt Congressional logrolling. Corruption was moderated by the fact that the dealmaking was fairly public (as tariffs were considered nothing to be ashamed of), and the tariffs themselves were moderated by the fact that one industry’s output was often anothe
r’s input, so lobbyists seeking higher tariffs were counterbalanced by lobbyists seeking lower ones. But that’s about as subtle as things got. In Sumner’s annoyed words:
They have never had any plan or purpose in their tariff legislation. Congress has simply laid itself open to be acted upon by the interested parties, and the product of its tariff legislation has been simply the resultant of the struggles of the interested cliques with each other, and of the logrolling combinations which they have been forced to make among themselves.453
But it worked. This was the golden age of American industry, when America’s economic performance surpassed the rest of the world by the greatest margin. It was the era in which the U.S. transformed itself from a promising mostly agricultural backwater, pupil at the knee of European industry, into the greatest economic power in the history of the world.
About the only technocratic sophistication American tariffs had was some drift towards taxing manufactured goods more than raw materials. In part, this simply reflected the fact that raw material imports were less likely to face a competing American industry lobbying for its own protection. In 1872, keeping pace with American industrialization, Congress modified the tariff from a broad-based levy on a wide range of imports to a narrower one targeted at protecting industrial wages and manufacturing industry.454 The U.S. went from importing five percent of its imports untaxed to nearly 50 percent; tea and coffee now came in duty-free.455
Protectionism was the overwhelming consensus of the era. Grover Cleveland, the sole Democratic president of the 1870-1913 period, survived politically largely by keeping quiet about the tariff. Then, after his first term in office, he ran in 1888 on a platform of cutting the tariff in favor of an income tax, devoting his entire 1887 State of the Union address to this idea. He was tarred in the press as a dupe of British interests and lost to Republican Benjamin Harrison.456 He learned his lesson and recanted. He returned to office in 1893, the only split-term president in American history.
The chart below gives the big picture.457 Note that this chart does not show the average tariff on dutiable goods (not all goods have been dutiable), and that it masks variations by product. Note also that changes in tariffs collected as a percentage of total imports can be caused not only by changes in tariff rates, but also by shifting proportions of what is imported. And remember that part of the significance of a tariff is that it eliminates some imports entirely, a fact that does not show up on this chart at all.
AMERICA’S RETREAT FROM THE TARIFF
Contrary to what one might expect, the United States’ retreat from the tariff was not caused by changes in policymakers’ opinions about economics. That is, there was no point at which they decided that the economics of protectionism was false and the economics of free trade was true. Rather, this retreat was driven by essentially political motives, operating in a space of economic carelessness carved out by our mid-20th-century economic zenith. Fundamentally, we believed that the foundations of our economic strength were so secure that we didn’t have to worry very much anymore about what they were. And for decades after we started dismantling protectionism, the legacy effects of 150 years of it shielded us from the consequences of increasingly free trade and distorted our understanding of what those consequences really were.
Woodrow Wilson was the first modern president to believe in free trade. (It was number three of his famous Fourteen Points for Peace after WWI.) He succeeded in reducing tariffs in 1913, in the course of introducing income tax for the first time since the Civil War, but Congress pushed them back up in 1921. The Roaring Twenties were a tariff era.
The “notorious” Smoot-Hawley tariff of 1930 is sometimes blamed for all or part of the Great Depression—most recently by presidential candidate John McCain, who said during the 2008 presidential campaign:
Every time the United States has practiced protectionism we’ve paid a very heavy price for it. Some even claim, with some authenticity, that the Smoot-Hawley tariff act was a major contributor to the outbreak of World War II, not to mention the Great Depression.458
This accusation is obviously implausible, given that the Depression was already taking hold, due to the 1929 stock market crash, before Smoot-Hawley even passed Congress. And it was proved by economist Milton Friedman (at least to the satisfaction of the Nobel Prize committee) that the Depression’s cause was monetary.459 The Fed had allowed the money supply to balloon during the late 1920s, piling up in the stock market as a bubble. It then panicked, miscalculated, and let it collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade policy was not involved.
As for the charge that Smoot-Hawley caused the Depression to spread worldwide: it did not affect enough trade, or raise the tariff by enough, to have plausibly so large an effect.460 For a start, it only applied to about one-third of America’s trade: about 1.3 percent of our GDP. Our average duty on dutiable goods went from 44.6 to 53.2 percent—hardly a radical change.461 Tariffs as a percentage of total imports were higher in almost every year from 1821 to 1914.462 America’s tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the recessions of 1873 and 1893 managed to spread worldwide without tariff increases.463 Neither does the myth of a death spiral of retaliation by foreign nations hold water.464 According to the official State Department report on this question in 1931:
With the exception of discriminations in France, the extent of discrimination against American commerce is very slight...By far the largest number of countries do not discriminate against the commerce of the United States in any way.465
World trade declined, but almost entirely due to the Depression itself, not tariffs. “Notorious” Smoot-Hawley is a deliberately fabricated myth, plain and simple.466 Smoot was a moderate and routine adjustment to America’s trade regime, not a major shock to the world trading system.467
THE TURNING POINT ON TARIFFS
America’s tariffs first started to come down for good in 1934, at the instigation of FDR’s Secretary of State Cordell Hull. Hull’s faith in free trade had more to do with his belief it would promote world peace than any particular economic analysis. In his own words:
I reasoned that, if we could get a freer flow of trade—freer in the sense of fewer discriminations and obstructions—so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance for lasting peace.468
This strange quasi-Marxist view that the underlying cause of war is “economic dissatisfaction” finds little support in history. But because of it, by 1937, the U.S. had reciprocally cut tariffs with Cuba, Belgium, Haiti, Sweden, Brazil, Colombia, Honduras, Canada, Switzerland, Nicaragua, Guatemala, France, Finland, Costa Rica, El Salvador, Czechoslovakia, and Ecuador.469 This first turn towards tariff cuts was greased through Congress by being presented as “an emergency measure to deal with emergency panic conditions,” and was mostly not spotted for the historic turning point it was. Because the Great Depression and World War II interfered with normal trade, it had little immediate practical effect, and the idea of tariff cutting was quietly assimilated to the New Deal consensus without much public ado, despite some fierce battles inside the administration.470
But a trend had taken root. As part of this change, Congress unconstitutionally (contra Article I, Section 8, which reads, “Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises [and] to regulate Commerce with foreign Nations”) ceded control over tariffs to the President. FDR turned the task over to mid-level officials from the State Department and other government departments—men not even sufficiently highly placed to require Congressional confirmation.471 Free traders have ever since preferred to keep tariffs out of the hands of Congress and in the hands of “experts” insulated from democratic accountability. Congress had previously managed the tariff with moderately corrupt favor trading and had had few ideolog
ical or geopolitical axes to grind. The Executive was also subject to interest-group politics, but it operated behind closed doors and had a far stronger tendency to make tariff policy the handmaiden of extraneous foreign policy agendas.472
FREE TRADE TO BEAT COMMUNISM
In the aftermath of World War II and in the face of British decline, the U.S. assumed Britain’s mantle of global underwriter of free trade. In the 1947 negotiations that established the General Agreement on Tariffs and Trade, the world’s main trading framework until establishment of the World Trade Organization in 1995, we cut our average tariff 35 percent.473 It was easy to do at the time, with the U.S. running a substantial (4.2 percent of GDP) trade surplus from 1946 to 1947.474 This was a deliberate Cold War strategy aimed at strengthening the economies of the noncommunist world and binding them to the U.S.475 It was obviously geopolitically wise, even if we know now that Communism was a less formidable economic challenger than it then seemed. “All problems of local industry pale into insignificance in relation to the world crisis,” President Eisenhower told Congress in 1953.476 Thus America became the only major market open to trade; all the others were small, poor, protected, socialist or communist.
At this stage of the game, American policymakers still had some residual awareness of the value of tariffs. (The delusion that free trade actually made economic sense only set in later.) Thus the Marshall Plan to deliberately reindustrialize Europe, and industrialize for the first time agricultural nations like Italy and semi-industrialized nations like France, employed high tariff walls and tight controls on capital mobility.477 At the time, we believed not that free trade made economic sense for us, but that our superior productivity had bought us enough breathing room to engage in it for political reasons regardless.478 As President Truman put it: