The Truth about Trade in History

The ongoing globalization of economic life leaves many Americans nervous and suspicious. Pat Buchanan has played to this anxiety with his book, The Great Betrayal, a root-and-branch rejection of free trade in favor of a “new nationalism.”

In this series, Cato Center for Trade Policy Studies scholars take issue with much of what Buchanan writes, and offer an alternative perspective to Buchanan’s protectionist analysis.

Buchanan on the history of U.S. protectionism: “Behind a tariff wall built by Washington, Hamilton, Clay, Lincoln, and the Republican presidents who followed, the United States had gone from an agrarian coastal republic to become the greatest industrial power the world had ever seen — in a single century. Such was the success of the policy called protectionism that is so disparaged today.”¹

Pat Buchanan contends that the United States grew economically strong and prosperous because of trade barriers. But America has experienced several phases in its trade history. It is more accurate to say that the country grew in spite of import restrictions.

From Colony to Republic

British trade policy toward the American colonies was mercantilistic. The mother country expected to gain materially from all colonial trade. The Navigation Acts, as noted earlier, generally required that all colonial trade be conducted on British ships manned by British sailors. Also, certain goods had to be shipped to Great Britain first before they could be sent to their final destination. The country’s mercantilist policies were a major burden on the colonies.² In that way, British protectionism was a significant cause of the Revolution.

Having achieved independence, however, many Americans advocated protectionist policies similar to those they had earlier condemned.³ Alexander Hamilton, the principal advocate of import restrictions, based his proposals on the alleged needs of infant industries. As he wrote in his “Report on Manufactures” (1791):

The superiority antecedently enjoyed by nations who have preoccupied and perfected a branch of industry, constitutes a more formidable obstacle … to the introduction of the same branch into a country in which it did not before exist. 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. The disparity … must necessarily be so considerable, as to forbid a successful rival ship, without the extraordinary aid and protection of government.⁴

The First Wave of Protectionism

Although Congress adopted the first tariff in 1789, its principal purpose was to raise revenue. Rates went from 5 percent to 15 percent, with an average of about 8.5 percent. However, in 1816 Congress adopted an explicitly protectionist tariff, with a 25 percent rate on most textiles and rates as high as 30 percent on various manufactured goods. In 1824, protection was extended to goods manufactured from wool, iron, hemp, lead, and glass. Tariff rates on other products were raised as well.

That first wave of protectionism peaked in 1828 with the so-called Tariff of Abominations. Average tariff rates rose to nearly 49 percent. As early as 1832 Congress began to scale back tariffs with further reductions enacted the following year. In 1842, tariffs were again raised; but by 1846 they were moving downward, and further lowered in 1857. Following the 1857 act, tariffs averaged 20 percent.⁵

Failed Tariff Policies

Economist Frank Taussig, in a thorough examination of those tariffs, found that they did nothing to promote domestic industry. “Little, if anything, was gained by the protection which the United States maintained” in the first part of the 19th century, he concluded. That finding considerably questioned the validity of the infant industry argument. “The intrinsic soundness of the argument for protection to young industries therefore may not be touched by the conclusions drawn from the history of its trial in the United States, which shows only that the intentional protection of the tariffs of 1816, 1824, and 1828 had little effect,” Taussig said.⁶

Thus, the early experience of the United States confirms the weakness of the idea that protection can aid infant industries. In practice, so-called infant industries never grow competitive behind trade barriers, but, instead, remain perpetually underdeveloped, thus requiring protection to be extended indefinitely. As Gottfried von Haberler put it:

Nearly every industrial tariff was first imposed as an infant-industry tariff under the promise that in a few years, when the industry had grown sufficiently to face foreign competition, it would be removed. But, in fact, this moment never arrives. The interested parties are never willing to have the duty removed. Thus temporary infant-industry duties are transformed into permanent duties to preserve the industries they protect.⁷

It is also important to note that the adverse effects of tariffs in 19th century America were more than offset by the economic activity that constituted the western expansion across the continent. Some 20 million immigrants came to the United States in that century. Also, much economic growth came from transportation, farming, mining, and construction of infrastructure. In effect, the United States was a giant, continental-size free-trade zone, from the Atlantic to the Pacific — the equivalent of the distance from Madrid to Moscow.

Figure 1:

Customs Duties as a Share of Imports



Source: The Department of Commerce

Following the Civil War, some tariff liberalization occurred, mainly assuming the form of exempting items from duties, rather than reducing tariff rates. As Figure 1 illustrates, until that time, duties had covered a large percentage of imports, as shown by the close relationship between the tariff rate on all imports and that on dutiable imports only. But after the Civil War, those rates began to diverge sharply.

Turn-of-the-Century Tariffs

In the election of 1888, Republicans called for tariffs to protect American manufacturing. Benjamin Harrison’s defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. An interesting aspect of the 1890 debate over the tariff is that protectionists abandoned any pretense that high tariffs were needed to protect infant industries. Even mature industries, they argued, needed protection. They further argued that high tariffs were needed to reduce the Treasury’s surplus. They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.⁸

Protectionist tariffs remained the bedrock of economic policy of the Republican Party for the next 20 years. Indeed, Republicans were so intent on passing the Payne-Aldrich tariff in 1909 that President William Howard Taft supported the 16th Amendment to the U.S. Constitution creating a federal income tax as the political price for Democratic support of the tariff.⁹ That has to have been one of the worst deals in history — a lose-lose situation if ever there was one.

The Underwood tariff of 1913, passed early in the administration of President Woodrow Wilson, liberalized trade somewhat. But as soon as the Republicans reassumed power after World War I, they raised tariffs again. The Fordney-McCumber tariff of 1922 generally increased tariff rates across the board. However, it also gave the President power to raise or lower existing tariffs by 50 percent.

Deepening Depression

The infamous Smoot-Hawley tariff of 1930 was the last outrage inflicted by the Republican protectionists. Rates on dutiable imports rose to their highest levels in over 100 years. Increases of 50 percent were common and some rates went up 100 percent. Table 1 indicates how much tariffs in creased during the 1920s as a result of both the Fordney-McCumber and Smoot-Hawley tariffs. A recent analysis estimates that the Smoot-Hawley tariff, on average, doubled the tariffs over those in the Underwood Act.¹⁰

Figure 2:
Collapse of World Trade Following Smoot-Hawley



Source: League of Nations

Economists and historians continue to debate how important the Smoot-Hawley tariff was in causing the Great Depression.¹¹ Whatever the degree, the effect certainly was adverse and the tariff was certainly bad policy. As Figure 2 indicates, world trade virtually collapsed following passage of the Smoot-Hawley tariff. Thus, if that tariff was not the single cause of the Great Depression, it certainly made a bad situation worse.

The Free-Trade Path

Politically, at least, in the long term the memory of the Smoot-Hawley tariff has kept Americans committed to a free-trade policy. For more than 60 years, a guiding principle of U.S. international economic policy has been that tariffs and other trade barriers should be reduced, that trade wars must be avoided at all costs, and that the best way to achieve those goals is through multilateral negotiations. Thus, the United States took the lead in establishing the General Agreement on Tariffs and Trade that reduced global tariffs in the decades following World War II, and spearheaded major GATT rounds of multilateral trade liberalization, including the Kennedy Round, Tokyo Round, and Uruguay Round.

In recent years, the free-trade consensus has begun to weaken. One must look back to 1929 to find protectionist rhetoric as heated as that commonly heard today. Throughout most of the postwar era, protectionists were embarrassed to call themselves protectionists. Today, however, prominent politicians such as Republican presidential candidate Pat Buchanan and Senator Ernest Hollings (D-S.C.) wear the label proudly.¹² Yet protectionist policies have not been the source of America’s economic strength. And American policy, fortunately, remains largely directed toward free trade.

Notes:

1. The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to the Gods of the Global Economy, by Patrick J. Buchanan, New York: Little, Brown, Page 224.

2. Larry Sawers, “The Navigation Acts Revisited,” Economic History Review 45, no. 2 (May 1992): 262-84.

3. Alfred Eckes noted the contrast between the public free trade rhetoric of the Founding Fathers and their private protectionism. Alfred E. Eckes Jr., Opening America’s Market: U.S. Foreign Trade Policy since 1776 (Chapel Hill: University of North Carolina Press, 1995), pp. 1-20.

4. Alexander Hamilton, Papers on Public Credit, Commerce and Finance (Indianapolis: Bobbs-Merrill, 1957), pp. 204-205.

5. United States Tariff Commission, The Tariff and Its History (Washington, D.C.: U.S. Government Printing Office, 1934), pp. 70-75.

6. F. W. Taussig, The Tariff History of the United States, 8th ed. (New York: G. P. Putnam’s Sons, 1931), pp. 61, 63.

7. Gottfried von Haberler, The Theory of International Trade (London: William Hodge, 1936), p. 281. More recent studies confirm the failure of infant industry protection. See Robert E. Baldwin, “The Case against Infant-Industry Tariff Protection,” Journal of Political Economy 77, no. 3 (May/June 1969): 295-305; Anne O. Krueger and Baran Tuncer, “An Empirical Test of the Infant Industry Argument,” American Economic Review 72, no. 5 (December 1982): 1142-52.

8. Harold U. Faulkner, Politics, Reform and Expansion, 1890-1900 (New York: Harper & Row, 1959), pp. 106-109.

9.. Arthur A. Ekirch Jr., “The Sixteenth Amendment: The Historical Background,” Cato Journal 1, no. 1 (Spring 1981): pp. 172-74.

10. Mario J. Crucini, “Sources of Variation in Real Tariff Rates: The United States, 1900-1940,” American Economic Review 84, no. 3 (June 1994): 737.

11. Barry Eichengreen, “The Political Economy of the Smoot-Hawley Tariff,” Research in Economic History 12 (1989): 1-43; idem, “Did International Economic Forces Cause the Great Depression?” Contemporary Policy Issues 6 (April 1988): pp. 90-114; Eckes, Opening America’s Market, pp. 100-39; B. Bruce-Briggs, “The Myth of the Hawley-Smoot Tariff,” Congressional Record, July 14, 1987, pp. S 9873-76; Robert Bartley, “Toying with Depression,” Wall Street Journal, September 5, 1985; Alan Reynolds, “What Do We Know about the Great Crash?” National Review, November 9, 1979, pp. 1416-21; Jim Powell, “Protect and Destroy,” Audacity (Winter 1993), pp. 38-47.

12. Buchanan has even defended the Smoot-Hawley tariff and made protectionism the bedrock of his presidential campaign. See Pat Buchanan, “Ghostbusting the Smoot-Hawley Ogre,” Washington Times, October 20, 1993; Richard Berke, “Candidates Clash over Trade Issues Heading into Vote,” New York Times, February 20, 1996; Susan Dentzer, “The Buchanan Trade Winds,” U.S. News & World Report, February 26, 1996, p. 31. For recent views of other open protectionists, see Ernest Hollings, “Protectionist and Proud of It,” Washington Post, March 17, 1996; idem, “No More Uncle Sucker,” New York Times, March 26, 1991; Alfred E. Eckes, “Who Says Republicans Are Free Traders?” New York Times, February 27, 1996; Robert Kuttner, “Protectionism: In the Right Dose, a Cure,” Washington Post, July 7, 1992.