Early American economic history does not vindicate economic protectionism.
Early American economic history does not vindicate economic protectionism.
I had the pleasure of participating on a panel in the Intercollegiate Studies Institute’s American Economic Forum. I was invited to defend the “Jeffersonian tradition of laissez faire” against the Hamiltonian tradition of industrial policy. The following has been adapted from my remarks:
T he New Right has awakened from the dogmatic slumber of “market fundamentalism” and embraced the tariff. Tariffs are lauded by some not only as political savvy, but even economically efficient. A robust set of domestic market protections, combined with targeted industrial subsidies, will reshore manufacturing jobs, improve wages, lower the cost of thriving, and facilitate innovation and technological development.
There are many commonsense reasons to doubt the consistency of these arguments. For example, if domestic producers rely on foreign imports as inputs into their products, and those imports are taxed, then the prices of domestic products will rise. In addition to affecting consumers, the higher prices will reduce the global demand for domestic products, which will depress national exports and employment in the affected industries. Other nations will likely retaliate in kind with tariffs of their own, further reducing the demand for exports and eating into the gains of trade. This was exactly what famously happened in the 1930s after the passage of the Smoot-Hawley Tariff.
Recent empirical evidence supports the common sense. As Phil Gramm and Don Boudreaux report, for example, the rising cost for Chinese component parts (brought about by the Trump administration’s steel and aluminum tariffs) slowed the growth rate of American manufacturing output, which turned negative in the final quarter of 2018. In part, this can be explained by the fact that there are over 30 times as many Americans working in industries that use steel and aluminum as input than those employed producing these metals. Steel- and aluminum-using industries suffer, along with the consumers of their products, as the price of those inputs rise.
For many years, a common rallying point for advocates of protectionism has been the historical role of the tariff in early American economic development. “Behind a tariff wall built by Washington, Hamilton, Clay, Lincoln, and the Republican presidents who followed,” Pat Buchanan argued in 1998, “the United Sates . . . [became] the greatest industrial power the world has ever seen — in a single century.” Oren Cass recently made the same point in passing: “For much of the nation’s history, while growing from colonial backwater to continent-spanning colossus, the U.S. imposed some of the world’s highest tariffs.”
The U.S. certainly did have high average tariffs up through the 1930s. And it did simultaneously transform into an economic superpower. But there are reasons to think that causal claims inferred from the correlation are spurious. The economic experience of the early American republic by no means offers unambiguous evidence of the efficacy of protectionism.
From 1798 to 1860, tariffs were pursued partly to stimulate American industry, especially after the humiliations of the War of 1812. But the main role of the tariff during the early phases of the republic was arguably to generate revenue. Ninety percent of federal receipts during these decades were in fact due to tariff revenue. Domestic taxes were minimal, and although state and local governments were quite active and large in scale, the scope of government was narrow.
The efficacy of tariffs in hindsight is difficult to judge, in part because the data are limited. Several empirical studies maintain that protection of fledgling Massachusetts textiles, iron, and glass works in Pennsylvania after 1812 boosted those industries and nudged America towards industrialization. One study argues that textile production would have fallen by 90 percent absent protection. Frank Taussig, however, in his 1931 The Tariff History of the United States, drew a different conclusion: “The intrinsic soundness of the argument for protection of young industries. . . 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.”
A few stylized facts from the antebellum years bolster Taussig’s conclusion. First, it is true that tariff rates on dutiable goods were high, but they also declined on average until 1860. The so-called Tariff of Abominations significantly raised tariffs on manufactures, leading to the Nullification Crisis, but the ensuing compromise reduced tariffs in 1833, and they continued to fall on average up to the Civil War.
That average tariffs declined through 1860 is significant, for during these decades, according to Stanley Lebergott, the prices of British manufactures fell. Ocean-freight costs also fell as shipping efficiency rose. This further reduced the cost of importing British products. But notwithstanding their falling production costs and the lower costs of trans-Atlantic trade, British exports to America declined. They declined, even in light of declining average tariffs, because American industries cut costs by revolutionizing the general parameters of industrial production.
After the Civil War, protection again rose. The average tariff rate on imported manufacturing goods fluctuated between 40–50 percent from around 1870 until 1913. This was a dynamic economic period. American income per capita in 1870 was 75 percent of that in Britain; by 1929, it was 130 percent. American output in manufacturing was only 7.2 percent of global manufacturing output in 1860, but by 1913, it comprised 32 percent of output. Was the tariff instrumental during these to American economic success? Again, there are reasons to believe that causal claims for protectionism are spurious.
Douglas Irwin has provided a comprehensive overview of this issue in a 2001 article, and in his 2017 book Clashing Over Commerce. From 1870 to around 1920, American economic growth was driven more by capital accumulation than by rising total factor productivity. But judging by capital-output ratios, capital accumulation in the post–Civil War decades was most robust in non-traded service sectors that did not enjoy protection. Capital accumulation, moreover, was made more difficult by the high tariffs that existed on manufactured capital goods. The tariff during this period, Bradford De Long has argued, “made a very wide range of investment goods — from British machine tools and steam engines to steel rails to precision instruments — more expensive.” Capital accumulation and high growth occurred in non-protected industries, despite the tariff-induced increase in production costs.
One of the celebrated protectionist stories of the 19th century is the tinplate industry, which gained tariff protection under the McKinley Tariff of 1890. This tariff indeed seems to have aided the production of tinplate. But Irwin has also argued that it is likely that even that industry would have taken off soon after 1890 without protection as U.S. iron and steel prices converged with those in Britain.
This brief presentation of stylized facts is of course one-sided and by no means conclusive. The facts here presented should, however, give pause to those who would recruit early American trade policy as an unambiguous example of the benefits of protectionism.
Additionally, there is at least one strong case to be made that free trade played a pivotal role in American economic development. The Constitution ensured that the United States would be a free-trade zone. Joseph Schumpeter noted that, in the 19th century, “the country soon grew so large as to make it possible to reap within its frontiers practically all the benefits that are usually attributed to a free-trade policy.” The success of American development domestically, irrespective of its international-trade policy, underscores the productive power of free trade generally.
Domestic economic freedom, abundant natural resources, easy access to land, and rates of population growth twice as high as those achieved by any European country (partly aided by high rates of immigration) were among the chief causes of American economic prosperity. The relative scarcity of labor to natural resources encouraged the development of capital-intensive machinery that, when combined with the growing aggregate demand for consumer goods (caused by population growth among other things), enabled the production of goods at scale, dramatically lowering average production costs.
These factors blended with what can only be described as a unique American commercial spiritedness. That spiritedness was already noted in the 18th century by British commentators including Edmund Burke, Josiah Tucker, and Richard Price. It was famously observed by Tocqueville in Democracy in America. The Americans themselves perceived it, too. Hezekiah Niles, a journalist, assessed the causes of American wealth in 1815 in the Baltimore periodical the Weekly Standard:
The climate is healthy, land is plenty, the soil is bountiful, industry is rewarded and enterprise walks forth unrestrained — and the people are free. . . The wealth of the United States grows much faster than their population. This partly arises from. . . the facilities afforded and partly from the almost universal ambition to get forward.
Freedom, resource abundance, and a commercial spirit of innovation — these were among the central causes of American economic greatness. The protective tariff may have played a modest role in aspects of economic development in the early decades of the republic, although there are reasons to question this. But it could also be argued that early American economic history broadly vindicates the tradition of free trade — a tradition, incidentally, I believe we would do better to associate with the thought of Adam Smith and Edmund Burke than Thomas Jefferson.