Trade lessons from America’s founders
Published 06 July 2017
Dear King George III: stop cutting off our trade from the rest of the world. That was among our grievances in the Declaration of Independence. The next 140 years saw U.S. tariffs rise and fall in response to the domestic preoccupation with the politics of protection.
Dear King George III: Stop Cutting Off Our Trade From the Rest of the World
In my class at Georgetown University on modern American trade policymaking (co-taught with respected trade lawyer, Andrew Shoyer), I usually begin my part of the course with a history lesson on the infamous and instructive Smoot Hawley Act of 1930 as a way of explaining why Congress delegates authority to negotiate trade agreements to the President. Answer: to insulate itself from the politics of protection.
On the occasion of American independence, it may be worth reaching further back all the way to our country’s founding. After all, the Declaration of Independence itself lists as a grievance against the King, “cutting off our trade from the rest of the world,” just above taxation without consent. In the prelude to the Revolution, Bostonians had thrown shipments of British tea into the harbor to protest the King’s Tea Act of 1773 which required the purchase of British tea and imposed yet another tax on goods shipped to the colonies.
U.S. Congress Feels the Lure of Tariff Revenue
The U.S. Constitution grants Congress the exclusive right to raise revenue by levying uniform duties on goods imported from foreign countries into any part of the United States, and grants Congress the power to regulate trade and commerce with foreign nations and among the states. Tariffs and excise taxes were practically the only sources of Federal revenue until the passage of the 16th Amendment in 1913, which enabled Congress to impose income taxes.
The first major bill considered by the House in the First Congress (1789-91) was a bill to levy duties on imports to pay for national debt. But in leading the debate, James Madison pointed out, that while necessary to raise revenue, the duties “shall not be oppressive to our constituents.” It seemed simple enough – tax rum a certain amount per gallon, and tax other articles a percent of their value at the time and place of importation (a method called ad valorem). But this “emergency” plan to dig out of war-related debts sparked a larger, and long-term debate over whether and how to protect domestic manufacturers, one that would pit one set of American interests against another.
Epitomizing this dynamic, tradesmen in Baltimore petitioned the First Congress to impose duties on “all foreign articles, which can be made in America, such duties as will give a just and decided preference to their [domestic] labors,” and attached a list of items that were, or could be, manufactured in America “on moderate terms”.
In a scenario repeated over the course of the history of trade politics, protected domestic interests were not satisfied with the extent of protection Congress granted, and sought more – for goods considered essential, particularly military supplies. In 1791, Treasury Secretary Alexander Hamilton issued a “Report on Manufactures” arguing the necessity of protecting domestic manufacturing for economic and national security reasons, while conceding in the same report that free international trade would be preferable.
The next 140 years saw U.S. tariffs rise and fall in response to the domestic preoccupation with the politics of protection, regardless of the consequences to our relations with other economies or the impact to those economies. Until Smoot-Hawley.
Those Who Do Not Learn History Are Bound to Repeat It
The Smoot-Hawley Tariff Act of 1930 raised average duties to their highest levels ever, a move that is largely thought to have hastened the spread, and deepened the impact, of the global depression that followed.
Protectionism tends to follow Newton’s Third Law of motion – every action has an equal and opposite reaction. Raise tariffs on my goods, I’ll raise tariffs on yours. The result? Global trade drops. Not only do you impede imports to the United States, your actions impede access to markets for your exports.
It’s a fundamental lesson of trade policy history, and the lesson of the Smoot-Hawley Act of 1930 is usually a good enough place to look to avoid repeating that history. But as the U.S. debate over steel and aluminum import restrictions to protect national security interests heats up, it may be useful to take this July 4th to consider the lessons from our founding fathers.
Protecting Ourselves from Protection
James Bovard reminds us in his terrific article, American Tariffs and Wars From the Revolution to the Depression, that:
“Prior to the Revolution, American iron manufacturers had been competitive with foreign products. But after Congress imposed a high tariff on iron imports, U.S. producers sharply raised their prices. Former Treasury Secretary Albert Gallatin, in an 1832 report, condemned “the injustice and mischievous effects of an exaggerated duty on an article of such general use as iron. It falls upon the farmer, the mechanic, the shipping interest, and on every branch of the iron manufacture, those few excepted which have been embraced by the partial protecting system.”
It’s a slippery slope to protect one or two industries, not only because of the potential harm to American users of those products, but because protectionism begets more protectionism. What one industry asks for, others will want too. What American industries seek, foreign producers will seek from their governments. We’ve seen this story before, from the beginning of our country’s history, but it doesn’t mean we need to repeat it.
Feature image credit: “The Destruction of Tea at Boston Harbor” 1846 lithograph by Nathaniel Currier