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America’s Tumultuous History With Tariffs

America’s first great protectionist political figure was Alexander Hamilton, George Washington’s treasury secretary. And compared to later mercantilist politicians in our history, Hamilton wasn’t even that much of a protectionist. His original U.S. tariff bill imposed an average taxation level of just 8.5 percent on imported goods. And Hamilton argued that any protection encompassed in those duties, as opposed to revenue requirements, should be discontinued as soon as protected industries established themselves in the American economy.

Hamilton’s opponents, the early American free traders, feared he had created a monster, while northeastern industrialists, particularly in Pennsylvania, predictably argued that protection should be substantial and permanent to ensure national prosperity.

Therein lay the first stirrings of the great trade debate that has reverberated through our history, down to our own time and to President Trump’s announcement last week that he intends to slap protective tariffs on imported steel and aluminum. Thus do we have the first president since Herbert Hoover who has explicitly placed protectionist sentiments at the heart of his economic philosophy.

Whether Trump’s tariff policy is the right medicine for what ails the American economy is an open question. But it certainly shines a spotlight on the hollowing out of America’s industrial base and the consequent powerful hit absorbed by the country’s working classes. In 1965, manufacturing represented 53 percent of the U.S. economy; by 1988 that was down to 39 percent; by 2004 it had fallen below 10 percent. In the 1970s, according to The Economist, manufacturing employment constituted 25 percent of U.S. jobs; today it is less than 10 percent. These trends reveal serious hardship, particularly in the old industrial heartland of the Midwest, and that translates into frustration and anger. Trump’s emerging trade outlook is designed in part to address these powerful political sentiments.

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The protectionists of the country’s early decades—Hamilton and his ideological heirs—advocated centralized executive power wielded by elites in the service of economic expansion and national greatness. They favored federal-level projects and policies—particularly a powerful national bank and protective tariffs to help budding manufacturers and finance federal action—to pull up the nation from above. This was the model later embraced by Henry Clay and his Whigs, who crafted a philosophy of government—called the “American System”—that included federal public works such as roads, bridges, and canals. And always there was the call for high tariffs to pay for civic programs and boost industrial expansion.

No one abhorred this governmental philosophy more ardently than Thomas Jefferson, who opposed high levels of governmental intrusiveness into the private economy. Such policies, he argued, would inevitably lead to special privileges for the favored few. He wanted to keep tax levels as low as possible and reduce federal interference so the people could build up the nation from below. Jefferson’s arguments were later taken up in powerful ways by Andrew Jackson.

The Hamilton-Clay forces won the first round in the tariff wars, with passage during the John Quincy Adams administration of legislation that slapped high duties on iron, molasses, distilled spirits, flax, and various finished goods. Northerners loved it, while Southerners hated it, because it raised prices on necessities not produced in the South and because it crimped Britain’s ability to purchase Southern cotton by squeezing the importation of British goods. Southerners called Adams’s import tax the “Tariff of Abominations.”

Whereas before the Adams presidency average tariff payments generally fluctuated between 16 and 26 percent, afterward the levies typically reached 50 percent. Following Andrew Jackson’s attempt to allay Southern anger with some modest tariff reforms, average tariff rates hovered around 35 percent.

Then came James K. Polk to the presidency in 1845. Polk, probably the greatest free-trade president of our history, reduced average tariff rates to between 20 and 28 percent. Those rates generally held until the Civil War, when revenue needs eviscerated free-trade arguments. After the war, the Republican Party, the party of burgeoning industry, continued the high-tariff cry as a means of maintaining the industrial expansion. Average tariff rates hovered around 40 percent in the postwar years.

Democrats didn’t have much leverage in those decades, but they did manage to elevate Grover Cleveland to the presidency in 1884 and 1892. During Cleveland’s first term, he managed to get a tariff-reduction bill through the House, but the Republican-controlled Senate boxed it in. Then two things happened to break the deadlock: Benjamin Harrison was elected president in 1888, and William McKinley, congressman from Ohio, became chairman of the House Ways and Means Committee.

With Harrison’s blessing, McKinley set about crafting the most comprehensive tariff bill the country had ever seen up to that time, encompassing some four thousand separate items. So earnest was McKinley in supporting protectionism that the famous progressive writer Ida Tarbell resorted to ridicule in describing him. He had an advantage, she said, “which few of his colleagues enjoyed—that of believing with childlike faith that all he claimed for protection was true.” McKinley even sought to raise tariff rates on some items to preclude any importation of them at all, including woolens, higher-grade cottons, cotton knits, linens, stockings, earthen and china ware, and all iron, steel, and metal products. He also placed duties for the first time on agricultural products. “This bill is an American bill,” said McKinley. “It is made for the American people and American interests.”

The crusty Representative Roger Mills of Texas, however, rejected the idea that market constrictions could generate prosperity. International trade, he argued, was like any other human transaction. To get something you must give something. So it was with the foreigner who wants to sell his products: “Let in his cotton, woolens, wool, ores, coal, pig-iron, fruits, sugar, coffee, tea—let all these things come into the country, because when you do that something has to go out to pay for them…. That will create a demand for that American product.”

But McKinley and the Republicans had the votes, and the so-called McKinley Tariff became law. When Cleveland got elected a second time, he promptly brought down the McKinley rates, but McKinley prevailed at the next presidential election and promptly restored them to their previous levels.

Then an interesting thing happened to McKinley the Protectionist. He began to see that America’s industrial and agricultural productivity was outstripping American markets. Ongoing prosperity would require more and more foreign markets, whose emergence would be constricted by protectionism. As President McKinley embraced a new doctrine designed to foster international trade where, in his view, domestic manufacturers were not harmed. He dubbed the new approach “reciprocity” and defined it as an extensive series of negotiated tariff-reduction deals with other countries. The goal was to eliminate unnecessary trade barriers on both sides of trade deals—without generating fears of resulting trade wars.

McKinley outlined this heady new concept in September 1901 at the Pan-American Exposition in Buffalo. “Reciprocity,” he said, “is the natural outgrowth of our wonderful industrial development.” In another passage, he said, “Isolation is no longer possible or desirable.” The next day he was assassinated.

His successor, Theodore Roosevelt, abandoned reciprocity in favor of traditional Republican protectionism. But the fluctuations in trade policy would continue, with Woodrow Wilson building a consensus for reduced rates that would last through the heady post-World War I period. Then came the Great Depression and the disastrous Smoot-Hawley Tariff of 1930, which raised duties on some 20,000 imported goods, in some instances to record levels. Many economic historians believe this legislation deepened and lengthened the Great Depression.

If so, it also contributed to the political eclipse of the Republican Party and its traditional protectionism. With Democrats now enjoying a commanding position in American politics, tariff rates began a steady decline that would last for decades. A free-trade consensus prevailed, even among Republicans. The General Agreement on Tariffs and Trade (GATT) was established in 1947 to reduce trade barriers and promote unfettered trade among capitalist nations. In 1995, that organization became the World Trade Organization. This regimen of open markets and low tariffs dominated worldwide commerce through the postwar era, including the period following the collapse of Soviet communism.

But protectionist sentiments bubbled up from time to time, most notably in the 1980s when Japanese industrial production battered various American manufacturers, starting with electronic appliances and eventually slamming U.S. automakers and their workers. It was a serious matter, both politically and economically. U.S. factories were being shut down, workers laid off, industrial towns and cities devastated. Labor unions clamored for some kind of protection.

President Reagan, far more deft on far more issues than he has received credit for, crafted an approach that precluded the blunt instrument of the old-fashioned tariff. Instead he worked towards voluntary restrictions based on import quotas arrived at through diplomatic agreements (not unlike McKinley’s reciprocity concept). As the Wall Street Journal’s Holman W. Jenkins Jr. wrote the other day, Reagan “slapped import quotas on cars, motorcycles, forklifts, memory chips, color TVs, machine tools, textiles, steel, Canadian lumber and mushrooms. There was no market meltdown.” There also were no trade wars.

That was before, as Jenkins notes, the rise of China (far more ominous than Japan’s industrial emergence in the 1970s and ‘80s) and before “the globalization of the world’s assembly line.” But Reagan’s approach reflected an appreciation for the sensitive nature of the trade issue and the need to mesh the imperatives of international commerce with the requirement of assuaging domestic political anger. That required finesse.

The fluctuating history of U.S. trade policy demonstrates that, while this issue may seem settled for extended periods, it will never remain under control indefinitely. The decline of industrial America, and the devastation it has wreaked in so many heartland areas of the country, has spawned a powerful backlash that contributed to the election of Donald Trump.

Whether Trump’s old-fashioned tariff approach can reverse that devastation and revive America’s industrial capacity remains an open question. But it seems clear that, if he can’t find a way to incorporate some of the reciprocity thinking of William McKinley and Ronald Reagan, he will almost surely fail.

Robert W. Merry, longtime Washington, D.C. journalist and publishing executive, is editor of The American Conservative. His latest book, President McKinley: Architect of the American Century [1], was released in September. 

15 Comments (Open | Close)

15 Comments To "America’s Tumultuous History With Tariffs"

#1 Comment By Emil Bogdan On March 5, 2018 @ 11:28 pm

“With Democrats now enjoying a commanding position in American politics, tariff rates began a steady decline that would last for decades. A free-trade consensus prevailed, even among Republicans.”

Thanks for illustrating the tension between the two policy poles and some of the history. In the era you refer to quoted above, its main competitors were decimated while the untouched US, already the greatest economy for decades, was suddenly half the global economy following the war, so it seems likely that bipartisan free-trade optimism would have been the order of the day for the upcoming decades, no matter who or what. Suddenly, our manufacturing was in greater demand than ever, until all the war-torn regained their footing again.

Some things in life are inevitable, and tension is one of them. No one policy can be eternal or exist without counterweights. Of course this doesn’t mean Trump has a clue. His tariff thing seems more like a humorously anachronistic fixation, but at least he has recognized a problem, and actually, he has been wanting to try this solution for decades, so now he’s gonna do it. What I like is that the policy seems to lack an element of disturbing malice, and to be honest, generally seems more grounded than many others he came up with. I know he means it, and he means well, and either nothing’s gonna come of it, or else he’ll manage to make something positive from it. This strange policy is actually a great encapsulation of all the best parts of the Trump presidency: it’s active, humorous, not completely insane but retrograde, probably futile.

#2 Comment By GregR On March 6, 2018 @ 12:09 am

This article discusses none of the reasons for the ‘hollowing out’ of American manufacturing jobs.

First the jobs haven’t been lost to other countries they have been lost to mechanization. It simply doesn’t take as man man hours to build a widget today as it did 10, 20 or 100 years ago. But total manufacturing capacity is actually higher today in most industries.

Second, we know exactly what these tariffs will do because Bush implemented substantial tariffs on steel about 15 years ago. Those tariffs cost the manufacturing sector about 200,000 jobs in 22 months. Relative to about 160,000 total steel production jobs that were being ‘protected’.

Third, as a fraction of the world economy the US has shrunk in importance from WWII until today. Just after WWII the US made up about half of the entire worlds economic output, today it is closer to 20%. But that is primarily because the rest of the world has caught up not because the US has shrunk. But thinking of the world in the same terms, as though we can still dictate every economic decision for the rest of the world hasn’t been true for decades, see Bush’s tariffs for example.

#3 Comment By Youknowho On March 6, 2018 @ 7:37 am

So tariffs need reciprocity to work.

But Trump does NOT do reciprocity. It goes against his inner fiber of being.

So you might as well say, these tariffs will be a disaster.

#4 Comment By Johann On March 6, 2018 @ 10:46 am

One silver lining. The left have become free traders. Chalk it up to the Trump derangement syndrome. If Trump is for something, the left is against it.

#5 Comment By Martin Ranger On March 6, 2018 @ 11:19 am

“Whether Trump’s tariff policy is the right medicine for what ails the American economy is an open question.”

No, not really. The effects of Trump’s suggested tariffs are pretty well understood.

@Johann: I am not sure “the left” have become free traders, and I am not sure they should. Moreover, opposition to Trump’s tariff policy has very little to do with a distaste for Trump, and a lot with the sheer idiocy of the policy.

#6 Comment By chris mahoney On March 6, 2018 @ 1:26 pm

The US was highly protectionist for political reasons during the Embargo, the Non-Intercourse Act and the War of 1812. There was no manufacturing prior to this period outside of Pawtucket, RI.

#7 Comment By One Guy On March 6, 2018 @ 1:50 pm

“The left have become free traders.”

No, they haven’t. They are for targeted, surgical tariffs, neither free trade, nor levying tariffs on all countries. Whether that will work or not, I don’t know, but let’s at least TRY to be accurate.

#8 Comment By collin On March 6, 2018 @ 2:34 pm

Whether Trump’s old-fashioned tariff approach can reverse that devastation and revive America’s industrial capacity remains an open question.

Well Reagan had some impact with tariffs but best trade moves were to get Japan to build cars in Detroit South so it made political easier for Japanese and European car makers to sell cars in the US.

TBH I am seeing Trump well thinking out his trade war. Steel and aluminum are so capital heavy the jobs created by the tariffs is 15 – 20K which is very minor job creation compared to the downstream construction and other manufacturing jobs. (Note China sales on steel are 11th nation so it hardly effects them.)

However:
1) Don’t diminish the impact of growth Japanese manufacturing of 1970 – 2000. By 1980 it was obvious they had better manufacturing process than US made stuff.
2) The big China question is what happens as real wages increase? US steel produces over 70% of US consumption so I am not sure where the tariff is essential here.

#9 Comment By George Vukmanovich On March 6, 2018 @ 3:36 pm

As a student of history and economics I found this article well written and highly informative. However, it neglected to mention that aside from the U.S. and Britain, other nations regard “free trade” as a form of Anglo-American economic idiocy, along with believing in the existence of Santa Claus and the Tooth Fairy. In reality, many of America’s trading partners deliberately manipulate their currencies’ value downward against the U.S. dollar. This can be accomplished in a number of ways, such as having their central banks buy the dollar to push its value upward, or artificially set currency exchange rates to keep their currencies cheaper against the dollar. For example, Japan prefers the former while China does the latter. It should also be noted that the European Union has tough import controls on products coming in from China. Aggravating the U.S. trade situation, the U.S. tries to keep the dollar’s value high as a way to fight inflation. That keeps the bankers and other parasites on Wall Street happy. In addition to all this, many other governments subsidize their respective industries if they lose money. Europeans are notorious for this, although they are not alone in this. Anybody reading this remember Japan’s zombie banks? In closing, it should be clear that in reality there is no such thing ‘true’ or ‘pure’ free trade. The best that can be said about making a viable ‘free trade’ policy is that it must first be ‘fair.’ Otherwise, you are no more likely to be successful than looking for a statue of Elvis on the Moon or Mars.

#10 Comment By Emil Bogdan On March 6, 2018 @ 4:37 pm

Thanks, George. There are no free traders in practice, not even the Anglo-Americans. Because of the existence of inequality, imagining a planet of diverse nations engaging in pure free trade is like imagining a society with no laws to constrain others. Some of those “others” make Mercedes while some “others” make wooden sticks. Continuous fruitful engagement on an unshielded one-to-one basis is not really possible. The world is not 100% benign.

#11 Comment By Patricus On March 6, 2018 @ 5:31 pm

George V has the clearest grasp on this thing called free trade. There are no free traders among our trade competitors. The wealthiest are mercantilists. Our US history was mercantilist. Trade competitors don’t listen to what we say about trade. They study what we did to grow the economy behind high tariff walls.

People love to judge Trump a bumbling idiot because he questions free trade. The real idiots are the free trade believers with their “seen and unseen” gibberish.

Trade is competition, like war with no guns. As long as there are separate nations we will angle to get the best for our side, at the expense of the other side. It would require an overwhelming world government to enforce international free trade. The only advocates for free trade are dominant economic powers such as the Brits in the nineteenth century and America in the late twentieth. Those clamoring for free trade now can’t see what it did to our country in recent decades.

Smoot Hawley tariffs were insignificant. In 1930 our combined imports and exports were less than 10% of the economy. The major import was coffee. Major exports were forestry products and grains. All the nations protected their industries.

#12 Comment By Emil Bogdan On March 6, 2018 @ 6:18 pm

It appears we have the first tangible (and delightfully positive) effect of Trump’s tariff move: the Goldman Sachs guy resigns.

#13 Comment By Giovanni On March 6, 2018 @ 7:02 pm

It’s heartening to see a President take serious steps to address the trade imbalance. With steel, however, most of our imports come from Canada and the EU which have similar cost structures, unlike say China. Why are we importing this steel? Cheaper? A superior product? Let’s address it and help our steel makers even if it means using tax dollars to help them retool or automate. If we really want to get serious about the trade imbalance we have to change the system itself. Something along the lines of Keynes Bancor system, where active rebalancing measures are triggered when nations accumulate excessive trade surpluses/deficits.

#14 Comment By Anon87 On March 6, 2018 @ 10:57 pm

If tariffs and protectionism are so bad, why does the rest of the world practice it and do quite well (just like the US practiced and became quite successful doing so)?

Do you prefer incomes taxes for revenue generation, which doesn’t give consumers any choice when making purchasing decisions, and also provides no checks on government spending?

When people say “it makes things cheaper!” how does that help when you have no job, or at best a job in a much lower paying segment?

Is it really mechanization when the same jobs haven’t disappeared but instead just moved offshore?

#15 Comment By LouisM On March 7, 2018 @ 3:04 am

I’m waiting for a blanket 5% import tariff then Trump will have kept his promise.

Import Taxes might raise prices but they also rebuild domestic industries.