American History and Trade Policy
Many people assume that America, the self-described “land of the free,” has always practiced free trade, upon whose principles America has soared to the top of global manufacturing and industry. Surely the land of the free has always embraced free trade! The fact of the matter, however, is that this statement betrays a profound ignorance of the actual history of trade in America. America began as a thoroughly protectionist nation, and she has declined in the twentieth century since the abandonment of protectionist policies.
History of the Rise and Fall of Protectionist Policy in America
“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.”1 This statement, made by Senator John McCain while he was campaigning for the Republican nomination for president in 2007, sums up contemporary American attitudes on protectionism. This is true for Republicans as well as Democrats, but does this represent the real history of protectionism in America?
The history of the emergence of the American economy parallels that of Great Britain. American policy on trade and commerce was mercantilist from the beginning. Colonial Americans were acutely aware of how British protectionist policies were actually hampering their own economic growth and progress. While preventing Americans from establishing their own manufacturing, Britain attempted to make America into a giant supplier of raw materials for nascent British manufacturing industries. Fletcher notes that in some ways, the American Revolution can be construed as a war over trade.2 After the passage of the Constitution, a protective tariff was the second bill that President Washington signed into law upon taking office.3 America’s foremost promoter of protectionism was Alexander Hamilton.
Whatever legitimate complaints some might have regarding Hamilton’s endorsement of a national bank and other policies, there is much wisdom that we can learn from him as well.4 Hamilton understood that competition produces good business, and he grasped how difficult it is for nations to break into new industries due to a wide disparity in competition. “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, in the one, or in the other, or in both, must necessarily be so considerable, as to forbid a successful rivalship, without the extraordinary aid and protection of government.”5
After the War of 1812, America began a period of extensive use of protective tariffs to stimulate new industries in America. It was during this period of mercantilism that American industry emerged on top of global trade, surpassing Great Britain in the last decades of the nineteenth century. During the period of 1870-1913, industrial production in mercantilist America and Germany grew 4.7 and 4.1 percent respectively, while free-trade Britain experienced an increase of only 2.1 percent.6 Mercantilism hit a small roadblock in 1913 when Woodrow Wilson became president. Wilson was an ardent free-trade advocate, and open trade played a central role in his internationalist worldview. While protective tariffs were rolled back under Wilson, they were reinstated to previous levels when Republicans regained power in 1921 and remained strong until the FDR administration came to power.
Recall John McCain’s allegation that the Smoot-Hawley Tariff Act of 1930 caused the Great Depression and was a “major contributor” to the outbreak of the Second World War. While McCain’s ridiculously ignorant view of the history of trade policy stated above demonstrates the quality of contemporary Republican presidential candidates, it is by no means confined to him. The idea that Smoot-Hawley caused the Great Depression is ludicrous. The Smoot-Hawley Tariff Act was passed in 1930, the year after the stock market crash in 1929. Furthermore, Smoot-Hawley could not have had such a tremendous impact on commerce as free-trade advocates imagine. The act only impacted a third of America’s trade, which accounted for about 1.3 percent of the GDP. The act raised the average duty on dutiable goods from 44.6 to 53.2 percent, which is hardly the radical paradigm shift that McCain and other free traders imagine.7 Tariffs as a percentage of total imports were higher in almost every year from 1821 to 1914.8 America’s tariffs increased in 1861, 1864, 1890, and 1922 without producing global recessions; recessions in 1873 and 1893 managed to spread without tariff increases; and America cut tariffs just prior to recessions in 1857 and 1872.9 While world trade did in fact decline,10 it was due to the depression itself rather than to tariffs.11 The real cause of the Great Depression was the balloon in the money supply thanks to the recently-created Federal Reserve. The inflation of the money supply created a bubble that finally burst in 1929.12
Nevertheless, the propaganda against tariffs has established a firm place in mainstream political and economic thought, and this emerging consensus has impacted commercial policy ever since. Tariffs became a major target of FDR’s “New Deal” plan to overhaul the economy along socialist lines. Many people were led to believe that protective tariffs were responsible for stifling recovery from the crash of the stock market. Secretary of State Cordell Hull pursued free trade under the unhistorical notion that “economic dissatisfaction” was an underlying cause of war. As part of the New Deal, tariffs came under the direct control of President Roosevelt, who promptly turned over this responsibility to mid-level State Department employees. During the Eisenhower administration, free trade was promoted as a means of encouraging free markets, as opposed to Marxist central planning. The United States rolled back trade barriers while erecting tariff walls and restricting capital mobility over European nations to aid economic recovery after WWII as part of the Marshall Plan.13 The removal of trade barriers was considered a strategic maneuver to help countries grow their economies in post-war Europe to reduce the appeal of communism. Only later would most economists embrace the idea that free trade was good for economic reasons.
Fletcher identifies the 1960s as the turning point of tariffs. In 1962, President Kennedy passed the Trade Expansion Act, which progressively cut duties on foreign imports over several years. Tariff cuts were particularly steep in regards to high-technology goods. Alfred Eckes, the former chairman of the U.S. International Trade Commission, summarizes the impact of these tariff cuts: “Viewed from a historical perspective, the Kennedy Round was a watershed. In each of the seventy-four years from 1893 to 1967 the United States ran a merchandise trade surplus (exports of goods exceeded trade imports). During the 1967-72 implementation period for Kennedy Round concessions, the U.S. trade surplus vanished and a sizable deficit emerged.”14
After the Trade Expansion Act rolled back tariffs in the 1960s, free trade enjoyed bipartisan support. Protectionist bills have been vetoed in the Democratic administrations of Jimmy Carter, Bill Clinton, and Barack Obama, as well as in the Republican administrations of Ronald Reagan,15 George H.W. Bush, and George W. Bush. Democratic presidential nominees Walter Mondale, Michael Dukakis, Al Gore, and John Kerry have all been free trade proponents, as have Republican presidential nominees Bob Dole, John McCain, and Mitt Romney. Free trade enjoys a virtually unchallenged position in mainstream partisan politics to this day. Both parties agree that opting for any major trade restrictions are unacceptable as a means of solving America’s economic problems.
Conclusions on American Trade History
There are many valuable lessons to be learned from the American history of trade and commerce. Like Great Britain, America climbed to the top of the world trade ladder by practicing mercantilist policies. Also like Great Britain, America has made the mistake of kicking away the ladder when she believed her economic place was secure and unassailable. Unfortunately, Americans have failed to learn the lesson, just as the British have also failed to rein in free trade and save their dying industries. More could be said about the history of free trade and protectionism in other countries, but the narrative is the same. This leads us to a very important question. Why has free trade gained such traction as the dominant policy on foreign commerce, and why does free trade still prevail as the overriding position to the exclusion of any alternative? I believe that the answer to this question is twofold.
First, many people who have a cursory knowledge of trade and markets are convinced by the historic argument based upon comparative advantage formulated by David Ricardo. Second, many elites in Europe and North America are thoroughgoing globalists whose natural interest it is to promote free trade in order to subvert national identity. In the next article, we’ll investigate the relationship between free trade and the rise of the welfare state. While many proponents of free trade aim to portray protective tariffs as an extension of the welfare state, the reality is that the abandonment of protectionist policies has led to the emergence of the welfare state.
Read Part 4
- Ramesh Ponnuru, “The Full McCain: an Interview,” National Review, March 5, 2007 ↩
- While the economic basis of the American complaints against British rule should not be overlooked, we should not ignore other factors as well, such as the rising tide of classical liberalism that motivated the American Founding Fathers in their political worldview. I admire the Founding Fathers, and they certainly understood a great deal about many important issues, but they weren’t necessarily correct on everything. ↩
- Tariff Act of 1789 (1 Stat. 24), July 4, 1789 ↩
- I agree with Russell Kirk when he said that Hamilton “erred after the manner of the old Tories,” but I still believe that Hamilton had many admirable qualities; and he certainly understood the importance of trade policy. ↩
- Alexander Hamilton, Report on the Subject of Manufacturers: In His Capacity as Secretary of the Treasury (Philadelphia: William Brown, 1827) p. 29 ↩
- B.R. Mitchell and Phyllis Dean, Abstract of British Historical Statistics, (Cambridge, UK: Cambridge University Press, 1971), pp. 520-521 ↩
- Alfred E. Eckes Jr., Opening America’s Market: U.S. Foreign Trade Since 1776 (Chapel Hill, NC: University of North Carolina Press, 1995), p. 107 ↩
- Ibid., p. 106 ↩
- Ibid., p. 112 ↩
- Gertrude Fremling, “Did the United States Transmit the Great Depression to the Rest of the World?” American Economic Review, December 1985 ↩
- Fletcher comments: “‘Notorious’ Smoot-Hawley is a deliberately fabricated myth, plain and simple. Smoot was a moderate and routine adjustment to America’s trading system.” Ian Fletcher, Free Trade Doesn’t Work. p. 140. ↩
- Information on the Smoot-Hawley Tariff Act is from Ian Fletcher, Free Trade Doesn’t Work, p. 139 ↩
- Alfred E. Eckes, Jr., Opening America’s Market: U.S. Foreign Trade Since 1776, p. 158 ↩
- Ibid., p. 202 ↩
- While Ronald Reagan was ideologically committed to free trade, he was also more pragmatic among recent presidents, as he realized that America didn’t always benefit from free trade. He did enact tariffs protecting steel, lumber, computer memory chips, and motorcycles (in order to aid Harley-Davidson). See Sheldon L. Richman, “Ronald Reagan: Protectionist,” The Free Market, May 1988. ↩