Trading Places
Dartmouth economist Douglas Irwin has
written a very long (832 pages in the print edition) and sometime tedious
history of U.S. trade policy, but in many respects it is a tour de force. In a
way he is writing American history through the lens of trade. His history
starts with the economic impact of the French and Indian War’s (The Seven Years
War globally) on Britain’s fiscal and colonial policy. The Boston Tea Party was
the result. After independence and the chaos caused by the failed Articles of
Confederation one of whose attributes were tariffs among the states a new
constitution was written that centralized trade policy within the national
government. In fact the second law enacted by the first Congress was a tariff.
It was needed to fund the government. Thus Trade policy is as old as the
Republic.
Irwin divides his history into three
eras: tariffs for revenue (1789-1860), tariffs for restriction (1861- 1933) and
tariffs for reciprocity (1934-Present?). Initially export oriented (cotton and
tobacco) South favored low tariffs (for revenue only) and the North supported
tariffs to restrict imports as well. Given that geography Democrats were for
low tariffs and Whigs/Republicans were for high tariffs. By the late 20th
century the two parties traded places with Republicans favoring open trade
while the Democrats became far more restrictionist. Irwin tells his story by
going into the details of all of the major congressional debates on tariff
questions. Sometimes this is very interesting and sometimes it gets a bit
tedious, but it is history in the making.
The first real battle over trade took
place in the 1820s where the political genius of Henry Clay pushed through a
restrictive tariff which both protected northern industry and raised revenue to
fund internal improvements. That was his American System. By 1832 led by John
C. Calhoun the South rose up in protest against what he called the Tariff of
Abominations and introduced the doctrine of nullification. Irwin notes that the
fight over the tariff became a proxy war over slavery. Nevertheless, with the
Southern Democrats largely in control tariffs were largely used for revenue
only prior to the civil war.
With the Republicans coming to power in
1861 the tariff was first used to raise revenue to fund the civil war and
afterwards to restrict the entry of foreign goods into the United States. Irwin found no real evidence the high tariff
policies of the Republicans promoted economic growth. This was due, in part, to
the economy being wide open to immigration and technology transfers. It was
also helpful that the U.S.’s leading trading partner was Britain which then had
a zero tariff policy. It is unfortunate that Irwin did not note that the
success of textile manufacturing in New England was due to stolen technology
from Britain.
Although the Republicans were in the
high tariff camp, both Presidents Garfield and McKinley in his second term were
open to reciprocity. Unfortunately both were assassinated before they could
implement their new ideas.
After growing unrest with the high
tariff policies of the Republicans which were thought by the Democrats to
promote monopoly and act as a tax on consumers, the new Wilson Administration
moved swiftly to lower tariff. Irwin highlights how Wilson was very hands on in
working with Congress to pass the Underwood Tariff which significantly lowered
import duties. Something else was going on as well. The U.S. was becoming a
major exporter of industrial goods. This was due to the discovery of huge iron
deposits in the Mesabi Range of Minnesota which made the U.S. the world’s
lowest cost producer of steel.
However after World War I and the
Republicans returned to power tariffs were raised dramatically in 1923 with the
Fordney-McCumber Tariff. That was followed by the Hawley-Smoot Tariff of 1930
which raised the already high tariffs by 15%. Irwin debunks the idea that the
Hawley-Smoot Tariff caused the stock market crash and the depression. It did, however,
exacerbate the global collapse of the early 1930s.
With the arrival of the Roosevelt
Administration tariff policy takes a U-Turn. Secretary of State Cordell Hull
established a policy of reciprocal trade, first with Latin America and then
with the rest of the world. If anyone person is a hero in the book it is
Cordell Hull. Under the leadership of state department official Will Clayton,
the Truman Administration follows up deal by deal reciprocal trade agreements
with broad multinational agreements(GATT now the WTO).
By the 1970s the parties traded places.
The Republicans supporting trade in financial services and high technology
products become free traders, while the labor oriented Democrats fearing the
loss of union jobs become protectionists. Further the long free trade oriented
South, switches sides as its textile manufacturing business come under stress.
All of this came to a head with Democrat Bill Clinton supporting NAFTA against
a majority of his party. NAFTA passed with Republican votes, but the fissures
the battle engendered made Americans more suspicious of trade deals.
Those fears bore fruit with the leading
Democratic candidates in 2016 opposing the Trans Pacific Partnership along with
Donald Trump. Now with a protectionist in the White House and a protectionist
Democratic Party it appears that the long era of reciprocal trade might be
behind us. Irwin thinks there is too much momentum and it took the Civil War
for policy to transition from revenue to restriction and it took the Great
Depression to transition for restriction to reciprocity. My question is whether
the Great Recession was another such trigger. I hope not.
In sum Irwin’s book is a long slog, but
for those serious about how our trade policy came to be, it is well worth the
effort.
