The legacy of US trade policy is that of protection and has been evident at nearly every stage of its existence and certainly now more than ever. To understand how we got to where we are now, we must start with one of the most renowned statesmen in American history.

Enter Hamilton

The story of US trade policy begins with the tenure of the first Secretary of the Treasury, Alexander Hamilton. In 1791, he presented his “treatise on trade” The Report on the Subject of Manufactures. It elucidated three central tenets, but we’ll be focusing on the aspects which covered trade. Its core policy was supporting protectionism of domestic industry. The commentary on trade can be aptly summarized as follows:

• High tariffs on all foreign goods, but especially the industries which have infant industries at home or face heavy import competition
• Use some of the tariff revenue to directly subsidize domestic firms

Admittedly, even before then, one of the landmark pieces of legislation of the 1st Congress was the passage of the Tariff of 1789, which sought to wield the new found powers delegated to them by the newly ratified US Constitution. It’s primary purpose was to raise revenue for the federal government; tariff revenues would go on to make up the vast majority of federal revenue until the passage of the 16th amendment to the constitution, which legalized the taxation of income. Some proponent of the bill, like Hamilton himself, touted that it would support domestic firms. This tariff schedule wasn’t in place for very long, but it set the stage for a succession of increasingly protectionist revisions to the tariff schedule. Up until the Tariff Act of 1816, the tariffs in place were primarily for reducing the national debt and financing the operation of the federal government. The Tariff Act of 1816 rose tariffs on goods imported from Europe with the hope that Americans would purchase more domestically produced goods instead and marked the beginning of tariffs being implemented as part of a larger industrial policy.

The American System

After Alexander Hamilton died, the protectionist torch was picked up by Henry Clay, who formulated the American System with heavy inspiration from Hamilton’s writings and previous policies. This happened a little after The War of 1812 and materialized into a couple of notable legislative achievements , namely the aforementioned Tariff Act of 1816, and the Tariff of 1828. The latter increase tariff rates to levels never seen before previously in and marked the highest average tariff rate in US history at nearly 60%.

The North-South Divide

Because of the distinct differences in the regional economies in the American North and South, they had differing dispositions on the matter of trade. The heavily industrialized North had burgeoning industries and plenty of wealthy business owners and merchants to accompany them. Because of this, the North had always been more favorable to protectionism. Meanwhile, the South was more agrarian and far less industrialized, and as a result favored much lower import tariffs as they didn’t have any vested interest in industrial protection and imported goods with high tariffs. This led to vociferous arguments between politicians from the North and politicians from the South. The Tariff of 1828 (which heavily favored the North) had been colloquially called “The Tariff of Abominations” and exacerbated tensions between the North and the South; many historians believe it played a role in instigating the Civil War.

Roles of the Political Parties

From the second party system to the incipience of the Civil War, and well into the 20th century, the issue of trade protectionism was largely split across party lines. The Democratic party, which evolved from the Democratic-Republican party and were very strong in the south and were against not just in the. The Whig party eventually emerged as the party of merchants and the wealth industrial North, and consequently supported the imposition of very high tariffs. The slightly older Democratic party did not favor tariffs and were the de facto voice of the South. In response to the emergence of the Democratic party (as well as the Jacksonian presidency), the Whig party was formed. They were much stronger in the industrial North and were stalwart supporters of protectionism, as was the Republican party which would go on to succeed them. This dichotomy would be preserved for well over one hundred years. There were varying degrees of consensus regarding protectionism, with there existing some support in all parties throughout much of the 19th century, but sentiments increasingly diverged as time went on.

The Jacksonian Era

President Andrew Jackson entered office shortly after the passage of the Tariff of 1828 and over the course of his presidency, he slashed tariffs considerably; after the national debt has been fully paid off in 1834 were when there were considerable rate cuts. When President Polk took office, he worked with Congress to pass the Walker Tariff, which had reduced the average tariff to approximately 25%. Democrats in Congress continued cutting tariffs through the 1850s to the point where average rates had plummeted to 18%.

The Civil War and After

Due to Democrats in southern districts resigning from their posts in Congress, congressional Republicans were able to pass the infamous Morrill Tariff, which would lead to an unfettered period of staunch protectionism until the end of World War II. Prior to its passage, America had very low tariffs relative to Europe and most other countries. The impetus to pass Morrill’s bill was to raise sufficient revenue to finance the Civil War, but the composition of revenue sources indicates that it financed relatively little of the overall revenue raised during that time period. Instead, it was war bonds and borrowing that financed the lion’s share of the war efforts. From the period of reconstruction through the beginning of the 20th century, the political landscape with respect to trade remained similar; the South and West despised tariffs and heavily industrialized New England desired protection and voted accordingly.

How Effective was Protectionism from Reconstruction to the Early 20th Century?

While there is broad consensus of the importance of open international trade, there is considerably more contention with respect to the efficacy of trade liberalization in the situation of an emerging economy with burgeoning industries. Much of the literature finds that imports were not the reason for growth (Irwin, 2000). There are a few studies that have found some correlation between protectionist economies (with the US as part of their sample) and growth during the late 19th century. That isn’t of interest though; the more pertinent question is was it a causal factor in promoting growth and if so, why? When the composition of different goods is considered, the relation some purport is more related to protective tariffs on manufacturing, but not on agricultural goods (Lehmann, O’ Rourke, 2008). Even if one could find a causal relationship between the utilization of protective tariffs in certain industries and growth, one would have to factor in the static welfare loss inherent in protectionism. The extent to which the possibility of judiciously applied tariffs on manufacturing created some benefit, it would likely be with respect to increasing the profits of the domestic firm so that they were able to reinvest the excess into research and development as well as scaling their production capacity and learning how to produce more efficiently. To meet these ends doesn’t necessitate the use of a tariff or other trade barrier; there are better ways to facilitate these processes to promote industrial development.

The 16th Amendment

The ratification of the 16th amendment in 1913 paved the way for the subsequent Revenue Act of 1913. This imposed the first permanent income tax in the United States and cut tariffs. Before its passage, tariff revenue was the primary source of government finances. A lot of the motivations behind implementing a new tax code with a new income tax and reduced tariffs was the rancor of the American populous at increasing income inequality during the gilded age; tariffs are disproportionately borne by lower income people and many desired a more progressive tax code. This brief bout of trade liberalization didn’t last very long however, as Republicans rose tariffs and cut income tax in the 1920s; this led to a trade war that increased the cost of living in many American cities and hurt farmers through price increases on farming machinery

The Great Depression

During the beginning of the great depression, the Smoot-Hawley Tariff Act was passed, which nearly doubled rates from the Revenue Act of 1913. There is overwhelming consensus that it exacerbated the ill effects of the Great Depression. The kerosene on the fire was that these were specific tariffs, so the real value of the tariffs rose as the price of most goods plummeted. It reduced total factor productivity (how effectively and efficiently factors in an economy are used) by 0.5% from 1930-1933, with considerably bigger losses to TFP if accounting for the counterfactual circumstance of free trade (Bond et al. 2012). The Tariff also contributed to approximately a quarter of the 40% drop in imports from 1930 to 1931. FDR with a Democratic Congress passed the Reciprocal Tariff Act in 1934, which empowered the president to negotiate bilateral tariff agreements for the purposes of reciprocal reduction in duties. Its passage helped (in part) to foster the opening of trade globally.

GATT, WTO, and the Era of “Free Trade”

After the muddied waters of international affairs had become more pellucid after the wake of World War II’s destruction, the General Agreement on Tariffs and Trade (GATT). This was the predecessor to what is now the World Trade Organization. It’s purpose (as is still the case with the WTO) was to promote the multilateral reduction of tariffs and non-tariff trade barriers. During this time, despite trade liberalization, one of the most notable holdouts was the protection of US automobile manufacturers during the 1980s as import pressure from Japan mounted. One thing to note was that then as well as now is the transition from tariffs to more non-tariff barriers for protective measures. This was such the case with auto protectionism, with Voluntary Export Restraints being the primary policy instrument. In 1980, there was increasing pressure from the United Auto Workers union and auto manufacturers like Chrysler, Ford, and GM to shield them from the flow of more affordable and fuel efficient Japanese imports coming to the US market. Ronald Reagan, despite the free trade rhetoric, capitulated to the demands and got Japan to limit their exports of automobiles. The effects were considerable; every job saved cost $95,000 to $220,000 in 1986 dollars and the increased manufacturer profits reflected rents extracted from domestic consumers (Nelson, 1994). This was the first among many protectionist moves that the US would take on throughout the 90s and through the present day; most notable after this were the Bush steel tariffs and Obama’s tire tariffs. The steel tariffs adversely affected employment and GDP and the tire tariffs cost approximately $900,000 for every job saved.

NAFTA and the myth of liberalized trade agreements

Most major modern trade agreements that the US is a part of contain hidden protectionist elements. Numerous tools are used, but the most commonly employed are intellectual property protections (with respect to imposing tougher regimes on trading partners) and local content requirements. Take NAFTA as an example; if you’re making socks in Mexico, you can send it tariff free to the US, but you cannot use yarn from China. Likewise with automobiles, at least 62.5% of their parts must be sourced from North America (that number is now 75% with the newly ratified USMCA).

Current US policies

The US currently has very low tariffs on average (around 1.6% in 2018) and only about 30% of imports have any tariff whatsoever. The US engages in plenty of protectionism in less obvious ways. The US still spends a great deal on agricultural subsidies, whose funding levels have remained stable over the last few decades. Not only that, but the US also utilizes import quotas on sugar to inflate sugar prices for the American consumer. There are also price guarantees that have been implemented; The US has added the most protectionist measures of any major economy in the world since 2008

Much of the protectionist measures the US have taken are government procurement and trade defense measures (retaliatory tariffs on goods where there are dumping accusations).

Policy Changes for the Future

The US could improve its trade policy by taking a number of bold, but realistic steps to liberalize trade whilst also aiding those who are affected by short-term trade shocks as well as intervening where appropriate to foster industrial development. The most salient policy considerations pertinent to these goals are elucidated below

End Currency Manipulation

To the extent that foreign trade partners engage in currency manipulation to support their export industries, the US needs to adopt a policy that offsets the negative ramifications of foreign currency manipulation with reciprocal action via purchasing the offending country’s currency at an equal level

Join the CPTPP

This is one of the most powerful instruments we have to stand against China and diverse our supply chains. It was a mistake to leave the TPP in the first place (though I believe there were merited arguments regarding IP to stand against the initial terms of the agreement) and we need to open trade with all other possible partners if we are to get effective leverage to deal with China.

Implement strong active labor market policies

Unlike many smaller open economies, the US hasn’t bothered to fully invest in robust active labor market policies that focus on keeping people employed and with stable incomes.

There are a number of policies to accomplish this end, but some include

• Expanding Reemployment Trade Adjustment Assistance (RTAA) to cover all workers effected by trade, immigration, and technological shocks and increasing generosity
• Pass the ELEVATE Act (or something like it) to subsidize jobs, fund retraining and reemployment programs adequately, encourage entrepreneurship, and provide relocation assistance
• Widely expand apprenticeship opportunities to all applicable jobs, not just traditional blue collar jobs
• Promote on the job and alternative credentialling
• Make tertiary education free at the point of use with an expanded income based repayment program or graduate tax over the current loan model

Quit the race to the bottom on taxes

Tax policy has become too important a consideration with respect to where companies choose to headquarter. This current paradigm has lost the US around 111 billion USD (Klausing, 2016). A major shift in tax policy will be necessary to combat this effectively. Here, I list 3 options that could be pursued

• Raise the corporate tax rate (to 25-28%), eliminate all credits excluding the R&D tax credit, remove most deductions, but move to full investment expensing, and implement a system of formulary apportionment.
• Fully replace our tax system with the Bradford X-tax, which would essentially be a destination based VAT with wage deductions on the business side
• Dean Baker’s corporate tax replacement that has corporations give some portion of their stock to the government as non-voting shares and would as a result send dividend payments to the treasury like they would to an ordinary shareholder

All three of these options would curb tax avoidance and ensure that all businesses doing business in the US pay tax, and the middle option in particular would end the favorable treatment of imports over exports by our tax code.

Remove protectionism in US trade deals

Removal of local content requirements and various intellectual property rules would help to truly liberalize trade deals, rather than allow the gains to largely flow to those who helped negotiate them. A greater deal of transparency during negotiations would help in holding accountable special interests who wish to sneak protectionism in trade agreements. Slashing arbitrary tariffs that we still have in place on goods within our tariff schedule is another good idea.

Industrial policy-lite

To have competitive export industries, the US needs to reverse course with its parsimonious investments into public research and development (only 0.71% of GDP in 2018). Increasing that figure to above 2% would give the US an edge in scientific breakthroughs and such knowledge can be used to create millions of decent paying jobs in innovative industries. Beyond nominal funding, our research agencies require more levity in doing high risk research in undiscovered areas as even the likes of DARPA have taken fewer and fewer risks on pursuing bold projects. On top of this, a modernized industrial policy for America may include

• A newfound public-private partnership between SBIR (Small Business Innovation Research Program) and venture capital firms in helping to bridge the gap of capital constraints so that long run, capital intensive projects (i.e in energy) can be funded
• Encourage “learning in production” via funding commercialization assistance for sectors that need it
• Place based policies that more equitably distribute where research grants go throughout the US and promote multipolar urbanization where feasible