One can exaggerate the degree of liberty in America before the 20th-century sprint of interventionism. (I have sinned myself.) One form of widespread government intervention in 19th-century America was protectionism –- the imposition of customs tariffs to limit imports. In his 1914 The Tariff History of the United States, F. W. Taussig follows the evolution of American protectionism from the early Republic, and especially the first really protectionist tariff act in 1808, up to 1913.
Frank William Taussig (1859-1940) was a well-known economist in his time. He taught economics at Harvard University for more than four decades, and was the editor of the Quarterly Journal of Economics, a major academic journal. His main contributions were in the theory of international trade, and especially his 1927 book International Trade. He also ventured into the theory of wages and capital, in which he was influenced by Eugen Böhm-Bawerk. He was an adviser on commercial policy to president Woodrow Wilson and, from 1917 to 1919, chairman of the U.S. Tariff Commission. He did not fall for the siren of protectionism.
Economists have long known that there is no serious economic argument for protectionism. The basic argument is that a customs tariff (the main form of protection until more recent times) increases the domestic price of the targeted good, and thus harms domestic consumers. A little bit of economic analysis (former economics students will remember the standard graphical analysis) shows that consumers lose more than the sum of what the Treasury grabs in revenues from foreign producers (who have to pay the tariff) and of what domestic producers gain in increased profits. If a tariff is high enough, it can stop all imports of the targeted good.
To the demonstration of the benefits of free international trade, protectionists oppose the infant-industry argument, which was known as the argument for the protection of young industries in Taussig’s time. The claim is that temporary protection is warranted in the case of a profitable industry that cannot take off only because of foreign competition. The purpose is to give it time to become profitable and competitive.
The first weakness of this claim is that the definition of profitability must include the cost of any investment towards eventual competitiveness. And if a business is profitable in this sense, it will find private financing to bridge the gap between investment and future profits. The second problem, well illustrated by Taussig, is that the more an industry is protected against foreign competition, the more protection it will require in the future. The protected producers will lack the incentives to become competitive, and will lobby against any removal of their privileges. In other words, the infant industry will remain indefinitely infantile.
The infant-industry argument started to be invoked early in the 19th century. After a few decades of protection, it became clear that the American manufacturing Taussig observed that, around 1840,
It seems to have been felt by this time that manufactures had ceased to be young industries and that the argument for their protection as such, was no longer conclusive. Another position was taken. The argument was advanced that American labor should be protected from the competition of less highly paid foreign labor.
This new protectionist argument –- that American labor needed protection against foreign competitors with lower wages –- is also easy to debunk, although Taussig is not as explicit as one would hope. If American workers are paid more, it is either because they are artificially protected against foreign competition or because they are more productive. And if they are more productive, they don’t need to be protected. So the wage argument is not an argument for artificial protection, but an admission that unproductive activities are artificially protected.
We can add that, according to the theory of comparative advantage, it is not absolute wages and other costs that determine the direction of trade, but relative costs. Lower foreign wages are compensated by the cost of other factors that are comparatively higher (like the cost of capital). A bit more of this later.
The result of protection is that consumers pay more for their goods and services. Taussig illustrates with the 1870 tariff on steel rails:
[C]onsumers in this country were compelled to pay twice as much for steel rails as they paid in England. … and a tax of this kind eventually comes out of the pockets of the people in the shape of higher railroad-charges for carrying freight and passengers.
By the early 20th century, it had become clear that the main effect, and motivation, of the tariffs was to increase profits in the protected industries, not to give a quick boost to young industries or to protect American salaries. A new level-playing field argument was called to the rescue. The 1908 Republican platform (the Republicans had been the “party of protection”) described the new doctrine as follows: “In all protective legislation the true principle of protection is best maintained by the imposition of such duties as will equal the difference between the cost of production at home and abroad, together with a reasonable profit to American industries.”
Taussig provides a definitive counter-argument:
Anything in the world can be made within a country if the producer is assured of “cost of production with reasonable profits.” … very good pineapples can be grown in Maine, if only a duty be imposed sufficient to equalize the cost of production between the growers in Maine and those in more favored climes. … Consistently and thoroughly applied, the “true principle’” means that duties shall be high enough to cause anything and everything to be made within the country, and international trade to cease.
In 1913, the Democrats, who were timidly trying to combat excessive protectionism, proposed another principle: the “competitive tariff.” As Taussig noted, “[t]the notion of a ‘competitive tariff’ is no less inconsistent with the principle of free trade than is the rival one.” He explains that “[t]he principle of a ‘competitive tariff’ would seem to mean merely that protection should not be unnecessarily high, yet high enough to insure the maintenance of domestic production.”
This, of course, does not make sense for “a cheap supply from abroad is better than a dear supply at home. This is the gist of the principle of free trade.” This brilliant formulation by Taussig summarizes the argument in favor of free trade. Let domestic producers produce what they are most efficient at, and let consumers buy the rest from foreign producers.
From the founding of the Republic until the middle of the second decade of the 19th century, tariffs were mainly used for raising federal government revenues, of which they were the main source. On the issue of protection against foreign competitors, the founders had been divided. The tariff acts of 1789 and 1808 showed signs of protectionism, but it was mainly with the Tariff Act of 1816 that the movement took off, under the excuse of the infant-industry argument. Over the following 100 years, some 20 major tariff acts were adopted, alternatively increasing and decreasing tariffs, creating, abolishing, and extending them, in a great political cacophony. Protection (tariff rates and the number of goods falling under them) increased until 1828, diminished with ups and downs until 1861, increased again and reached an uncertain plateau until the tariff acts of 1909 and 1913, which attenuated it somewhat.
Over the whole period, the average tariff on dutiable goods oscillated between 20% and 60%. The tariffs on some goods reached 100% or more. Nothing close to free trade.
The experience of the Civil War is especially interesting. As wars and major disruptions generally do, the Civil War provided a great opportunity for the protectionists. The tariff act of 1864 dramatically increased protection under the excuse of patriotism. The average rate on dutiable commodities jumped to 47%. Many tariffs were jacked up again in 1870. Taussig observes:
The high duties which the war thus caused to be imposed, at first regarded as temporary, were retained, increased, and systematized, so developing gradually into a system of extreme protection. …
Not only during the war, but for several years after it, all feeling of opposition to high import duties almost entirely disappeared. … [E]ven after the war, almost any increase of duties demanded by domestic producers was readily made.
American protectionism provides remarkable examples of the drift of democracy, the dangers of political entrepreneurship, the power of special interest, and the defrauding of citizens. As Leonard Cohen sings, America is “the cradle of the best and the worst.” Taussig’s history of the American tariff does not focus on the best.
As much as entrepreneurship is efficient in economic life, Public Choice theory has shown how inefficient it can be in political life. Taussig was writing half a century before the development of Public Choice, but his depiction of congressmen haggling and log-rolling over tariffs is telling. In the debate over the 1909 tariff, for example, a senator from Kansas insisted on a tariff on hides before he would vote for tariffs on other goods. He got his way, because “[t]hat is one of the courtesies of the Senate when any member wants something done,” says the Congressional Record, quoted by Taussig (emphasis in Taussig’s quote). The public ends up with lots of tariffs that lots of people do not want.
Congressmen log-rolled on increased protection satisfy the special interests benefiting from it. Presenting the tariff bill of 1828 in the House, a Vermont representative declared: “The committee [on manufactures] gave the manufacturer of iron all he asked, and more.” On the Tariff Act of 1864, Taussig observes that it “contained flagrant abuses in the shape of duties whose chief effect was to bring money into the pockets of private individuals.” Regarding the Tariff Act of 1867, he writes:
The whole course of events forms the most striking example –- and such examples are numerous –- of the manner in which, in recent tariff legislation, regard has been had exclusively to the producer. Here was an intricate and detailed scheme of duties, prepared by the producers of the articles to be protected, openly and avowedly with the intention of giving themselves aid; and yet this scheme was accepted and enacted by the National Legislature without any appreciable change from the rates asked for.
In the process, citizens were duped. They did not understand the “intricate reasoning … needed to follow the effects of such duties into all the ramifications of international and domestic trade.” Today’s economists versed in Public Choice theory would talk of the voters’ “rational ignorance.” Citizens faced “a confused notion, fostered by much of the ultra-protectionist talk, that a duty brings a burden on the foreign producer, not on the domestic consumer.”
Industry lobbyists and their political operatives made sure that the tariff laws were impossible to understand. Taussig observes:
The whole cumbrous and intricate system –- of ad valorem and specific duties, of duties varying according to the weight and the value and the square yard –- was adopted largely because it concealed the degree of protection which in fact the act of 1867 gave.
About the Tariff Act of 1909, he explains that, “as in previous tariffs, there were so-called ‘jockers,’ –- obscure changes, working to the advantage of particular individuals, and concealed amid the endless details.”
For all the talks about liberty and individual rights, America was far from being the least protectionist country in the world. Britain, where a powerful free-trade movement had developed, declared unilateral free trade (if only for a few decades) at the time when nearly unquestioned protectionism thrived in her former colony.
Taussig probably underestimated the damage of protectionism when he claimed that, all in all, tariffs did not have a major economic impact, that “[t]he great bulk of our occupations would be conducted in the same way even under complete free trade.” Yet, despite high tariffs, many of today’s economic constraints did not exist in the 19th-century America. For one thing, the surveillance state was kept in check, as shown by this remarkable observation about the 1913 tariff bill:
A clause that aroused strong opposition sought to give opportunity for the examination of the books of importers and foreign manufacturers suspected of dishonest practices. After much discussion, and vehement protest from persons interested, the clause was so framed as to give the Secretary of the Treasury discretionary authority to impose an additional duty of 15 per cent. in case where there was refusal to submit books and records.
Today’s businessmen can only dream of legally bribing the state to stay away from their books and papers.
Although well-grounded in economic theory, The Tariff History of the United States is often short on theoretical explanations. Taussig could have explained the theory of comparative advantage, which he does not once mention by name –- even though it underlies his general argument. Discovered by David Ricardo (or perhaps Robert Torrens) in the 19th century, this theory shows how two countries (that is, individuals from one country to the other) have an interest to trade even if one country is less efficient in everything, provided only that the inefficient country is comparatively less inefficient in the some production.
The benefits of free trade may be better understood today than in Taussig’s time; perhaps, after all, economic education has progressed –- or at least that is what we like to believe. But the protectionist danger is still looming especially in times of popular discontent, mounting nationalism, and demagogic exploitation.
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