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Wednesday, December 22, 2010

Tariffs and Freedom

A historical episode that opponents of consumer sovereignty—that is, opponents of free trade—frequently cite to support their case for high tariffs is late nineteenth-century America. Pat Buchanan, for example, in his book The Great Betrayal asserts about the 1800s that “Behind a tariff wall . . . the United States had gone from an agrarian coastal republic to become the greatest industrial power the world has ever seen—in a single century. Such was the success of the policy called protectionism that is so disparaged today.”

It is true that the U.S. government imposed relatively heavy tariffs on American purchases of foreign-made goods throughout the nineteenth century. After steadily falling throughout the 1830s, 1840s, and 1850s, tariff rates began to rise again in the 1860s. A pinnacle of sorts was reached with the McKinley Tariff of 1890, which imposed what were then the steepest tariff rates in U.S. history.

It is also true that the nineteenth century was one of steady industrialization and great economic growth. According to Nobel laureate economic historian Douglass North, in 1820 America’s agricultural workforce was nearly seven times larger than her nonagricultural workforce. By the late 1890s, however, the number of nonagricultural workers surpassed the number of Americans working on farms.

And real per-capita income also rose steadily during this time. In 1900 it was about three times higher than it was in 1840.

Was this industrialization and significant improvement in Americans’ incomes the consequence of high tariffs? Or at least can we say that high tariffs did no harm to America’s economy during the 1800s?

No and no.

Facts on other fronts undermine protectionists’ claims that the nineteenth-century experience with high tariffs was positive.

Begin by noting that throughout the 1800s tariff revenues were a major source of operating funds for Uncle Sam. But tariffs that could significantly reduce imports would also reduce government revenues. After all, the very purpose of a “protective tariff”—as opposed to that of a “revenue tariff”—is to dramatically decrease the occurrence of the thing being taxed: imports. (In the extreme case, even a very high tariff rate on imports yields no government revenue if that rate causes Americans to stop importing completely.)

Because sustained budget deficits were practically out of the question in the nineteenth century, genuine protective tariffs arguably kept government in general smaller than it would otherwise have been by keeping revenues lower than they would have been under revenue (rather than protective) tariffs.

Smaller government, in turn, meant less intrusion into the economy. The resulting freedom of entrepreneurs and consumers, and lower likelihood of government handouts (and bailouts!) to favored interest groups, promoted healthy economic growth.

More generally, except for high tariffs, the U.S. economy of the nineteenth century was relatively free. Labor unions enjoyed no special legislative protections; outright industrial and agricultural subsidies were rare; nontariff taxes were either low or nonexistent; antitrust obstructionism wasn’t even possible until 1890, with the passage of the Sherman Act (and even then, it was largely held in check by the courts for a few more years); and there was no SEC, FDA, FTC, EPA, or any of the other alphabet-soup bureaucracies that haunt the economy today. (The first such agency—the Interstate Commerce Commission—wasn’t created until 1887.)

Real Growth Factors

Low taxes and minimal regulation paved the way for entrepreneurs to create, investors to invest, and consumers to reap the resulting benefits. America’s economic growth in the nineteenth century owed a great deal to this freedom.

One particular unregulated feature of the economy was immigration. Substantial immigration, especially during the last few decades of the 1800s, infused the American economy with productive human power and creativity. This immigration also expanded the size of the market able to be served by domestic firms, permitting these firms to take advantage of economies of scale that would otherwise have been unavailable to them because of restrictions on trade with foreign markets.

Economists Cecil Bohanon and T. Norman Van Cott reported, in a 2005 paper published in The Independent Review, that America’s policy of open immigration went a long way toward minimizing the harmful effects of high tariffs.

In addition to the immigrant-fed growth of the U.S. population in the nineteenth century, there was the growth of U.S. geography. By the end of the nineteenth century, the United States stretched from the Atlantic to the Pacific, and from Canada to Mexico and the Gulf. This enormous geographic area was a free-trade zone. Consumers and producers in frigid New England could specialize and trade with producers and consumers in sunny Florida and even faraway California.

The different geographic features that are among the reasons why trade among different small countries is so beneficial were present within this one sprawling and geographically diverse country.

Home of the Free(-Trade Zone)

So America’s impressive economic growth during the nineteenth century was in fact the result of free trade—trade unhampered within the expansive boundaries of a country that was huge, growing, and diverse in both its geography and its population.

If the protectionist logic was correct, then even greater wealth—or at least as much—would have been produced had each U.S. state adopted its own policy of protecting in-state producers from out-of-state competitors. But I know of no serious scholar who laments the fact that the United States, from its origins, has truly been a zone of free trade.

Of course, the fact that America’s economy grew impressively during the 1800s despite Uncle Sam’s restrictions on foreign trade does not mean that these restrictions weren’t harmful. They no doubt were. The restrictions stopped specialization from going ever further; they diminished the intensity of competition from the levels that consumers would have enjoyed without high tariffs; and they hampered the ability of American producers and consumers to tap into the creativity of non-Americans who did not immigrate to America.

Fortunately, though—or is it unfortunately?—nineteenth-century America’s other advantages were so great that the bounty they made possible blinds many people to the harm caused by that era’s high tariffs.

  • Donald J. Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.