Trade War!!

It seems no matter what news channel you turn to these days you cannot escape the coverage on the trade war between the US and China. The US actually has a long and winding history when it comes to trade and tariffs. While over the last 50 years or more the US has been a beacon for free trade, it started out as the poster child for tariffs and restricted trade.

Prior to the 2016 presidential election, no person living in the US ever heard any Politian discuss tariffs. This is because after World War II much of western Europe was in shambles and the only hope for recovery was free trade. But prior to the second great war there had been a long history of vigorous debate about trade in the political arena. In fact, one of the very first pieces of legislation passed by the first congress of the US addressed tariffs specifically.  The Tariff Act of 1789 gave congress the authority to tax foreign imports and the revenue generated from these tariffs would account for most of the federal revenue in the 18th century. Believe it or not, in some years tariff duties accounted for 90% of federal revenue.

For the most part, the debate on tariffs in the 18th century came down to party lines. Republican politicians in the North favored tariffs because it protected many burgeoning industries. The southern economy was still very agrarian as compared to the north. Democratic politicians did not like tariffs because it just raised the cost of goods sold. (That’s not a typo. For the most part, in our countries first 100 years or more Republicans represented the north, and Democrats the south.) While northerners were buying American made goods, the south was still purchasing cheap imports from Europe.

After the Civil War the American economy had established itself as a leader on a global scale. American industry and agriculture had become the most efficient in the world, and its citizens were not exactly at risk from cheap imports. No other country had the industrial capacity or the complex distribution system needed to compete in the vast American market. Nevertheless, many American manufactures wanted to maintain high tariffs, others not so much. For example, railroads consumed massive amount of steel, they opposed tariffs that would raise prices on the metal. By the end of the 19th century it was US Steel exporting steel rail to Britain and Europe. For the US Steel industry, protectionist trade policies worked very well.

Because tariffs accounted for such a large part of federal revenue, they were necessary to run the government. However, that all changed in 1913 when the 16th Amendment to the US constitution was ratified and gave the federal government the power to impose a direct tax on American citizens’ income. Combine that with the lack of trade that took place after World War I, and the political rhetoric on tariffs declined sharply. But then in 1930 with the economy slowing, the US passed the infamous Smoot-Hawley Tariff Act. This increased tariff duties drastically and reciprocal trade barriers were imposed by other countries. Global trade came to a stand still and the move is seen by contemporaries today as just another part of the perfect storm leading up to the Great Depression.

The period after Smoot-Hawley is viewed as a time of trade liberalization. Prior to the 1930’s any change to tariffs were proceeded by months and months of congressional hearings. The Reciprocal Tariff Act of 1934 gave the executive branch authority to negotiate bilateral tariff reductions and between 1934 and 1945 President Roosevelt negotiated 32 bilateral agreements with other countries.

As mentioned earlier, the post WWII period is viewed as the “free trade era”. During this time, we saw the creation of the General Agreement on Tariffs which was backed by the US and established in 1947. This minimized tariffs between capitalist countries and would become the World Trade Organization in 1995. By the 1970s foreign products started to make there way into US markets. Industries like steel, television, toys, shoes, textiles and clothing started to collapse in the US. Today organizations and treaties like the WTO and NAFTA are starting to be given a second look as people are asking whether the costs of free trade are starting to out weigh its benefits.