Protectionism in the United States is protectionist economic policy that erects tariffs and other barriers on imported goods. This policy was most prevalent in the 19th century. At that time, it was mainly used to protect Northern industries and was opposed by Southern states that wanted free trade to expand cotton and other agricultural exports. Protectionist measures included tariffs and quotas on imported goods, along with subsidies and other means, to restrain the free movement of imported goods, thus encouraging local industry.
There was a general lessening of protectionist measures from the 1930s onwards, culminating in the free trade period that followed the Second World War. After the war, the United States promoted the General Agreement on Tariffs and Trade (GATT), to liberalize trade among all capitalist countries. In 1995, GATT became the World Trade Organization (WTO), and with the collapse of Communism its open markets/low tariff ideology became dominant worldwide. Protectionism has increased in popularity since the election of Donald Trump in 2016.
History
Britain was the first country to successfully use a large-scale infant industry promotion strategy. However, its most ardent user was the U.S. Economic historian Paul Bairoch once called it "the homeland and bastion of modern protectionism" (Economics and World History: Myths and Paradoxes, Bairoch).
Britain initially did not want to industrialize the American colonies, and implemented policies to that effect. For example, banning high value-added manufacturing activities. Thus, the American Revolution was, to some extent, a war against this policy, in which the commercial elite of the colonies rebelled against being forced to play a lesser role in the emerging Atlantic economy. Despite the common man's antipathy to this protectionism, after independence Alexander Hamilton and other nationalists passed the Tariff Act of 1789 - the second bill of the Republic signed by President Washington which allowed Congress fund the new government by imposing a fixed tariff of 5% on all imports, with a few exceptions.
Most American intellectuals and politicians during the country's catching-up period felt that the free trade theory advocated by British classical economists was not suited to their country. The US went against the advice of economists like Adam Smith, Ricardo and Jean Baptiste Say and tried to protect its industries. Alexander Hamilton, the first Secretary of the Treasury of the United States (1789–1795) and economist Daniel Raymond were the first theorists to present the argument of the emerging industry, not the German economist Friedrich List. List started out as a free trade advocate and only converted to the infant industry argument following his exile in the U.S (1825–1830).
Hamilton feared that Britain's policy towards the colonies would condemn the United States to be only producers of agricultural products and raw materials. Washington and Hamilton believed that political independence was predicated upon economic independence. Increasing the domestic supply of manufactured goods, particularly war materials, was seen as an issue of national security. In his Reports, Hamilton argued that the competition from abroad and the "forces of habit" would mean that new industries that could soon become internationally competitive ("infant industries") would not be started in the United States, unless the initial losses were guaranteed by government aid.
According to him, this aid could take the form of import duties or, in rare cases, prohibition of imports. He called for customs barriers to allow American industrial development and to help protect infant industries, including bounties (subsidies) derived in part from those tariffs. He also believed that duties on raw materials should be generally low. Hamilton explained that despite an initial "increase of price" caused by regulations that control foreign competition, once a "domestic manufacture has attained to perfection ... it invariably becomes cheaper".
In 1789, Congress passed a tariff act, imposing a 5% flat rate tariff on all imports. Between 1792 and the war with Britain in 1812, the average tariff level remained around 12.5%. In 1812, all tariffs were doubled to an average of 25%, in order to cope with the increase in public expenditure due to the war.
In 1816, a new law was introduced to keep the tariff level close to the wartime level—especially protected were cotton, woolen, and iron goods. The American industrial interests that had blossomed because of the tariff lobbied to keep it, and had it raised to 35 percent in 1816. The public approved, and by 1820, America's average tariff was up to 40 percent.
According to Michael Lind, protectionism was America's de facto policy from the passage of the Tariff of 1816 to World War II, "switching to free trade only in 1945".Michael Lind, "Free Trade Fallacy", New America Foundation, January 1, 2003.
There was a brief episode of free trade from 1846, coinciding with the zenith of classical liberalism in Europe, during which American tariffs were lowered.
In the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name the "American System".
The American Civil War (1861–1865) was fought over the issue of slavery as well as tariff disputes. At the time of independence, the agrarian interests of the South were opposed to any protection, while the manufacturing interests of the North wanted to maintain it. The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade, and implemented a 44-percent tariff during the Civil War—in part to pay for railroad subsidies and for the war effort, and to protect favored industries.
After the First World War, the GOP was baffled when the restoration of higher tariff rates with the Fordney–McCumber Tariff in 1922 did not prevent an economic crash. The second attempt to raise tariffs with the Smoot-Hawley Tariff Act of 1930 also backfired. A stark reduction in international trade and retaliatory actions from Canada, Britain, Germany and other industrial nations exacerbated the devastating effects of the Great Depression on the American population. During the Second World War, the interest in tariffs waned, recent American economic policies were supportive of free trade, while never reaching the heights of British freedom of trade in the mid-nineteenth century.
Southern states Historically, slave-holding states had little perceived need for mechanization because of the low cost of manual slave labor. They supplied raw cotton to Britain, which supported free trade.
Northern states Northern states sought to develop manufacturing industries and sought protections to allow nascent Northern manufacturers to compete with their more sophisticated British competitors. Throughout the 19th century, leading US politicians, including Senator Henry Clay, supported Hamilton's approach within the Whig Party under the name "American System."
The opposed Southern Democratic Party contested elections throughout the 1830s, 1840s and 1850s in part over the issue of protection of industry. However, Southern Democrats were never as strong in the U.S. House of Representatives as the more populous North. The Northern Whigs achieved higher protective tariffs over the South's bitter resistance. One Southern state precipitated what came to be called the Nullification Crisis, over the issue of tariffs, arguing that states had the right to ignore federal laws.
Mostly over the issue of abolition and other scandals, the Whigs collapsed, leaving a void which the fledgling Republican Party, led by Abraham Lincoln filled. Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade. He implemented a 44% tariff during the American Civil War in part to pay for the building of the Union Pacific Railroad, the war effort and to protect American industry.
By President Lincoln's term, the northern manufacturing states had ten times the GDP of the South. With this advantage, the North was able to starve the South of weapons through a near total blockade, while supplying its own army with everything from heavy artillery to Henry repeating rifles.
With the Northern victory, Republican dominance was assured. Republicans continued to dominate American politics until the early 20th century.
President Ulysses S. Grant stated:
For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.
Southern Democrats gradually rebuilt their party and allied themselves with Northern Progressives. They had many differences, but both opposed the corporate trusts that had emerged. This marriage of convenience to face a common enemy reinvigorated the Democratic Party, catapulting them to power.
Colonial Era to 1789 In the colonial era, before 1775, nearly every colony levied its own tariffs, usually with lower rates for British products. There were taxes on ships (on a tonnage basis), import taxes on slaves, export taxes on tobacco, and import taxes on alcoholic beverages. The London government insisted on a policy of mercantilism whereby only British ships could trade in the colonies. In defiance, some American merchants engaged in smuggling.John W. Tyler, Smugglers and Patriots: Boston Merchants and the Advent of the American Revolution (1986) online review
During the Revolution, the British blockade from 1775 to 1783 largely ended foreign trade. In the 1783–89 Confederation Period, each state set up its own trade rules, often imposing tariffs or restrictions on neighboring states. The new Constitution, which went into effect in 1789, banned interstate tariffs or trade restrictions, as well as state taxes on exports.Dewey, Financial History of the United States (5th ed. 1915) ch. 1–3
Tariffs and the constitution
The framers of the United States Constitution gave Congress the power to "lay and collect taxes, duties, imposts and excises, pay the debts and provide for the common defense and general welfare of the United States" and also "to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."
There was a consensus among the Founding Fathers that tariffs were the most efficient way of raising revenue as well as the most politically acceptable. President George Washington signed the Tariff of 1789, which authorized the collection of duties on imported goods. It was sponsored by Congressman James Madison, passed by the 1st United States Congress, and signed into law by Washington. The Tariff Act of 1789 was the first major piece of legislation passed in the United States after the ratification of the United States Constitution. It had three purposes: to support the government, to protect manufacturing industries developing in the nation, and to raise revenue for the federal debt.Dewey, Financial History of the United States (5th ed. 1915) ch. 4–5