"Historical Aspects of U.S. Trade Policy"

What happens when the U.S. closes its doors to trade? Does protectionism help infant industries? Does protectionism impact economic growth? Douglas Irwin looks to the past to answer these and other questions about international trade:

Historical Aspects of U.S. Trade Policy, by Douglas A. Irwin, NBER Reporter: While international trade and trade policy continue to be as controversial as ever, the United States has been committed for more than half a century to maintaining an open market. It was not always that way. For most of U.S. history, the United States imposed fairly substantial barriers to imports in an effort to protect domestic producers from foreign competition.

For the past several years, I have been investigating the historical aspects of U.S. trade policy as part of the NBER's research on international trade and the development of the American economy. The purpose of this research has been to study the economic effects of past trade policies on the U.S. economy and understand the political and economic forces that have shaped those policies.

Early American Trade Policy ...[H]istorical data ... from early government documents ... reveal that tariffs started out at relatively low levels, about 15 percent in the 1790s, but rose thereafter to generate additional revenue and help finance the War of 1812. ...

One of the classic, early statements on U.S. trade policy is Alexander Hamilton's Report on Manufactures in 1791. This report called for government support of manufacturing through subsidies and import tariffs... Although Hamilton's proposals for bounties (subsidies) failed to receive support, ... Congress adopted virtually every tariff recommendation put forward in the report by early 1792. These tariffs were not highly protectionist duties, because Hamilton feared discouraging imports, the critical tax base on which he planned to fund the public debt. Indeed, because his policy toward manufacturing was one of limited encouragement and not protection, Hamilton was not as much of a protectionist as he is often made out to be. Hamilton's moderate tariff policies found support among merchants and traders, the backbone of the Federalist Party. But disappointed domestic manufacturers shifted their political allegiance to the Republican Party, led by Thomas Jefferson and James Madison, both of whom were willing to consider much more draconian trade policies aimed at Britain.

Indeed, as president, Jefferson was responsible for one of the most unusual policy experiments in the history of U.S. trade policy. At his request, Congress imposed a nearly complete embargo on international commerce from December 1807 to March 1809. The Jeffersonian trade embargo provides a rare opportunity (or natural experiment) to observe the effects of a nearly complete (albeit short-lived) elimination of international trade. Economists usually describe the gains from international trade by comparing welfare at a free-trade equilibrium with welfare at an autarky equilibrium. In practice, such a comparison is almost never feasible because the autarky equilibrium is almost never observed, except in unique cases such as this one. By mid-1808, the United States was about as close to being fully shut off from international commerce as it has ever been during peacetime.

Monthly price data allow us to observe the dramatic impact of the embargo: the export-weighted average of the prices of raw cotton, flour, tobacco, and rice, which accounted for about two-thirds of U.S. exports in the United States, fell by one third within a month or two of the embargo. The price of imported commodities rose by about a third as the number of ships entering U.S. ports fell to a trickle and imports became increasingly scarce. According to my calculations, the static welfare cost of the embargo was about 5 percent of GDP. Thus, the embargo inflicted substantial costs on the economy during the short period that it was in effect.

The embargo, along with the dramatic reduction in trade as a result of the War of 1812, is commonly believed to have spurred early U.S. industrialization by promoting the growth of nascent domestic manufacturers.

Joseph Davis and I used his newly available series on U.S. industrial production to investigate how this protection from foreign competition affected domestic manufacturing. On balance, the trade disruptions did not decisively accelerate U.S. industrialization as trend growth in industrial production was little changed... However, the disruptions may have had a permanent effect in reallocating resources between domestic infant industries (such as cotton textiles) and trade-dependent industries (such as shipbuilding).

Antebellum Trade Policy During the 1820s, the average tariff on dutiable imports rose sharply, peaking at over 60 percent in 1830, even higher than under the notorious Hawley-Smoot tariff of 1930. Over the next decade, the average tariff fell by half, and stood at less than 20 percent by the Civil War. In fact, the period from 1830 to 1860 was one of just two in American history when tariffs exhibited a secular decline (the other being from the mid-1930s to the present). ...

Aside from revenue, the ostensible purpose of such import tariffs was to protect import-competing manufacturers from foreign competition. The role of the tariff in promoting the expansion of the early American cotton textile industry has been quite controversial, with older scholarship by Frank Taussig suggesting that the industry was well established by the 1830s and more recent work suggesting that the tariff remained critical for some time. In joint work, Peter Temin and I concluded that Taussig was correct in that the cotton textile industry could survive without the tariff by the early 1830s. ...

Post Civil War Industrialization and Growth After the Civil War, the United States maintained high tariffs to protect domestic manufacturers from foreign competition. Tariff advocates claimed that high import duties helped to expand industrial employment and keep wages high, while also aiding farmers by creating a steady demand in the home market for the food and raw materials that they produced. Tariff critics charged that those import duties raised the cost of living for consumers and harmed agricultural producers by effectively taxing their exports, thus redistributing income from consumers and farmers to big businesses in the North. ...

Were protectionist policies essential for domestic industries after the Civil War? In the case of pig iron, high import tariffs may have helped those producers, but they harmed other manufacturers who needed access to cheap iron to produce other products, such as machinery and bridges. One justification for the tariffs is that they promoted the growth of infant industries. I examined the case that has been heralded as possibly the best example of infant industry protection: the tinplate industry, which produces thin sheets of iron or steel that have been coated with tin.

Although the tinplate industry is an obscure one, it is unique because, unlike most manufacturing industries, it did not receive significant tariff protection after the Civil War, apparently because of a mistaken interpretation of the tariff code. Left without adequate protection, there was virtually no domestic production prior to 1890. The McKinley tariff of 1890 substantially raised the duty on imported tinplate to encourage the entry and growth of domestic producers. ... The tariff succeeded in promoting domestic production and output rapidly expanded, and by about 1910 the price of U.S. tinplates fell below those produced in the United Kingdom.

The tinplate example has all the elements of an apparently successful application of infant industry protection. But in asking the counterfactual question - would the industry have developed anyway, and were the tariffs worthwhile? - I answer yes and no. My analysis suggests that tinplate was not an "infant industry" that floundered because of the lack of previous production experience (learning by doing), but rather an industry in which domestic production was not profitable because of the high domestic cost of iron and steel inputs attributable to tariffs. The tinplate industry suffered ... due to the existing tariff structure... In the absence of the McKinley tariff, the U.S. tinplate industry would have established itself about a decade later as the material input costs of iron and steel converged with those in Britain. Over this time horizon, the McKinley duty fails to pass a cost-benefit test.

Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? One paper investigates the multiple channels by which tariffs could have promoted growth during this period. I found that 1) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; 2) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; and 3) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff...

---

D.A. Irwin, "Historical Perspectives on U.S. Trade Policy," NBER Reporter, Winter 1999.

D.A. Irwin, "New Estimates of the Average Tariff of the United States, 1790-1820," NBER Working Paper No. 9616, April 2003, and Journal of Economic History, 63 (June 2003), pp. 506-13.

D.A. Irwin, "The Aftermath of Hamilton's Report on Manufactures," NBER Working Paper No. 9943, September 2003, and "The Aftermath of Hamilton's Report on Manufactures," Journal of Economic History, 64 (September 2004), pp. 800-21.

D.A. Irwin, "The Welfare Costs of Autarky: Evidence from the Jeffersonian Embargo, 1807-1809," NBER Working Paper No. 8692, December 2001; and "The Welfare Costs of Autarky: Evidence from the Jeffersonian Embargo, 1807-1809," Review of International Economics 13 (September 2005): pp. 631-45.

J. H. Davis and D.A. Irwin, "Trade Disruptions and America's Early Industrialization," NBER Working Paper No. 9944, September 2003.

D.A. Irwin, "Antebellum Tariff Politics: Coalition Formation and Shifting Regional Interests," NBER Working Paper No. 12161, April 2006.

D.A. Irwin and P. Temin, "The Antebellum Tariff on Cotton Textiles Revisited," NBER Working Paper No. 7825, August 2000, and Journal of Economic History 61 (September 2001): pp. 777-98.

D.A. Irwin, "The Optimal Tax on Antebellum Cotton Exports," NBER Working Paper No. 8689, December 2001, and Journal of International Economics, 60 (August 2003), pp. 275-91.

D.A. Irwin, "Tariff Incidence in America's Gilded Age," NBER Working Paper No. 12162, April 2006.

D.A. Irwin, "Could the U.S. Iron Industry Have Survived Free Trade After the Civil War?" NBER Working Paper No. 7640, April 2000, and Explorations in Economic History 37 (July 2000): pp. 278-99.

D.A. Irwin, "Did Late Nineteenth Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry," NBER Working Paper No. 6835, December 1998, and Journal of Economic History 60 (June 2000): pp. 335-60.

D.A. Irwin, "Tariffs and Growth in Late Nineteenth Century America," NBER Working Paper No. 7639, April 2000, and The World Economy 24 (January 2001): pp. 15-30.

D.A. Irwin, "Interpreting the Tariff-Growth Correlation of the Late Nineteenth Century," NBER Working Paper No. 8739, January 2002, and American Economic Review 91 (May 2002): pp. 165-69.

D.A. Irwin, "Explaining America's Surge in Manufactured Exports, 1880-1913," NBER Working Paper No. 7638, April 2000, and Review of Economics and Statistics 85 (May 2003): pp. 364-76.

Comments

[camille roy]

Then, people thought tariffs were necessary and used them intensively. Now people don't think that, and examine that period of intensive tariff use for signs that they didn't work as advertised - despite the fact that this was a period of extensive industrialization and development. I don't think it is possible to make an anti-tariff general case from this period. You are essentially arguing that the economic success was in spite of rather than because of the policies which were in effect.

[NinjaPlease]

Mark, how many jobs were being outsourced out of the US from 1807 to 1809?

How many people were claiming that education was the key to prevent your job from disappearing, you only need $80,000 and a parent to live with while you get re-educated?

[NinjaPlease]

One could also make the argument about how Roman Mercenaries didn't fight as hard to defend Rome vs a home army, therefore the US should never use contractors to support the military using this logic.

[bakho]

More Recent History:

Monday, January 27, 2003
Automotive Suppliers Tell of Their Hardships; Details of New Resolution to Review Steel Tariff Consequences Introduced
Detroit, MI – A new bipartisan House Concurrent Resolution to be introduced in the U.S. House of Representatives on Wednesday, January 29 will call upon the Bush Administration to consider the devastating impact of the Section 201 steel tariffs on steel consuming manufacturers and other industries across the United States.
… leading automotive product manufacturers to brief the media today in Detroit about the resolution and impacts of the Section 201 tariffs. The event, hosted by the Motor & Equipment Manufacturers Association (MEMA), detailed the profound impact of the Section 201 steel tariffs on automotive suppliers and other steel consuming industries. The resolution would specifically urge President George W. Bush to direct the International Trade Commission (ITC) to expand the existing midterm review process and include an assessment of the impact of the tariffs on steel consumers
“The figures supplied by MEMA tell a frightening story for manufacturers everywhere,” Knollenberg said. “Their sample set of 16 companies reported a cost of $121 million in 2002 directly attributable to higher steel prices from the tariffs. These are both big and small companies, most of whom cannot pass these price increases on. That means lost business and layoffs.”
“Right now, the unintended consequences of the steel tariffs are killing American jobs in steel consuming companies,” he added. “This clearly was not the intent of the Steel Safeguard Program. This is the collateral damage. But we can’t ignore the fact that the tariffs are costing jobs.”
Executives from six leading automotive suppliers – ArvinMeritor, Dana Corporation, Dura Automotive Systems, Illinois Tool Works, Metaldyne and Spring Engineering and Manufacturing Corp.– discussed the hardships that their companies are facing as a consequence of the steel tariffs. Many of the companies have noted future plant closures as a result of drastically increased steel prices and the disruptions caused by incomplete deliveries, growing leadtimes and steel quality concerns. According to Chris Bates, president and CEO of MEMA, additional measures such as plant closures and facility relocation may become necessary.
“Since March 2002, automotive suppliers have had to cope with steel price increases ranging from 20 percent to 50 percent, but in some cases hitting peaks as high as 65 percent to 80 percent,” Bates said. “The steel 201 program hit the automotive products industry at a very bad time. We are in the middle of a cost-price squeeze – that is, rising costs and no pricing power. If something is not done soon regarding the tariffs, many suppliers will have some very tough and painful decisions to make.”
They are seriously contemplating moving their manufacturing operations overseas in order to remain globally competitive. When those jobs move overseas, they are not coming back,” ….

[dryfly]

Mark - all these examples cited by the 'anti-protectionists' are binary. It is either 'all protection' or 'no protection'... no middle road, no 'analog' gradualism.

No one is seriously suggesting a huge wall blocking all imports but that is the case they make - that it is either complete protectionism or complete open market free trade...

These folks need to wake up. If we continue on the path we are now... most all middle class workers will find they compete directly with very low wage offshore competition and sooner than they imagine... the comparison will not favor to people here... the social & political ramifications will be very ugly when the results become felt.

I don't see any way to stop the eventual convergence between world wage scales & standards of living and US wage scales & standards of living. And by 'world' I don't mean Sweden's standard of living taken as the lone comparison... it will also include a couple 2-3 billion other folks barely getting by that we'll also be competing with.

We need to slow this process down. Allow our social & political institutions to catch up with the new realities. Find some way to share gain & pain 'cause there isn't even a suggestion of a mechanism now that doesn't get shouted down as 'PROTECTIONISM!!!'

Otherwise - like I said - it will get ugly.

That is unless you like revolution. I can't think of a better way to radicalize our population (either left or right leaning) than to continue to allow the erosion of middle class standards of living due to job loss from globalization.

I think there is more at stake here than just economic numbers.

[save the rustbelt]

Anyone who asks any question about trade policy seems to be labeled a protectionist and a "Lou Dobbs-type nutcase."

Reminds me of 1968, when anyone who questioned the war was a commie.

yeah, right.

[NinjaPlease]

“Right now, the unintended consequences of the steel tariffs are killing American jobs in steel consuming companies,”

Hah.

Please read the following:
http://www.visteon.com/utils/whitepapers/
2004_01_1519.pdf#search=%22quantity%20of
%20steel%20a%20pickup%20truck%20consumes%22

God forbid an industry modernizes.

[Stormy]

dryfly,

Good observations and well said.

There are profound political risks in allowing and encouraging this kind of rapid dislocation.

There are, of course, enormous economic risks as well. We are risking capsizing the global economy. If and when debt servicing--public and private--goes ballistic and profits start to shrink--and they will--, then the world will be left with huge productive capacity and no buyers. Trot out the old domino theory.

Vietnam is now in the wings for WTO membership. And they are accustomed to competing with China.

[kharris]

Dryfly's rapid-vs-gradual notion is useful in taking another thin slice from the author's argument. The author writes of an "equilibrium" comparison between free trade and autarky, implying that the Jefferson experiment is as close as we are likely to get. Perhaps true, but that doesn't mean this actually is an example of any particular equilibrium. Too little time was allowed for a full adjustment to the supply and demand shocks represented in those big price swings. Those were not equilibrium prices in the article.

I like the bit of history, but care is needed in throwing words like "equilibrium" around.

[reason]

I live in Germany, and I can see in the next few years a huge reversal taking place. There is going to be a big shortage of skilled tradesmen. The reason is clear, nobody has been training apprentices and the median age of tradesmen keeps rising. Any shortages at the moment are filled from Eastern Europe. But who will then train the apprentices once there is a shortage?

Now bear with me, this will get to back to the topic. We have a generational problem building up. I believe real exchange rates will adjust in the future bringing a huge change in the terms of trade. No society can exist just by owning capital, capital will always tend to concentrate (reason simple money makes more money) and that will make the society unstable. It needs well rewarded and productive workers. But if everybody is training as a manager or lawyer or salesman the society will be very vulnerable to terms of trade change. Development depends on complex chains of interdependent specialists. If societies lose some skills they potentially lose their developed status or their ability to regain it. How will those skills be rediscovered when they haven't been encouraged for a whole generation?

International specialisation brings temporal benefits, but putting all your eggs in one basket brings risks. I'm not sure that last word has been spoken on the subject of risk, especially existential risk.

[reason]

I think we need people studying in Economic History in the US to concentrate more on Argentina. It seems to me, that the US is in the process of following the Argentinian path.

[anne]

http://www.allheadlinenews.com/articles/7004659264

August 26, 2006

Study: Outsourcing Raises U.S. Wages
By Josephine Roque

Jackson Hole, WY - Two Princeton University economists claim that job outsourcing increased productivity and real wages for low-skilled U.S. workers.

Princeton professors Gene Grossman and Esteban Rossi-Hansberg debated that salaries for the least-skilled blue collar jobs had been increasing since 1997 as outsourcing pushed productivity.

They discussed their paper during the Kansas City Federal Reserve conference with the theme, "The New Economic Geography."

The Princeton economists say that critics tended to gloss over the productivity benefits that come with offshoring labor.

They showed evidence that the resulting productivity had actually increased real wages for the least skilled among U.S. workers by about a quarter of a percent per year between 1997 and 2004.

Grossman and Rossi-Hansberg said outsourcing critics had cited "incomplete" figures that the low-wage labor overseas decreases low-skill wages or increases unemployment in the United States.

Rising productivity related to U.S. firm outsourcing "have served to bolster U.S. wages ... contrary to the fears of Lou Dobbs and others," they said relating to the high-profile CNN anchorman who has rallied against U.S. outsourcing....

[anne]

What the argument by Gene Grossman and Esteban Rossi-Hansberg is, should be interesting....

[anne]

http://www.princeton.edu/%7Egrossman/offshoring.pdf

Trading Tasks: A Simple Theory of Offshoring
By Gene M. Grossman and Esteban Rossi-Hansberg - Princeton University

August 2006

Abstract

For centuries, most international trade involved an exchange of complete goods. But, with recent improvements in transportation and communications technology, it increasingly entails different countries adding value to global supply chains, or what might be called “trade in tasks.” We propose a new conceptualization of the global production process that focuses on tradable tasks and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that results from reductions in the cost of trading goods in other neoclassical frameworks.

[dryfly]

think we need people studying in Economic History in the US to concentrate more on Argentina. It seems to me, that the US is in the process of following the Argentinian path.

I agree. One of my manufacturing engineering prof's was an economics's history buff - avid reader and casual researcher - said Argentina had a higher per capita standard of living than the US prior to about 1920... sometime in there the fortunes reversed for a lot of reasons... some of it was class stratification.

Clearly Argentina then went down a road of extreme protectionism under Peron... but he would have argued that was a predictable social response to symptoms already well established prior to Peron and not the root cause.

We could easily follow Argentina's path... but with nuclear weapons.

[save the rustbelt]

"...Princeton professors Gene Grossman and Esteban Rossi-Hansberg debated that salaries for the least-skilled blue collar jobs had been increasing since 1997 as outsourcing pushed productivity...."

I have worked with labor markets all over the country since then, and their conclusion simply belies reality for most of the country.

A hazard of (economics) crunching vast amounts of data is that economists sometimes come to inaccurate conclusions.

Reminds me of an old joke:

According to economists, no one drowned on the Titanic, because a study revealed there were plenty of lifeboat seats.

[anne]

http://www.princeton.edu/%7Egrossman/offshoring.pdf

Trading Tasks: A Simple Theory of Offshoring
By Gene M. Grossman and Esteban Rossi-Hansberg - Princeton University

[A quick read of the paper, suggests an interesting and provoking thesis that is worth considering carfully.]

[anne]

Suppose then, as an hypothesis, we look more carefully at the possible of trade and offshoring than is done by opponents of globalization and focus on domestic labor policy and labor-management balance and relations in explaining the current difficulties of labor. Looking at what I take as comparative well-being of labor in Europe, I am more or at least as concerned with domestic policy than or as with trade and offshoring.

[dryfly]

Grossman and Rossi-Hansberg said outsourcing critics had cited "incomplete" figures that the low-wage labor overseas decreases low-skill wages or increases unemployment in the United States.

Grossman & R-H have a point... however if you think about it carefully, it actually supports the case that we're in deeper trouble rather than confronts it.

Consider this...

Imagine you run a factory in the US heartland, what jobs would you outsource first? Answer is pretty simple...

(1) The ones you are ABLE to physically do elsewhere (leaves out construction & some face-time-dependent services).

(2) Those where the cost advantage to offshore is greatest, ie do a Pareto analysis with worst first.

While productivity isn't a perfect surrogate for cost it comes pretty close when labor cost is the primary cost driver (ie inverse of productivity is proportional to cost). And with the universality of technology, capital and global supply chains for materials - labor is increasingly the only major independent variable left so this holds for many tradeables - the stuff easiest to offshore.

So what jobs are likely to be left here? Things that can't be offshored easily (like construction) and only the most cost competitive operations, ie most labor efficient domestic operations... the latter by definition don't hire a lot of people (else they wouldn't be labor efficient).

So if we average the up-until-now growing but pretty inefficient construction & service labor pool with the shrinking but increasingly efficient domestic manufacturing & technology labor pool then I can see how OVERALL we'd see greater efficiency and in aggregate it might not look too scary to the likes of G & R-H.

So my question to them is... have they run the numbers based on an RE led recession? What happens if a large number of those construction jobs go away?

My guess is that in the end, after all the dust has settled and RE has slipped back to long term trendlines... our aggregate productivity will be even higher than it is today as you average in fewer RELATIVELY inefficient construction workers with the increasingly efficient tech & mfg workers remaining.

But there will be a whole lot more unemployment unless we find some place to employ all the ex-construction workers. I don't see any likely candidates until our wages & standard of living converge with world wage rates.

[bakho]

Quite frankly, dryfly, there are one hell of a lot of projects in the US that could be completed to make our lives better. Just look at all the cleanup going undone in the Big Easy for starters. The US gains by offshoring work but those gains are not being translated into our economy and our society. However, we cannot discuss lack of government investment without a big smackdown from the right wing media. So people carp about the outsourcing instead. The psychology term is displacement. It is one thing to offshore work and have the excess profits go to building infrastructure in Asia. It is quite another to invest those profits in the US.

The best example of a project desparately in need of outsourcing is Iraq. We should outsource it to the Iraqis and put US citizens back to work in the US.

[anne]

Suppose we think round to the New Deal, which is where my reading is taking me, and think that we are not running out of work for as Bakho so well argues imagine what we might have done with New Orleans alone. Remember that George Bush immediately set aside minimum wage requirements for work on federal projects in New Orleans after the storm. Now the order was rescinded after complaints, but New Orleans has been cleaned and built, such as it has been, by a startling number of international workers when domestic workers might have been trained and used in far greater numbers. Policy bothers me; labor policy.

[Emmanuel]

Personally, I'd like to what happens if they pass Schumer-Graham. I'm convinced that China would be hurt yet come out better off in the event of its passage, but what the heck? It would undoubtedly provide some answers for us economics blog junkies, eh?

The US and China have been spoiling for a fight for a very long time now, so they might as well get it over with. [Ladeez and gentlemen, in the Red(s) corner...]

[camille roy]

My sense is that the preference for liberal economists is for federally funded make-work infrastructure projects over tariffs.

But where's the data? Historically, tariffs are associated with periods of intensive development and industrialization, whereas federal make-work projects are associated with the Depression. Not exactly confidence inspiring.

Also, I think some aspects of the big picture are not being grasped, here. The surge of capital investment in China and India has come => at the expense of <= investment in the United States.

Labs and factories are being left to wither on the vine here, as companies pour their resources into projects overseas. The short term consequences are not good, but the long term consequences are dire.

[Tom Geraghty]

Here's a good economic history of Argentina.

I'm somewhat skeptical of this "industrialization despite tariffs" argument too, given that just about every industrialized country from Britain all the way through to the Asian tigers and China got that way at least partly by using protection and other forms of industrial policy. I know that's not the same thing as proving that industrial policy is necessary for development, but still, it's a pretty interesting empirical regularity.

[Tom Geraghty]

Sorry, here's the proper link to that Argentina book:

A New Economic History of Argentina

[Emmanuel]

Tom G: Virtually all countries have dabbled with tariffs at one time or another, making it hard to conclude--as Ha-Joon Chang does--that applying tariffs is the path to prosperity.

Economic History Services, which has a lot of quality book reviews, makes this point clear: If putting up tariffs were all there was to it, then shouldn't "import substitution" policies have resulted in mass development among Latin American countries during the Seventies and Eighties? In formal terms, Chang is guilty of "sample selection bias"--many of the failed cases also used tariffs. This is just one of the many cogent critiques in their review of the Chang volume.

I think you get it better than Chang does. There is a regularity about the use of tariffs, but casuality--for better or worse--that's another thing!

[dryfly]

My sense is that the preference for liberal economists is for federally funded make-work infrastructure projects over tariffs.

That's a historical artifact. Most of the benefit of tariffs used to accrue to capital and little trickled down to workers as there was a surplus of labor just about everywhere and it was almost always cheap as dirt.

If you imposed higher tariffs back then the only people whose incomes increased were those who owned the domestic factories protected by the tariffs.

Its different now but maybe we are heading back that way.

[Tom Geraghty]

Emmanuel - right. Latin America proves that ISI does not necessarily lead to development (although one could point out that those countries did grow faster during their pre-1980 ISI days, but whatever).

But all the developed countries passed through something like an ISI phase on the way to riches, which does suggest (not prove) to me that if (big if?) managed properly (i.e. does not become entrenched protectionism) industrial policies can be helpful to development.

[Lord]

The issue isn't whether no tariffs are better than tariffs, it is whether taxes raised by other means are better than tariffs. In the 19th century, the only substantial source of income for the federal government were land sales and tariffs. Tariffs are a very efficient and effective method to collect taxes. They still are. I would go so far as saying some modest level of tariffs is desirable purely from the standpoint of stabilizing international exchange.

[Movie Guy]

It's always appropriate to review U.S. trade policy from a historical perspective as a background for current economic conditions. I applaud Mark's effort in this regard.

Doug Irwin is a good economic historian on such matters. More of his works can be viewed at his web site without need for registration at NBER: Douglas Irwin's papers

If there is anything to fault in his above snapshot presentation, it would be the lack of focus on sources of Federal revenue during the periods concerned.

On this point:

"Probably one reason that the framers of the US Constitution reserved trade policy formation for the US Congress was because at the time of US independence and for well over a century after that, tariff revenue was the primary source of funds for the federal government. It must have been thought unwise for the purse strings of the government to be controlled by the President."

US Trade Policy Highlights
* Note the graph

"The adjoining diagram shows US customs duties as a percentage of federal government revenue from 1821 to 1996. Notice that in the early 1800s tariff revenue comprised more than 90% of the federal government budget. This fell during and after the US Civil War in 1860 as alternative sources of funds became necessary to finance the war. Another major decline occurred in the early part of the 1900s shortly after the Constitution was amended to allow the collection of personal income taxes. In the 1990s, more than 70% of federal government revenue came from payroll taxes which consists of both personal income taxes and social security taxes. In contrast, less than 1.5% of revenue came from customs duties."

If we are discussing the historical context of current U.S. trade policy, I recommend starting with the Reciprocal Trade Agreements Act (RTAA) of 1934 which authorized the U.S. President to negotiate bilateral tariff reduction agreements with other countries.

The discussion of U.S. trade policy and the matter of tariffs and other trade policy tools deserves considerable attention. At the end of the day, we are still faced with the following current economic situations:

Economic Policy Institute - Two Economic Indicators

Trade Picture - 1998-2006

Current Account Picture - 2005-2006; and here (International Picture - June 2006)

Focusing on more recent U.S. trade policy history, what are the viable solutions for the U.S. trade deficits and U.S. current account deficits?

[Movie Guy]

Lord,

Good points.

[reason]

Lord,
has it right. I'm glad somebody pointed that out. Tariffs are also revenue. (And they pay for the controls of keeping undesireable products out).

Now will somebody notice my point about VAT (I've made it three times now). Countries with VAT tax imports but NOT exports, whereas countries with income taxes but not sales taxes tax exports but not imports. This implies having a VAT allows you to have a higher priced currency before you run into balance of payments problems. Given that today the exchange rate seems more governed by capital market considerations that trade reality one easy way to protect domestic manufacturing would be to do what Europe does and use VAT. Now, what to do about that decrease in the progressivity of the tax system?