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Tuesday, August 29, 2006

"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.

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