The Truth about Trade in History

Cato Institute/Center For Trade Policies ^ | 1997 | Bruce Bartlett

[LowCountryJoe]

Great Britain

As the Dutch were removing medieval restrictions on trade in the 16th century, England was beginning to open its market as well. In the early part of the century, usury laws were no longer enforced, restrictions on the export of unfinished cloth were relaxed, and certain differential duties were abolished. Enforcement of remaining trade restrictions was also generally reduced. The result, according to historian F. J. Fischer, was "one of the great free trade periods in modern English history."14

Unfortunately, the initial era of free trade was short-lived. By the latter half of the 16th century trade restrictions were reimposed to protect domestic industry from the effects of a depression caused by government currency policy. However, by 1604 the House of Commons again moved toward free trade as the impact of the depression faded.15

17th-Century Market Closings

The end of the 17th century saw another revival of protectionism. Between 1690 and 1704 the general level of duties on imports quadrupled. That level was generated primarily by the need for revenue; nevertheless, the effect was to transform the tariff system into one that was, in practice, protectionist.16 Furthermore, in France at that time, Jean Baptiste Colbert, minister to King Louis XIV, was attempting to raise government revenue and make the country self-sufficient through restrictions on imports, including those from England, and through industrial policy. That encouraged English retaliation.

Also contributing to the growth of protectionism was the spread of mercantilist ideas from writers in England such as Thomas Mun. Those mistaken doctrines have an all-too-modern characteristic. For example, one maintained that prosperity came from accumulating gold and silver bullion, and a country could best do that by exporting more than it imported.17 Many policymakers even today tout the supposed virtues of a positive balance of trade.

Adam Smith’s Revolution

In the decades after the 1776 publication of Adam Smith’s The Wealth of Nations, free trade wholly won the intellectual battle.18 Smith demonstrated how freedom to trade and the resulting division of labor benefited all parties involved. However, the remnants of mercantilism were extensive, as were restrictions on domestic trade dating back to the Middle Ages. Thus, hard battles would still be necessary to establish free trade.

Among the most important trade restrictions still operating at the beginning of the 19th century were the Navigation Acts and the Corn Laws. The principal Navigation Act, dating back to 1660, required English ships, manned by English sailors, to be used for most trade with England or its colonies. The Corn Laws, dating from 1670, imposed protectionist duties on the import of corn, to keep domestic corn prices high and encourage domestic production.

The free-trade campaign began in 1820 and concluded with the repeal of the Corn Laws in 1846 and of the Navigation Acts in 1849.19 The principle of freedom to trade was cemented by the Anglo-French Commercial Treaty of 1860.20 From then until World War I, Great Britain practiced a largely free-trade policy.

The Economic Giant

Free trade was a logical outcome of the free-market policies. As Great Britain’s economy grew, it needed more imports, especially as materials for manufacturing and food for the tables of a growing population; the country also needed markets for its products. During this period Great Britain was the world’s wealthiest and most powerful nation. Historian Paul Kennedy described the situation:

Between 1760 and 1830, the United Kingdom was responsible for around two-thirds of Europe’s industrial growth of output, and its share of world manufacturing production leaped from 1.9 to 9.5 percent; in the next thirty years, British industrial expansion pushed that figure to 19.9 percent, despite the spread of new technology to other countries in the West. Around 1860, which was probably when the country reached its zenith in relative terms, the United Kingdom produced 53 percent of the world’s iron and 50 percent of its coal and lignite, and consumed just under half of the raw cotton output of the globe. With 2 percent of the world’s population and 10 percent of Europe’s, the United Kingdom would seem to have had a capacity in modern industries equal to 40-45 percent of the world’s potential and 55-60 percent of that in Europe. . . . It alone was responsible for one-fifth of the world’s commerce, but for two-thirds of the trade in manufactured goods. Over one-third of the world’s merchant marine flew under the British flag, and that share was steadily increasing. It was no surprise that the mid-Victorians exulted at their unique state, being now . . . the trading center of the universe.21

The reversal of Great Britain’s free-trade policy began as a reaction to Germany, which imposed a protectionist tariff in 1879 under pressure from its big businesses.22 The situation soon led to adoption of protectionist measures throughout Europe.23 Although Great Britain initially resisted the protectionist trend, by the turn of the century it, too, began to adopt such measures. Joseph Chamberlain was the leading advocate of the policy of limiting free trade to the nations within the British Empire, while imposing protection against those out side.24 Lillian Knowles described the change in policy:

The period from 1886 to 1914 witnessed a great change in English policy. It is the period of abandonment of laissez-faire in colonization, commerce, industry and agriculture. Great Britain began to modify her cosmopolitan ideas of free trade and laissez-faire, and to concentrate on developing trade within the British Empire.25

In 1897, Great Britain renounced its treaties with Germany and Belgium that had prevented the country from giving preferences to its colonies. However, the major break with free trade came in 1915 when the government imposed tariffs of 33 1/3 percent on motor cars and parts, musical instruments, clocks, wristwatches, and movie film. Subsequent legislation broadened the list of items subject to protectionist tariffs.26

The abandonment of free trade during World War I coincided with the beginning of Great Britain’s economic decline. Freedom to trade had been the strongest pillar of Britain’s general free-market policy. When that pillar fell, the doorway opened to socialist measures of all kinds. British history in the 20th century is essentially one of almost continually expanding government control of the economy, and an equal decline in Great Britain’s power and influence in world affairs.27

The United States

Some protectionists contend that the United States grew economically strong and prosperous because of trade barriers. But America has experienced several phases in its trade history. It is more accurate to say that the country grew in spite of import restrictions.

From Colony to Republic

British trade policy toward the American colonies was mercantilistic. The mother country expected to gain materially from all colonial trade. The Navigation Acts, as noted earlier, generally required that all colonial trade be conducted on British ships manned by British sailors. Also, certain goods had to be shipped to Great Britain first before they could be sent to their final destination. The country’s mercantilist policies were a major burden on the colonies.28 In that way, British protection ism was a significant cause of the Revolution.

Having achieved independence, however, many Americans advocated protectionist policies similar to those they had earlier condemned.29 Alexander Hamilton, the principal advocate of import restrictions, based his proposals on the alleged needs of infant industries. As he wrote in his "Report on Manufactures" (1791):

The superiority antecedently enjoyed by nations who have preoccupied and perfected a branch of industry, constitutes a more formidable obstacle . . . to the introduction of the same branch into a country in which it did not before exist. To maintain, between the recent establishments of one country, and the long-matured establishments of another country, a competition upon equal terms, both as to quality and price, is, in most cases, impracticable. The disparity . . . must necessarily be so considerable, as to forbid a successful rival ship, without the extraordinary aid and protection of government.30

The First Wave of Protectionism

Although Congress adopted the first tariff in 1789, its principal purpose was to raise revenue. Rates went from 5 percent to 15 percent, with an average of about 8.5 percent. However, in 1816 Congress adopted an explicitly protectionist tariff, with a 25 percent rate on most textiles and rates as high as 30 percent on various manufactured goods. In 1824, protection was extended to goods manufactured from wool, iron, hemp, lead, and glass. Tariff rates on other products were raised as well.

That first wave of protectionism peaked in 1828 with the so-called Tariff of Abominations. Average tariff rates rose to nearly 49 percent. As early as 1832 Congress began to scale back tariffs with further reductions enacted the following year. In 1842, tariffs were again raised; but by 1846 they were moving downward, and further lowered in 1857. Following the 1857 act, tariffs averaged 20 percent.31

Failed Tariff Policies

Economist Frank Taussig, in a thorough examination of those tariffs, found that they did nothing to promote domestic industry. "Little, if anything, was gained by the protection which the United States maintained" in the first part of the 19th century, he concluded. That finding considerably questioned the validity of the infant industry argument. "The intrinsic soundness of the argument for protection to young industries therefore may not be touched by the conclusions drawn from the history of its trial in the United States, which shows only that the intentional protection of the tariffs of 1816, 1824, and 1828 had little effect," Taussig said.32

Thus, the early experience of the United States confirms the weakness of the idea that protection can aid infant industries. In practice, so-called infant industries never grow competitive behind trade barriers, but, instead, remain perpetually underdeveloped, thus requiring protection to be extended indefinitely. As Gottfried von Haberler put it:

Nearly every industrial tariff was first imposed as an infant-industry tariff under the promise that in a few years, when the industry had grown sufficiently to face foreign competition, it would be removed. But, in fact, this moment never arrives. The interested parties are never willing to have the duty removed. Thus temporary infant-industry duties are transformed into permanent duties to preserve the industries they protect.33

It is also important to note that the adverse effects of tariffs in 19th century America were more than offset by the economic activity that constituted the western expansion across the continent. Some 20 million immigrants came to the United States in that century. Also, much economic growth came from transportation, farming, mining, and construction of infrastructure. In effect, the United States was a giant, continental-size free-trade zone, from the Atlantic to the Pacific--the equivalent of the distance from Madrid to Moscow.

Following the Civil War, some tariff liberalization occurred, mainly assuming the form ofexempting items from duties, rather than reducing tariff rates. As Figure 1 illustrates, until that time, duties had covered a large percentage of imports, as shown by the close relationship between the tariff rate on all imports and that on dutiable imports only. But after the Civil War, those rates began to diverge sharply.

Turn-of-the-Century Tariffs

In the election of 1888, Republicans called for tariffs to protect American manufacturing. Benjamin Harrison’s defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. An interesting aspect of the 1890 debate over the tariff is that protectionists abandoned any pretense that high tariffs were needed to protect infant industries. Even mature industries, they argued, needed protection. They further argued that high tariffs were needed to reduce the Treasury’s surplus. They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.34

Protectionist tariffs remained the bedrock of economic policy of the Republican Party for the next 20 years. Indeed, Republicans were so intent on passing the Payne-Aldrich tariff in 1909 that President William Howard Taft supported the 16th Amendment to the U.S. Constitution creating a federal income tax as the political price for Democratic support of the tariff.35 That has to have been one of the worst deals in history -- a lose-lose situation if ever there was one.

The Underwood tariff of 1913, passed early in the administration of President Woodrow Wilson, liberalized trade somewhat. But as soon as the Republicans reassumed power after World War I, they raised tariffs again. The Fordney-McCumber tariff of 1922 generally increased tariff rates across the board. However, it also gave the President power to raise or lower existing tariffs by 50 percent.

Deepening Depression

The infamous Smoot-Hawley tariff of 1930 was the last outrage inflicted by the Republican protectionists. Rates on dutiable imports rose to their highest levels in over 100 years. Increases of 50 percent were common and some rates went up 100 percent. Table 1 indicates how much tariffs in creased during the 1920s as a result of both the Fordney-McCumber and Smoot-Hawley tariffs. A recent analysis estimates that the Smoot-Hawley tariff, on average, doubled the tariffs over those in the Underwood Act.36

Economists and historians continue to debate how important the Smoot-Hawley tariff was in causing the Great Depression.37 Whatever the degree, the effect certainly was adverse and the tariff was certainly bad policy. As Figure 2 indicates, world trade virtually collapsed following passage of the Smoot-Hawley tariff. Thus, if that tariff was not the single cause of the Great Depression, it certainly made a bad situation worse.

The Free-Trade Path

Politically, at least, in the long term the memory of the Smoot-Hawley tariff has kept Americans committed to a free-trade policy. For more than 60 years, a guiding principle of U.S. international economic policy has been that tariffs and other trade barriers should be reduced, that trade wars must be avoided at all costs, and that the best way to achieve those goals is through multilateral negotiations. Thus, the United States took the lead in establishing the General Agreement on Tariffs and Trade that reduced global tariffs in the decades following World War II, and spearheaded major GATT rounds of multilateral trade liberalization, including the Kennedy Round, Tokyo Round, and Uruguay Round.

In recent years, the free-trade consensus has begun to weaken. One must look back to 1929 to find protectionist rhetoric as heated as that commonly heard today. Throughout most of the postwar era, protectionists were embarrassed to call themselves protectionists. Today, however, prominent politicians such as Republican presidential candidate Pat Buchanan and Senator Ernest Hollings (D-S.C.) wear the label proudly.38 Yet protectionist policies have not been the source of America’s economic strength. And American policy, fortunately, remains largely directed toward free trade.

[LowCountryJoe]

And this only covers the United States and Great Britain. The entire piece would be much too lengthy to post on one thread. But if one were to take the time and to read all of it, one might just come away more knowledgeable.

Ok, maybe not! Many FReepers know everything about all subjects already, making reading unecessary.

[ServesURight]

"But, generally speaking, the Protective system in these days is conservative, while the Free Trade system works destructively. It breaks up old nationalities and carries antagonism of proletariat and bourgeoisie to the uttermost point. In a word, the Free Trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favor of Free Trade."

Karl Marx

[1rudeboy]

So how often do you agree with Mr. Marx? Hmmm?

[Jank]

Thank you for the information, great job.

[Willie Green]

Ok, maybe not! Many FReepers know everything about all subjects already, making reading unecessary.

Well, it is true that Bruce Bartlett's revisionist tripe has been debunked many times on this forum. Rather than waste time rehashing this entire diatribe, I'll simply address one of the more common myths that he attempts to perpetuate:

Economists and historians continue to debate how important the Smoot-Hawley tariff was in causing the Great Depression.

The notion that Smoot-Hawley "caused" the Great Depression is totally preposterous. The stock market crashed in October, 1929, but Hoover did not sign the tariff into law until June 17, 1930.

Furthermore, the Smoot-Hawley Tariff only slightly worsened the depression, which was already gaining considerable momentum. Imports formed only 6 percent of the GNP. With average tariffs ranging from 40 to 60 percent (sources vary), this represents an effective tax of merely 2.4 to 3.6 percent. Yet the Great Depression resulted in a 31 percent drop in GNP and 25 percent unemployment. The idea that such a small tax could cause so much economic devastation is too far-fetched to be believed.

Even an effective tax of 2.4 to 3.6 percent is overstating the effects of the tariff. The tariff rates were already high to begin with. One source reveals that Smoot-Hawley raised rates from 26 to 50 percent; another source from 44 to 60 percent. In that case, we are talking about an effective tax increase of 1.4 percent at most.

The Smoot-Hawley tariff actually extended the list of imports that entered the country with no tariffs at all compared to the Fordney-McCumber tariff of 1922. What the Smoot-Hawley tariff did do was raise tariffs on particular import sensitive goods, such as Canadian agriculture, that were already on the tariff list and increase the amount of goods to which no tariffs were applied.

Bartlett can squawk about the Smoot-Hawley boogeyman all he wants.
He's just plain wrong. Period.

[1rudeboy]

Of course, Mr. Bartlett's "myth" is footnoted, and the footnote follows:

Barry Eichengreen, "The Political Economy of the Smoot-Hawley Tariff," Research in Economic History 12 (1989): 1-43; idem, "Did International Economic Forces Cause the Great Depression?" Contemporary Policy Issues 6 (April 1988): pp. 90-114; Eckes, Opening America’s Market, pp. 100-39; B. Bruce-Briggs, "The Myth of the Hawley-Smoot Tariff," Congressional Record, July 14, 1987, pp. S 9873-76; Robert Bartley, "Toying with Depression," Wall Street Journal, September 5, 1985; Alan Reynolds, "What Do We Know about the Great Crash?" National Review, November 9, 1979, pp. 1416-21; Jim Powell, "Protect and Destroy," Audacity (Winter 1993), pp. 38-47.

I can understand why you choose the easy way out.

[LowCountryJoe]

I'm leery of quotations without sources. I've seen and read that one many times and I've never seen where he wrote it or where he said it.

I'm asking that you check out this link to a thread I started that didn't start much of a discussion. But, i think that it's very use information in case you run across it again.

Now, will someone show me the source of the Karl Marx quote?

[Willie Green]

Of course, Mr. Bartlett's "myth" is footnoted, and the footnote follows

Yes, it is absolutely no surprise that globalism advocates have published extensive articles to promote their revisionist history. Nevertheless, the true facts are as I've posted them, and it exposes the globalists for what they are: lying distortionists.

[LowCountryJoe]

And as for the rest of Bartlett's "revisionist tripe", what do you have on it? Why don't you read the full piece. Then, afterward, I really wish that you would "waste [your] time rehashing [his] entire diatribe, [by] simply address[ing] [those other] more common myths that he attempts to perpetuate.

[Willie Green]

Why don't you read the full piece.

Because Bartlett has been refuted ad nauseum on this forum and I don't want to revisit some outdated trash you dug up from 1997. If you want to post this crappy propaganda, at least pick something that's current.

[LowCountryJoe]

...and I don't want to revisit some outdated trash you dug up from 1997...

Does this mean that I can, through writing, spank your @$$ whenever you reference history or any of your "propaganda"?

Should I go back and look at some of your posts over the last few weeks or might this action show you to be rather fraudulent?

[Libertarianize the GOP]

bump

[ServesURight]

WHY KARL MARX ADVOCATED FREE TRADE

[Willie Green]

Does this mean that I can, through writing, spank your @$$ whenever you reference history or any of your "propaganda"?

Yeah. Go ahead and spam the forum with all the 5~7 year old articles you can dredge up.
There's a $hitload of them on the Internet.
I promise I won't waste a whole lot of time on any of 'em.

Should I go back and look at some of your posts over the last few weeks or might this action show you to be rather fraudulent?

Weeks, months, years...
Heck, you're free to review anything I've ever posted.
My current stats indicate I've posted 5,858 articles.
The vast majority were currently published articles when I posted them.
However, I must confess that this one was somewhat dated. It was written on October 28, 1785.

But go ahead, "spank my @$$" all you want.
I've become quite adept at ignoring beligerant trolls.
Doesn't bother me a bit.

[LowCountryJoe]

That's interesting! even a blind squirrel finds...

Did you happen to read the whole speech by Marx. He was well conflicted on the matter...go on read it! The problem was that his conclusion was all wrong. He assumed that the removal of boundaries and boarders to allow trade liberalization would lead to a one politically party ruled "Pangaea" - one that is centrally planed; he ignores the very "freedom of capital" argument that he invokes earlier in the same speech. He also ignores the fact that, if bad enough conditions existed, wealth holders would "go off" (leave society) and do their own thing. Does that sound familiar?

Just about everything Marx said concerning trade liberalization was, in essence, true. But his conclusion ignores the very same human conditions that he pegged so correctly earlier in his speech.

Just taking that isolated quote and reading it, should tell one to dig deeper...Go ahead and try that!

Thanks for posting...goodbye!

[David]

"The notion that Smoot-Hawley "caused" the Great Depression is totally preposterous. The stock market crashed in October, 1929, but Hoover did not sign the tariff into law until June 17, 1930."

It is an article of faith among professional and academic economists that adoption of Smoot-Hawley was one of the principal causes of the Great Depression. So as 1rudeboy points out in his #6 above, it is easy for Bartlett to come up with a laundry list of citations for his footnote demonstrating that a lot of sources think it is so.

However there is no data that supports the proposition.

A look at the timeline demonstrates what really happened--during the 1920's, the fed created excess money supply. In our monetary system, the way money is created is through the lending process--typically the fed makes available more or cheaper bank reserves which in our fractional reserve banking system the bank then lends against.

In the 1920's, much of the lending was stock market margin debt. The event in October 1929 occurred when it became clear that underlying stock values were insufficient to pay the margin debt. At that point available liquidity flows were overwhelmed by debt service requirements that could not be met from proceeds of sale of stock severely contracting current demand for all other goods and services and the economy collapsed.

What did Smoot Hawley have to do with this? Nothing. The depression scenario was in place by 1927 which is why Coolidge decided not to run for reelection and handed the bag to Hoover.

By the time of Smoot Hawley, demand for all goods and services had disappeared as a result of impaired liquidity flow--the tariffs were a non-issue. As Willie points out, the tariffs were a small number on a declining base.

As a threshold proposition, Adam Smith, Ricardo, and the academic economists are correct--free trade is generally a positive economic force for everyone. But as to the narrow issue of the causal impact of Smoot Hawley on the Great Depression, Willie is correct, it was a non-event.

Why do we hear this nonsense? Because most of the professional and academic economic community is directly or indirectly benefited by support of the fed role as manager of monetary policy and the economy.

In fact, the fed caused the Great Depression and is probably engaged in laying the groundwork for a greater economic implosion in its current policies. A careful look at fed policy in the 1920's makes the pattern of events that caused the depression much clearer and should be a basis for an early careful examination of fed policies in the 1990's and today.

So the economic community closed ranks behind the fed with two arguments: One, the Smoot Hawley argument; and two, the argument that the poor individual fed members of 1930 failed to print money fast enough to provide liquidity to avoid the problem. Neither argument withstands factual analysis. Both were later day concoctions designed to obfuscate the real cause of the depression.

[1rudeboy]

Article of faith? From the text:

Thus, if [the Smoot-Hawley] tariff was not the single cause of the Great Depression, it certainly made a bad situation worse.

In other words, the writer is willing to entertain doubts, whereas others (on this thread) are focused like a laser-beam on the Smoot-Hawley "issue" simply to discredit the writer.

[Willie Green]

Excellent commentary, David!
Thank-you VERY much for contributing your thoughtful insight!

[Willie Green]

In other words, the writer is willing to entertain doubts,

Globalization advocates like Bartlett are well aware that they are promulgating a "Big Lie".
That's why they always provide themselves with an "escape hatch" through which they can bail-out when challenged with the true facts.

[jpsb]

As this article documents, up until ww2 and really until after ww2, the USA was a high tariff nation. And built the greatest ecomony and greatest wealth the world has ever seen behind tariff walls. Spin all you like, but those are the facts. GB drank the free trade cool-aid long before we did and look at them now. Italy has a bigger economy.

I don't understand why the free trader want to destroy this nation. Why are yall trying to kill us?