Tariffs are back in the spotlight, but skepticism of free trade has deep roots in American history
- Written by Erik Guzik, Assistant Clinical Professor of Management, University of Montana
One of the more surprising developments in recent American politics has been the backlash against free trade.
As recently as a decade ago, Democrats and Republicans alike[1] generally favored free trade. But with the 2024 presidential election just days away, both Republican Donald Trump[2] and Democrat Kamala Harris[3] are leaning hard on protectionism. The Trump campaign in particular is promoting tariffs that would be difficult to imagine[4] coming from a Republican presidential candidate just a decade ago.
This new post-neoliberal[5] moment might seem confounding. But it hearkens back to economic policies – and political parties – from around the time of the nation’s founding, and it offers clues to our divided present.
Back in the late 18th century, the Founding Father Alexander Hamilton helped put in place a set of policies designed to encourage U.S. industry and to promote economic development and innovation.
That arrangement, which laid the groundwork for what became known as the “American System[6],” emerged in part as a counterbalance to British conceptions of free trade. And the American System quickly grew as accepted economic policy as a young America developed its industrial strength.
Hamilton’s economic nationalism
In the early years of the republic, the U.S. didn’t have much of a trade policy at all.
When the U.S. officially achieved independence in 1783 with the signing of the Treaty of Paris[7], the Articles of Confederation[8] – the nation’s first constitution – greatly limited the federal government’s powers, including its ability to regulate foreign trade.
These restrictions reflected the reality of 13 very different states that had been more united against the British – and their trade controls – than in support of a common vision of economic development.
The economic conditions within this loosely connected nation quickly worsened. A deepening economic crisis[9], rising debt, inflation, cheap British manufactured goods and rising bankruptcy soon emerged. Such changing conditions gave rise to calls for a new national economic policy.
This economic strain was an important factor leading to the drafting of the U.S. Constitution, ratified in 1789. The Constitution gave the federal government the capacity to regulate trade with foreign countries and, for the first time, to collect taxes. Both were privileges once held exclusively by sovereign American states.
The ‘second American revolution’
A strengthened American Congress made passing a national Tariff Act one of its first tasks. When it was ratified in 1789[10], a national import tax replaced customs previously enacted by the states. Perhaps indicating the magnitude of this change, supporters called it “the Second American Revolution,” passed as it was on July 4, 1789. In effect, it helped create a new conception of the American political and economic system, with a much stronger role for the state in economic matters.
Duties were levied on 30 commodities, including hemp and textiles. Perhaps foreshadowing trade policy of a future era, the Tariff Act also placed duties[11] of 12.5% on goods imported from China and India.
The main architect of this new industrial policy was Hamilton, who released his seminal work on economic policy, Report on Manufactures[12], in 1791. Hamilton’s ideas were based on transforming a predominantly agricultural nation into one defined, at least in part, by growing and diversified industry.
Though often overlooked, Hamilton’s Report on Manufactures also contained a grander vision – it sought to encourage the development of American invention and ingenuity as a form of economic policy and argued for unlocking “the genius of the people”[13] so that “the wealth of a nation may be promoted.”
To promote this spirit of national enterprise, Hamilton encouraged promoting technological progress, subsidizing research, attracting migrants, supporting a new financial system and implementing a patent system to promote invention. Such policies were in many ways an extension of previous policy enshrined in Section 8[14] of the Constitution.
Tariffs and their discontents
As the use of tariffs continued in the decades following Hamilton’s plan, policymakers turned increasingly protective in an attempt to more directly promote American industry. They enacted tariffs to insulate growing American industries from foreign competition, primarily from the U.K.
By the early 19th century, this growing protectionist movement coalesced around the powerful Kentucky legislator Henry Clay[15] and his Whig Party. Clay, who first referred to the American System by name[16], and his allies were instrumental in raising average national tariff rates to 20% in 1816.
When crisis appeared during the Panic of 1819[18], a collapse in cotton prices, a tightening of credit, widespread foreclosures and rising unemployment followed. In response, Clay and his allies raised tariff rates again, to 50% in 1828[19].
The increasing use of tariffs provoked a fierce response from some in the nation’s agricultural and slave-owning class, who objected to perceived Northern dominance and a strong federal government. One prominent Southern critic at the time referred to the 1828 tariff as the “tariff of abominations[20].”
Indeed, opposition to elements of the American System was one of the chief policy goals of early Democratic politicians such as Andrew Jackson, and fights over the system presaged later sectional fights leading up to the Civil War.
As an industrial revolution took root in American society in the decades that followed, tariffs remained a cornerstone of U.S. economic policy. By the late 1850s, tariffs had become integrated into the policy of the newly formed Republican Party and an important plank of Abraham Lincoln’s economic platform.
Toward the end of the 19th century, a changing Democratic Party, supported increasingly by a strong agricultural populist movement, continued to largely oppose the tariff system[21], arguing it benefited powerful industrialists at the expense of the working class while offering little to counter economic crisis.
The breakup of the American System − and why it matters today
Between 1861 and 1933, tariffs were a standard tool of U.S. economic policy. During this period, tariffs on dutiable goods often averaged 40% to 50%, especially in the late 19th and early 20th centuries. U.S. policymakers didn’t seriously question tariffs as a form of industrial policy until the deepening of the Great Depression in the 1930s.
Following World War II, the U.S. decisively shifted away from tariffs. The Smoot-Hawley Tariff Act was widely blamed[22] for deepening the Great Depression and contributing to the international conflicts of the 1930s and 1940s, effectively ending the protectionist era of U.S. industrial history.
The establishment of the Federal Reserve in 1913 provided policymakers with a novel tool – monetary policy – to deal with economic downturns. The Keynesian revolution[23] provided still another policy response for governments to consider during periods of economic crisis: spending as fiscal stimulus to create jobs and income.
Finally, as postwar American policy embraced open global trade, American economic policy pursued more direct mechanisms to foster national innovation and entrepreneurship – effectively breaking up policy once dependent on activist trade intervention. With the elimination of tariffs, one of the great periods of American economic growth and innovation followed.
In 2024, the Republican platform has, in many ways, returned to its origins by offering tariffs as a key economic strategy. Likewise, the Democratic platform, with its skepticism of concentrated corporate power, coupled with a renewed focus on financial support for small businesses and entrepreneurship, echoes its own earlier generation.
As Americans head to the polls, it’s worth asking how current economic proposals with deep roots in the American System of old might help shape economic policy in the future.
References
- ^ Democrats and Republicans alike (www.vox.com)
- ^ Donald Trump (prod-static.gop.com)
- ^ Kamala Harris (democrats.org)
- ^ that would be difficult to imagine (www.pbs.org)
- ^ neoliberal (theconversation.com)
- ^ American System (www.senate.gov)
- ^ the Treaty of Paris (www.archives.gov)
- ^ the Articles of Confederation (www.archives.gov)
- ^ deepening economic crisis (www.econlib.org)
- ^ ratified in 1789 (fraser.stlouisfed.org)
- ^ placed duties (fraser.stlouisfed.org)
- ^ Report on Manufactures (founders.archives.gov)
- ^ “the genius of the people” (founders.archives.gov)
- ^ Section 8 (www.archives.gov)
- ^ the powerful Kentucky legislator Henry Clay (www.senate.gov)
- ^ who first referred to the American System by name (www.senate.gov)
- ^ Library of Congress (www.loc.gov)
- ^ Panic of 1819 (democracy.missouri.edu)
- ^ to 50% in 1828 (fraser.stlouisfed.org)
- ^ tariff of abominations (www.gilderlehrman.org)
- ^ continued to largely oppose the tariff system (www.smithsonianmag.com)
- ^ Smoot-Hawley Tariff Act was widely blamed (www.npr.org)
- ^ The Keynesian revolution (www.imf.org)
