8.6 Trade policies and tariffs
7 min read•august 21, 2024
Trade policies and tariffs have been pivotal in shaping America's economic landscape. From colonial restrictions to modern global agreements, these policies reflect the nation's evolving economic interests and international relationships.
The ongoing debate between and has defined US trade policy. This tension, influenced by sectional interests and changing economic conditions, continues to shape America's approach to international commerce and its role in the global economy.
Origins of US trade policy
- Trade policies shaped early American economic development and international relations
- Colonial-era restrictions and post-independence challenges influenced the formation of US trade strategies
Colonial trade restrictions
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- British Navigation Acts regulated colonial trade flows
- Required colonies to ship certain goods only to England or its possessions
- Imposed duties on imports from other countries to colonies
- Led to smuggling and resentment among American colonists
Post-independence trade challenges
- Loss of preferential access to British markets after American Revolution
- Difficulty establishing new trade relationships with European powers
- Individual states created conflicting trade policies before Constitution
- Weak central government under Articles of Confederation hindered unified approach
Early tariff debates
- First US Congress passed to generate revenue
- Madison's commercial discrimination proposal aimed to pressure British concessions
- Federalists favored higher tariffs to protect infant industries
- Democratic-Republicans generally supported lower tariffs for agricultural exports
Key historical trade policies
- Significant trade policies shaped American economic development in early 19th century
- Debates over tariffs and trade restrictions reflected competing economic interests
Hamilton's Report on Manufactures
- Advocated for government support of manufacturing industries
- Proposed tariffs to protect domestic producers from foreign competition
- Argued for subsidies and infrastructure investments to promote industrialization
- Influenced subsequent protectionist policies and economic nationalism
Embargo Act of 1807
- Prohibited American ships from trading with foreign ports
- Aimed to pressure Britain and France to respect US neutrality rights
- Led to severe economic hardship for American merchants and farmers
- Proved ineffective and was replaced by Non-Intercourse Act in 1809
Tariff of 1816
- First explicitly protective tariff in US history
- Raised duties on imported manufactured goods (cotton, woolens, iron)
- Supported by Henry Clay's "American System" economic program
- Marked shift towards more protectionist trade policies
Tariff of Abominations
- Passed in 1828 with high rates on imported manufactured goods
- Strongly opposed by Southern states who relied on agricultural exports
- Led to Nullification Crisis with South Carolina threatening secession
- gradually reduced rates to appease Southern interests
Protectionism vs free trade
- Ongoing debate in US trade policy between protectionist and free trade approaches
- Reflected competing economic theories and sectional interests
Arguments for protectionism
- Protect infant industries from foreign competition
- Preserve domestic jobs and wages
- Reduce trade deficits and dependence on imports
- National security concerns for strategic industries
Free trade advocacy
- Promotes economic efficiency through
- Lowers consumer prices and increases product variety
- Encourages innovation and productivity growth
- Fosters international cooperation and peace
Sectional interests in tariffs
- Northern manufacturers generally favored higher protective tariffs
- Southern agricultural exporters supported lower tariffs
- Western farmers' positions varied based on crop markets
- Urban consumers often benefited from lower prices with free trade
Civil War to World War I
- Period saw fluctuations between high protectionist tariffs and attempts at reform
- Reflected changing political power dynamics and economic conditions
Civil War tariffs
- raised rates to generate war revenue
- Absence of Southern representatives allowed Northern interests to dominate
- High tariffs continued after war to pay off debt and protect industries
- Became major issue dividing Republicans (pro-tariff) and Democrats (anti-tariff)
McKinley Tariff of 1890
- Raised average tariff rates to nearly 50% on dutiable imports
- Introduced reciprocity provisions for bilateral trade agreements
- Sparked international retaliation and domestic price increases
- Contributed to Republican losses in 1890 and 1892 elections
Wilson-Gorman Tariff of 1894
- Democratic attempt to lower tariffs and implement income tax
- Significantly watered down by pro-business senators
- Income tax provision struck down by Supreme Court in Pollock v. Farmers' Loan
- Failure to deliver on promises contributed to Democratic losses in 1894
Interwar period trade policies
- Global economic instability and rising nationalism influenced US trade policies
- Shift from high tariffs to reciprocal trade agreements marked changing approach
Fordney-McCumber Tariff of 1922
- Raised tariff rates to protect US industries after World War I
- Introduced "scientific tariff" concept to equalize production costs
- Gave president limited authority to adjust rates based on findings
- Contributed to international economic tensions in 1920s
Smoot-Hawley Tariff of 1930
- Dramatically increased tariffs on over 20,000 imported goods
- Aimed to protect US farmers and industries during
- Sparked retaliatory tariffs from trading partners
- Widely criticized for deepening global economic crisis
Reciprocal Trade Agreements Act
- Passed in 1934 as part of Roosevelt's New Deal program
- Gave president authority to negotiate bilateral trade agreements
- Allowed tariff reductions up to 50% without congressional approval
- Marked shift towards more liberal trade policy and executive authority
Post-World War II trade liberalization
- US led efforts to create new international economic order after WWII
- Promoted as tool for economic growth and geopolitical stability
GATT and WTO
- (GATT) established in 1947
- Provided framework for multilateral trade negotiations
- Evolved into World Trade Organization () in 1995
- US played key role in shaping rules-based international trading system
Trade expansion act of 1962
- Gave president broad authority to negotiate tariff reductions
- Authorized participation in Kennedy Round of GATT negotiations
- Introduced for workers affected by imports
- Reflected strategy of strengthening allies through trade
NAFTA and regional agreements
- North American Free Trade Agreement implemented in 1994
- Eliminated most tariffs between US, Canada, and Mexico
- Became model for subsequent US free trade agreements
- Sparked debates over impact on US jobs and manufacturing sector
Modern US trade policy
- Globalization and rise of new economic powers reshaped trade landscape
- Increased focus on and trade in services
China's WTO accession
- US granted China Permanent Normal Trade Relations in 2000
- China joined World Trade Organization in 2001
- Led to surge in US-China trade and increased economic interdependence
- Sparked concerns over job losses and unfair trade practices
Trade disputes and negotiations
- Increased use of WTO dispute settlement mechanism
- Bilateral negotiations to address specific trade issues (currency, intellectual property)
- Rise of mega-regional trade agreements (Trans-Pacific Partnership)
- Growing focus on digital trade and e-commerce rules
Trump era tariffs
- Imposed tariffs on steel, aluminum, and Chinese goods citing national security
- Renegotiated into (USMCA)
- Engaged in "trade war" with China over technology transfer and market access
- Marked shift towards more confrontational and protectionist trade policies
Economic impacts of trade policies
- Trade policies have wide-ranging effects on US economy and global markets
- Impacts vary across industries, regions, and socioeconomic groups
Effects on domestic industries
- Import competition can lead to job losses in affected sectors
- Access to foreign markets creates export opportunities
- Lower input costs can increase competitiveness of downstream industries
- Trade-exposed industries face pressure to innovate and increase productivity
Consumer price implications
- Tariffs generally lead to higher prices for imported goods
- Trade liberalization tends to lower consumer prices and increase variety
- Price effects can vary significantly across product categories
- Indirect effects on domestic substitutes and complementary goods
International competitiveness
- Trade policies influence relative costs of production across countries
- Access to global supply chains affects firms' ability to compete internationally
- Exchange rate effects can offset or amplify impacts of trade policies
- Trade agreements shape rules and standards for international competition
Political dimensions of trade policy
- Trade policy decisions involve complex interplay of economic and political factors
- Institutional structures and interest group dynamics shape policy outcomes
Interest group influence
- Industry associations lobby for favorable trade policies
- Labor unions often oppose trade liberalization that threatens jobs
- Consumer groups generally support lower trade barriers
- Think tanks and policy organizations shape public debate on trade issues
Congressional vs executive authority
- Constitution gives Congress power to regulate foreign commerce
- Modern presidents have gained increased authority in trade negotiations
- Fast-track/Trade Promotion Authority streamlines approval of trade agreements
- Tensions between branches over trade policy direction and implementation
Public opinion on trade
- Generally favorable views of trade but concerns over specific impacts
- Attitudes vary based on education, income, and geographic location
- Increased polarization on trade issues in recent years
- Media coverage and political messaging influence public perceptions
Future of US trade policy
- Evolving global economic landscape presents new challenges and opportunities
- Debates over trade policy direction likely to continue in coming years
Emerging trade challenges
- Digital trade and data flows require new policy frameworks
- Climate change and environmental concerns impact trade negotiations
- Rise of state capitalism and non-market economies complicates rules
- Geopolitical tensions affect trade relationships and supply chains
Potential policy directions
- Continued push for trade liberalization and market access
- Renewed focus on domestic industrial policy and reshoring
- Increased use of trade remedies and national security provisions
- Reform of international institutions and trade rules
Global economic integration
- Technological advances continue to facilitate cross-border trade and investment
- Regional trade blocs and agreements shape patterns of economic integration
- Debates over benefits and costs of globalization likely to persist
- US policy choices will significantly influence future of global trading system
Key Terms to Review (29)
Balance of trade: The balance of trade refers to the difference between the value of a country's exports and the value of its imports over a specific period. A positive balance, known as a trade surplus, occurs when exports exceed imports, while a negative balance, known as a trade deficit, happens when imports surpass exports. This concept is crucial for understanding how trade policies and tariffs influence economic health and how nations become economically interdependent.
China's WTO Accession: China's WTO Accession refers to the process by which China became a member of the World Trade Organization (WTO) on December 11, 2001, after a lengthy negotiation period that lasted nearly 15 years. This accession marked a significant turning point for China's integration into the global economy, leading to substantial changes in its trade policies and tariffs, as well as fostering increased foreign investment and competition in domestic markets.
Cold War: The Cold War was a period of geopolitical tension between the Soviet Union and the United States, lasting roughly from the end of World War II in 1945 until the collapse of the Soviet Union in 1991. This era was marked by political rivalry, military tension, and ideological conflict, primarily revolving around capitalism versus communism. It influenced trade policies and economic relationships globally, as both superpowers sought to expand their spheres of influence through economic means and alliances.
Comparative Advantage: Comparative advantage is an economic principle that explains how individuals or countries can gain from trade by specializing in the production of goods or services for which they have a lower opportunity cost than others. This principle emphasizes that even if one party is more efficient in producing everything, both parties can benefit from trade by focusing on their unique strengths.
Compromise Tariff of 1833: The Compromise Tariff of 1833 was a federal law that aimed to resolve the Nullification Crisis by gradually reducing tariffs on imported goods over a period of years. This tariff was significant in easing tensions between the federal government and Southern states, particularly South Carolina, which had been strongly opposed to high tariffs that they felt favored Northern industrial interests. It marked an important moment in the ongoing struggle over trade policies and the economic interests of different regions, particularly in relation to the emerging textile industry in the North.
Embargo Act of 1807: The Embargo Act of 1807 was a law passed by the United States Congress that prohibited American ships from trading with foreign nations. This act aimed to protect American interests and avoid conflict by imposing economic sanctions on Britain and France during the Napoleonic Wars, but it ultimately led to significant economic distress in the U.S. and increased tensions within the nation.
Fordney-McCumber Tariff of 1922: The Fordney-McCumber Tariff of 1922 was a significant piece of legislation that raised tariffs on imported goods to protect American industries following World War I. It aimed to promote domestic production by making foreign products more expensive, which resulted in increased costs for consumers and strained international trade relations, particularly with Europe as it struggled to recover economically from the war.
Free trade: Free trade is an economic policy that allows for the unrestricted import and export of goods and services between countries without tariffs, quotas, or other trade barriers. This approach encourages international competition and specialization, ultimately leading to more efficient resource allocation and lower prices for consumers. The concept is often associated with the belief that free markets will lead to better economic outcomes for all participating nations.
General Agreement on Tariffs and Trade: The General Agreement on Tariffs and Trade (GATT) was a multilateral treaty established in 1947 to promote international trade by reducing tariffs and other trade barriers. It served as a framework for trade negotiations among member countries, facilitating a more open and cooperative global trading environment that ultimately contributed to the establishment of the World Trade Organization (WTO). GATT's principles encouraged nations to lower trade barriers, impacting multinational corporations, global supply chains, trade policies, and economic recovery strategies following economic downturns.
Great Depression: The Great Depression was a severe worldwide economic downturn that began in 1929 and lasted through the late 1930s, marked by widespread unemployment, significant declines in industrial production, and deflation. This period dramatically reshaped American society and led to major changes in government policies and labor movements.
Hamilton's Report on Manufactures: Hamilton's Report on Manufactures was a foundational document written by Alexander Hamilton in 1791, advocating for the promotion of manufacturing in the United States to foster economic growth and independence. The report outlined various policies, including protective tariffs and government incentives, to encourage domestic industries and reduce reliance on imported goods. Hamilton believed that a strong manufacturing base was essential for national prosperity and security.
McKinley Tariff of 1890: The McKinley Tariff of 1890 was a significant piece of legislation in the United States that raised import duties on foreign goods to historically high levels, reflecting a shift towards protectionist trade policies. By increasing tariffs, the McKinley Tariff aimed to protect American industries from foreign competition and encourage domestic production. This act is often viewed as a turning point in U.S. trade policy, sparking debates about the balance between free trade and protectionism.
Morrill Tariff of 1861: The Morrill Tariff of 1861 was a significant piece of legislation that increased tariffs on imported goods in the United States, introduced in the midst of rising tensions leading to the Civil War. This tariff aimed to protect American industries by making foreign goods more expensive, thus encouraging domestic production. It marked a shift in trade policy, reflecting the economic priorities of a nation on the brink of conflict and the need for greater revenue to support the war effort.
NAFTA: NAFTA, or the North American Free Trade Agreement, was a trade deal established in 1994 between the United States, Canada, and Mexico aimed at eliminating trade barriers and promoting economic cooperation among the three countries. It significantly influenced various aspects of trade relationships, encouraging foreign investment and affecting multinational corporations, outsourcing practices, and economic policies in North America.
Non-tariff barriers: Non-tariff barriers are trade restrictions that do not involve the use of tariffs or duties but instead use regulatory and policy measures to control the amount and type of trade between countries. These barriers can take various forms, such as quotas, import licensing, and standards for products that must be met before goods can enter a market. They serve to protect domestic industries from foreign competition while also influencing trade flows and market access.
Protectionism: Protectionism is an economic policy aimed at shielding a country's domestic industries from foreign competition by imposing tariffs, quotas, and other trade barriers. This strategy is designed to promote local businesses, protect jobs, and maintain national security, often resulting in increased prices for consumers. Protectionism has roots in earlier economic theories, particularly mercantilism, where the emphasis was on accumulating wealth through trade surpluses and government regulation.
Reciprocal Trade Agreements Act: The Reciprocal Trade Agreements Act (RTAA) was a significant piece of legislation enacted in 1934 that allowed the President of the United States to negotiate bilateral trade agreements without needing specific congressional approval for each deal. This act was aimed at reducing tariffs and fostering international trade during the Great Depression, promoting economic recovery by encouraging foreign trade through lower trade barriers.
Smoot-Hawley Tariff of 1930: The Smoot-Hawley Tariff of 1930 was a significant piece of legislation that raised U.S. tariffs on over 20,000 imported goods, with the intention of protecting American industries during the Great Depression. This tariff is closely associated with trade policies that aimed to support domestic businesses but ultimately resulted in widespread retaliation from other countries, exacerbating the economic downturn and leading to a decrease in international trade.
Tariff Act of 1789: The Tariff Act of 1789 was the first significant piece of legislation passed by the United States Congress, aimed at raising revenue through tariffs on imported goods. This act was crucial in establishing the federal government's financial foundation and shaping the country's trade policies, reflecting the early economic priorities of the new nation.
Tariff of 1816: The tariff of 1816 was a protective tariff implemented by the United States to promote American manufacturing by increasing the cost of imported goods. This legislation was designed to counteract the influx of British goods after the War of 1812, fostering early American entrepreneurs by making their products more competitive in the market. It marked a significant shift in U.S. trade policy, emphasizing protectionism over free trade and reflecting the growing desire for economic independence.
Tariff of Abominations: The Tariff of Abominations refers to the Tariff Act of 1828, which imposed high duties on imported goods, particularly benefiting Northern manufacturers while harming Southern economies reliant on imported goods. This tariff ignited significant controversy and resentment in the South, leading to heated debates over states' rights and economic policy, and played a critical role in the escalating tensions between different regions of the United States.
Trade adjustment assistance: Trade adjustment assistance is a program designed to help workers who lose their jobs or face reduced wages due to trade policies and increased competition from imports. It provides various forms of support, including job training, income support, and assistance with relocation, aimed at helping displaced workers transition to new employment opportunities. This program is often linked to the broader conversation about trade policies and tariffs, as it reflects the economic adjustments needed in response to changing global markets.
Trade deficit: A trade deficit occurs when a country's imports exceed its exports, leading to a negative balance of trade. This situation indicates that a nation is buying more goods and services from other countries than it is selling, which can affect its economy and currency value. It often highlights the reliance on foreign products and can be a point of concern for policymakers, especially in relation to trade policies and tariffs.
Trade Expansion Act of 1962: The Trade Expansion Act of 1962 was a significant piece of legislation aimed at promoting international trade and reducing tariffs. This act allowed the President to negotiate tariff reductions with other countries and to enter into trade agreements, enhancing the United States' role in global commerce and addressing the growing importance of trade policy in a post-World War II economy.
Trade liberalization: Trade liberalization is the process of reducing or eliminating barriers to trade, such as tariffs and quotas, to encourage international trade and economic cooperation. This process often leads to increased competition, lower prices for consumers, and greater efficiency in production as countries become more integrated into the global economy.
Trump Era Tariffs: Trump era tariffs refer to the series of import tariffs imposed by the Trump administration from 2018 onwards, primarily targeting China and several other countries. These tariffs were part of a broader trade strategy aimed at reducing the trade deficit, protecting American industries, and promoting domestic manufacturing, while also signaling a shift towards protectionist trade policies.
US-Mexico-Canada Agreement: The US-Mexico-Canada Agreement (USMCA) is a trade deal that replaced the North American Free Trade Agreement (NAFTA) in July 2020, aiming to create a more balanced and reciprocal trade environment among the three countries. This agreement focuses on increasing trade and economic growth while addressing modern trade issues such as digital trade, labor rights, and environmental standards.
Wilson-Gorman Tariff of 1894: The Wilson-Gorman Tariff of 1894 was a significant piece of legislation aimed at reforming tariff rates in the United States. It reduced tariff rates from the high levels established by the McKinley Tariff of 1890 and introduced a graduated income tax to offset the revenue loss, reflecting a shift towards more progressive tax policies and growing concerns over economic inequality during the late 19th century.
WTO: The World Trade Organization (WTO) is an intergovernmental organization that regulates international trade by providing a framework for negotiating trade agreements and settling disputes. It aims to ensure that trade flows as smoothly, predictably, and freely as possible, impacting global trade policies and tariffs significantly.