Tariff

A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade. It is a policy that taxes foreign products to encourage domestic industry. It is used to equalize the trade balance. The tariff is historically used to protect infant industries and to allow import substitution industrialization.

History

19th century

Average tariff rates for selected countries (1913–2007)
Tariff rates in Japan (1870–1960)
Average tariff rates in Spain and Italy (1860–1910)
Average tariff rates on manufactured products
Average Levels of Duties (1875 and 1913)

According to Paul Bairoch (Myths and Paradoxes of Economic History, 1994), the industrialized world of 1913 is similar to that of 1815: "An ocean of protectionism surrounding a few liberal islets", with the exception of a short free trade interlude in Europe between 1860 and 1892. Only two islands of liberalism emerged in the developed part: Great Britain and the Netherlands. On the other hand, "the Third World was an ocean of liberalism", with Western countries imposing so-called "unequal" treaties on colonized and even politically independent countries that required the lowering of customs barriers. Bairoch write that the "Third World" has in fact become underdeveloped because of the imposition of free trade while North America and Western Europe have been able to develop, precisely because they have rejected trade liberalism (free trade) in their history. He notes that[1]:

in history, free trade is the exception and protectionism the rule.

Europe

Trade liberalisation (free trade) in the United Kingdom from 1846 onwards was the first example of large-scale liberalisation after the Industrial Revolution and was initiated by the dominant economy. However, it is the only country where over a specific period (during the two decades from 1846), free trade coincided with an increase in growth. Bairoch explains this by the fact that the country had a significant lead over the other countries in 1846, given that the country had emerged from at least half a century of protectionism[1]. It was in 1860 that free trade made a real breakthrough in continental Europe with the Cobden-Chevalier Treaty signed by Napoleon III. The agreement was considered in France as a coup d' etat, since the parliament was opposed to it, and the agreement was established by means of secret negotiations between Napoleon Ill's envoy Michel Chevalier (a follower of Saint-Simon) and Britain's Richard Cobden. That agreement was the first of a series which Britain would establish with several European countries, known as the "Cobden agreements": the Franco-Belgian treaty was signed in 1861 and between 1861 and 1866 almost all European countries joined the Cobden treaty. Only a few countries on the continent had adopted a truly liberal trade policy before 1860: the Netherlands, Denmark, Portugal, Switzerland, Sweden and Belgium. The decades that followed were not a period of growth and prosperity, but on the contrary they were likened to "the Great Depression"[1].

European Great Depression

Paul Bairoch notes in Myths and Paradoxes of Economic History that the Great European Depression began around 1870-1872 at the height of free trade in Europe between 1866 and 1877 and ended with the return to protectionism around 1892[1]:

The important point is not only that the crisis started at the height of free trade, but that it ended around 1892-1894, just as the return to protectionism became effective in continental Europe[...]It is almost certain that free trade coincided with the depression for which it was probably the cause, while protectionism was probably at the origin of growth and development in most of the current developed countrie.

In Europe, the slowdown in GNP growth was mainly the result of the decline in agricultural production growth; European tariff barriers were not completely eliminated on manufactured products, whereas they were totally eliminated on agricultural products in all countries.This agricultural crisis in continental Europe can be explained almost exclusively by the influx of foreign cereals, which became possible thanks to the abolition of tariff protection on cereals in continental Europe between 1866 and 1872. It was mainly the farmers who suffered because cheap imports led to the collapse of agricultural commodity prices; the farmers' standard of living fell or stagnated in almost all continental European countries. But it also affected overall demand for industrial goods and the construction sector. In France, which was an agrarian economy, wheat imports, which reached 0.3% of national production in 1851/1860, rose to 19% in 1888/1892. In Belgium, this percentage rose from 6% around 1850 to more than 100% around 1890[1].

During the 1870s and 1880s, the United States was Europe's largest supplier of cereals. There was an increasing trade imbalance between Europe and the United States until the 1900s, given that the United States had remained protectionist. The United States had not participated in the free trade movement and, on the contrary, had raised its level of protection. They experienced a period of strong growth while Europe was in the midst of a depression. Around 1870, Europe's trade deficit with North America represented 5% to 6% of the region's imports. It reached 32% in 1890 and 59% around 1900.

Return of protectionism
Trade Policy, Exports and Growth in European Countries

Germany was the first major European country to significantly change its trade policy by adopting a new tariff in July 1879. This new German tariff meant the end of the period of free trade on the continent. Thus, the period 1879-1892 saw the gradual return of protectionism in Europe and the period 1892-1914 can be described as that of growing protectionism in continental Europe, but not all countries changed their policies at the same pace [1].

Bairoch also notes that it was when all countries were strengthening protectionism that the growth rate reached its highest level in continental Europe: indeed, GNP growth rose from 1.1%/year in the years 1850-1870 (protectionist period) to 0.2%/year in the years 1870-1890 (free trade period). And it was the countries that had returned to protectionism that mainly benefited from the economic recovery: during the protectionist phase (after 1892), GNP growth was 1.5% in Mainland Europe , while in the United Kingdom, which continued free trade, the rate reached about 0.7%. In all countries except Italy, and regardless of the date of policy review, the adoption of protectionist measures (after 1892) was followed by a sharp acceleration in growth in the first ten years; in the following decade, which is the decade of increased protection, there was a further acceleration in growth. In contrast, in the United Kingdom, where there was no change in free trade policy, there was an initial period of stagnation followed by a sharp decline in the growth rate. In 1892, France reintroduced strong protectionism: over the previous ten years, its GNP was 1.2%/year. In the first ten years after the protectionist change, GNP was 1.3%/year and the following decade it rose to 1.5%/year. The differences are even more marked in the case of Germany: after the introduction of new protectionist measures in 1885, GNP increased from 1.3% in the previous decade, to 3.1% in the following decade and to 2.9% in the second decade[1].

Third World

From 1813 onwards, the economic liberalism (free trade) imposed by the Western powers on the Third World and the opening of these economies was one of the main causes of the lack of development. The import of large quantities of cheap manufactured goods led to a process of massive deindustrialization. Around 1750, the Third World produced about 70% to 76% of all manufactured goods in the world. But by 1913, it was only producing 7% to 8%. In 1913, the level of industrialization measured by the production of manufactured goods per capita was only one-third of its 1750 level. Bairoch observes that protectionism tends to promote industrialization, while free trade tends to destroy it[1]:

Protectionism has always coincided in time with industrialization and economic development and is even at the origin of it.

The Ottoman Empire served as an example to Disraeli, who disapproved of British free trade, particularly during the discussions on the abolition of the Corn Laws (February 1846)[1]:

the system of pure competition and perfectly applied for a very long time [...], free trade was applied in Turkey and what did it produce? It detroyed some of the best manufactures in the world.

Colonies

In India, for example, after the abolition in 1813 of the East India Company's trade monopoly, which prohibited the import of textile products into India, they quickly flowed into the country. While imports were either prohibited or subject to tariffs of 30% to 80% in Europe, British textile products entered the Indian market without paying any tariff. In 1813, India's textile industry was the country's leading industry as in any traditional society, and probably accounted for 45% to 65% of the country's total manufacturing activities. By the 1870s and 1880s, the rate of deindustrialization in this sector ranged from 55% to 75%. In the years 1890/1900 the rate of deindustrialization in metallurgy ranged from 95% to 99%. The process was similar or even more marked in the rest of Asia, with the exception of China where local industry survived better. In China, the deindustrialization of the textile industry ranged from 30% to 50%[1].

Before independence, Latin American countries were under the domination of Spain and Portugal. The United Kingdom's intervention had greatly helped most of these countries to achieve political independence in the 19th century (mostly between 1804 and 1822). The United Kingdom was thus able to sign many trade treaties that opened the markets of these countries to British and European manufactured goods. The independence of most of these countries therefore paradoxically leads to a phase of deindustrialization because it facilitates the penetration of products from countries more advanced than Portugal and Spain. Thanks to the influence of North America, most Latin American countries changed their trade policies during the period 1870-1890 and imposed protective tariffs to support industrialization[1].

Independent countries

With regard to independent third world countries or countries that did not have colony status in the 19th century (most of Latin America, China, Thailand, the entire Middle East), Western countries had exerted such pressure that most of them had signed treaties providing for the abolition of import duties. They were forced to open their markets to Western products, which allowed the massive entry of imported manufactured goods. Customs legislation could not provide for tariffs higher than 5% of the import value of the goods. Most of these "unequal treaties" were signed between 1810 and 1850, mainly at the initiative of the British[1].

20th century

Tariff and the Great Depression

The years 1920 to 1929 are generally misdescribed as years in which protectionism increased in Europe. In fact, from a general point of view, the crisis was preceded in Europe by trade liberalisation. The weighted average of tariffs remained tendentially the same as in the years preceding the First World War: 24.6% in 1913, as against 24.9% in 1927. In 1928 and 1929, tariffs were lowered in almost all developed countries. So there was no particular protectionism at the time[2]. In addition, the Smoot-Hawley Tariff Act was signed by Hoover on June 17, 1930, while the Wall Street crash took place in the fall of 1929. And the 1929 crisis had already caused a halving of international trade (most of the contraction) before the major industrial countries adopted protectionist measures. Paul Bairoch therefore concludes that the argument that protectionism caused the 1929 crisis and the depression of the 1930s is a myth.

Most economists hold the opinion that the tariff act did not greatly worsen the great depression:

Milton Friedman held the opinion that the Smoot–Hawley tariff of 1930 did not cause the Great Depression, instead he blamed the lack of sufficient action on the part of the Federal Reserve. Douglas A. Irwin wrote: "most economists, both liberal and conservative, doubt that Smoot–Hawley played much of a role in the subsequent contraction".[3]

Peter Temin, an economist at the Massachusetts Institute of Technology, explained that a tariff is an expansionary policy, like a devaluation as it diverts demand from foreign to home producers. He noted that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff. He concluded that contrary the popular argument, contractionary effect of the tariff was small.[4]

William Bernstein wrote: "Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression... The inescapable conclusion: contrary to public perception, Smoot-Hawley did not cause, or even significantly deepen, the Great Depression[5].

Nobel laureate Maurice Allais argued that: First, most of the trade contraction occurred between January 1930 and July 1932, before most protectionist measures were introduced, except for the limited measures applied by the United States in the summer of 1930. It was therefore the collapse of international liquidity that caused the contraction of trade[8], not customs tariffs. Second, domestic output in the major industrialized countries fell faster than international trade contracted, so it was not the contraction in foreign trade that caused the depression, but rather the reverse (it was the fall in domestic demand in the countries that caused the contraction in foreign trade). This indicates that it is the domestic growth of countries that generate foreign trade, not the reverse. So protecting domestic production through tariffs is more important than safeguarding foreign trade. Maurice Allais concludes that higher trade barriers were a means of protecting domestic demand from external shocks, deflation, and deregulation of competition in the global labour market.[6]

Protectionism and free trade among nations

Great Britain

Edward III (1312–1377) was the first king who deliberately tried to expand the wool cloth manufacture. He brought Flemish weavers, centralized the raw wool trade and banned the importation of wool fabrics[7].

The Tudor monarchs, particularly Henry VII (1485-1509), transformed England from a raw wool exporter into the world's largest wool manufacturing nation, through tariff (A Plan of the English Commerce, Daniel Defoe)[7].

At the beginning of the 19th century, Britain's average tariff on manufactured goods was roughly 51 percent, the highest of any major nation in Europe. And even after Britain embraced free trade in most goods, it continued to tightly regulate trade in strategic capital goods, such as the machinery for the mass production of textiles[2]. Thus seen, according to Bairoch, Britain's technological lead had been achieved "behind high and long-lasting tariff barriers"[1].

In 1800, the United Kingdom, which accounted for about 8% to 10% of the European population, provided 29% of all pig iron produced in Europe, a proportion that reached 45% in 1830; industrial production per capita was even more significant: in 1830 it was 250% higher than in the rest of Europe compared to 110% in 1800. In 1846, the industrialization rate per capita was more than double that of its closest competitors such as France, Belgium, Germany, Switzerland and the United States[1].

Tariffs were reduced in 1833 and the Corn Law was repealed in 1846, which amounted to free trade in food. (The Corn Laws were passed in 1815 to restrict wheat imports and guarantee British farmers' incomes ). This devastated Britain's old rural economy. Tariffs on many manufactured goods have also been abolished. But as free trade progressed in the United Kingdom, protectionism continued on the continent[1]. British elites expected that thanks to free trade their lead in shipping, technology, scale economies and financial infrastructure to be self-reinforcing and thus last indefinitely. Britain practiced free trade unilaterally in the vain hope of imitation, but the United States emerged from the Civil War even more explicitly protectionist than before, Germany under Bismarck turned in this direction in 1879, and the rest of Europe followed. During the 1880s and 1890s, tariffs went up in Sweden, Italy, France, Austria-Hungary and Spain[2].

Britain's economy still grew, but inexorably lagged: from 1870 to 1913, industrial production rose an average of 4.7 percent per year in the U.S., 4.1 percent in Germany, but only 2.1 percent in Britain. It was surpassed economically by the U.S. around 1880. Britain's lead in textiles and steelheld eroded as other nations caught up. Britain then fell behind as new industries, using more advanced technology, emerged after 1870 in states that still practiced protectionism[2].

Fundamentally, the country believed that free trade was optimal as a permanent policy and was satisfied with laissez faire absence of industrial policy. But contrary to British belief, free trade did not improve the economic situation and increased competition from foreign production eventually devastated Britain's old rural economy. Britain finally abandoned free trade in 1932 until 1950[2].

United States

Average tariff rates (France, UK, US)
Average tariff rates in US (1821–2016)
US Trade Balance and Trade Policy (1895–2015)

Protectionism was an American tradition. According to Paul Bairoch, the United States was "the homeland and bastion of modern protectionism" since the end of the 18th century and until after World War II[8].

The Tariff Act was the second bill of the Republic signed by President George Washington allowing Congress to impose a fixed tariff of 5% on all imports, with a few exceptions[2]. Most American intellectuals were against the free trade theory advocated by classical economists like Adam Smith, Ricardo and Jean Baptiste Say and were protecting their industries. Alexander Hamilton, the first Secretary of the Treasury of the United States (1789-1795) and Daniel Raymond were the first theorists to present the infant industry argument , not the German economist Friedrich List[7]. Hamilton feared that Britain's policy towards the colonies would condemn the United States to be only producers of agricultural products and raw materials. Washington and Hamilton believed that political independence was predicated upon economic independence. Increasing the domestic supply of manufactured goods, particularly war materials, was seen as an issue of national security. Hamilton was the first to use the term "infant industries" and to introduce the infant industry argument to the forefront of economic thinking. In Report on Manufactures which is considered the first text to express modern protectionist theory, he called for customs barriers to allow American industrial development and to help protect infant industries, including bounties (subsidies) derived in part from those tariffs.[9] Hamilton explained that despite an initial “increase of price” caused by regulations that control foreign competition, once a “domestic manufacture has attained to perfection… it invariably becomes cheaper”.

According to Michael Lind, protectionism was America's de facto policy from the passage of the Tariff of 1816 to World War II, "switching to free trade only in 1945"[10]. It has been argued that one of the underlying motivations for the American Revolution itself was a desire to industrialize, and reverse the trade deficit with Britain, which had grown by a factor of ten in the space of a few decades, from £67,000 (1721–30) to £739,000 (1761–70)[11].

In 1812, all tariffs were increased to 25% due to the war[12]. There was a brief episode of free trade from 1846 but the panic of 1857 eventually led to higher tariff demands than President James Buchanan, signed in 1861 (Morrill Tariff)[2].

In the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System [13]".

The American Civil War (1861-1865) was fought over the issue of tariffs as well as slavery. The agrarian interests of the South were opposed to any protection, while the manufacturing interests of the North wanted to maintain it. The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade, and implemented a 44-percent tariff during the Civil War—in part to pay for railroad subsidies and for the war effort, and to protect favored industries[14]. Lincoln's victory was the victory of protectionism. In 1847, he declared: "Give us a protective tariff, and we shall have the greatest nation on earth"[2].

The Republican Party, which is heir to the Whigs, makes protectionism a central theme in its electoral platforms. According to the party, it is right to favour domestic producers and tax foreigners and consumers of imported luxury products. Republicans prioritize the protection function, while the need to provide revenue to the federal budget is only a secondary objective.

In the early 1860s, Europe and the United States pursued completely different trade policies. The 1860s were a period of growing protectionism in the United States, while the European free trade phase lasted from 1860 to 1892. The tariff average rate on imports of manufactured goods was in 1875 from 40% to 50% in the United States against 9% to 12% in continental Europe at the height of free trade. Between 1850 and 1870 the annual growth rate of GNP per capita was 1.8%, 2.1% between 1870 and 1890 and 2% between 1890 and 1910; the best twenty years of economic growth were therefore those of the most protectionist period (between 1870 and 1890), while European countries were following a free trade policy[1].

After the United States overtook European industries in the 1890s, the argument for the Mckinley tariff was no longer to protect the "infant industry" but rather to maintain workers' wage levels, improve protection of the agricultural sector and the principle of reciprocity[1].

Alfred Eckes Jr notes that from 1871 to 1913, the average U.S. tariff on dutiable imports never fell below 38 percent and gross national product (GNP) grew 4.3 percent annually, twice the pace in free trade Britain and well above the U.S. average in the 20th century (Opening America's Market: U.S. Foreign Trade Policy Since 1776, Alfred Eckes Jr). According to Ian Fletcher, the protectionist periode "was the golden age of American industry, when America’s economic performance surpassed the rest of the world by the greatest margin"[2].

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