BELIEVE IT OR NOT
These days, tariffs are treated like a bad word. They are to be avoided, condemned, and shunned. Tweed-clad economists get visibly agitated when discussing them on television. Think-tankers in the Acela corridor scoff at them as a “tax on consumers” that “makes us poorer.” And because President Trump has made tariffs a central piece of his economic agenda – especially in our relationship with China – they have become a hot button political issue too.
But whether you are an ardent free-trader or hope Trump takes a more “America First” approach to our trade agreements in 2019, it’s important to know that the consensus opinion on tariffs has changed dramatically over the course of American history. The back and forth debates over tariffs in this country are as old as the Republic itself.
In fact, if it weren’t for tariffs, there probably wouldn’t be a United States of America.
The Founding Fathers went to war because of “taxation without representation,” but much of the colonists’ frustrations also came from tariffs.
18th century Britain’s mercantilism dictated that its colonies were to be a source of raw goods, not finished products. This led to Parliament passing the Molasses Act of 1733 and the Sugar Act of 1764, intended to protect domestic industry on the British Isles. It was the new tax contained in the Stamp Act of 1765 that was finally too much for the colonists to bear, but tariffs had built up their resentment for decades.
Finally pushed over the edge, America had a revolution, George Washington kicked King George’s men out of Yorktown, and a new nation was born. But guess what the new government turned its attention to in 1789? The second official act – right after oaths of office – that the new Congress took was passing the following legislation:
“Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise”
Tariffs! The very first law the American Congress ever passed was to raise revenue (it feels like nothing has changed). This isn’t all that surprising given the large debts the new nation had from its war for independence. Under the Articles of Confederation, there was no mechanism for the federal government to directly raise money. It had to go to the states and basically ask for cash. Unsurprisingly, this was insufficient to fund the government.
None of this is to say that tariffs were uncontroversial, even among the founders. Alexander Hamilton was for them, whereas Thomas Jefferson was against them. This split between an agricultural economy in the South that wanted something closer to free trade and a growing industrial economy in the North would continue to be a source of tension all the way up the Civil War and played a role in the causes of the war itself.
As we know, the North won that fight and Congress soon passed all kinds of tariffs, all the way up to the Great Depression in 1929. Until federal income tax came about in 1913, almost all federal government income came via these tariffs. It was tariffs that quite literally funded the government. And it wasn’t until after World War II that America really embraced the doctrine of free trade.
The results speak for themselves. The last 80 years or so have seen an incredible explosion of global wealth. More people were pulled out of abject poverty in the 20th century than in all the previous centuries of human history combined. We have capitalism to thank for this, and free trade has played no small part in its expansion.
We are wealthier and more prosperous because of freer trade, despite the trade deficits America has been running in recent decades. In the words of Milton Friedman in 1978:
The gain from foreign trade is what we import. What we export is the cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things, so we get as large a volume of imports as possible, for as small a volume of exports as possible.
But just when it seemed the free trade mantra had banished pro-tariff stances forever in this country, the Trump administration came in with a contrarian approach. Now, there is a debate underway about just how “free” our free trade really is. China has predatory trade practices and engages in all kinds of unfair practices, but even the EU and Canada have tariffs in place. So does America. Free trade has started to sound more like a guiding principle than a description of global reality.
How do we resolve this? Will China back down? Will free trade mean the 21st century sees as great an explosion of wealth globally – and here in America – as the century that preceded it?
I’ll leave that to the economists.
When it comes to history, however, there’s no denying that tariffs were an early building block for the most dynamic, richest economy on earth.
Buck Sexton is host of the nationally syndicated talk radio program, The Buck Sexton Show, heard on over 100 stations across the country. A former CIA and NYC Police Department Intelligence Officer, Buck is also the co-host of Stansberry Investor Hour, a weekly radio show that you can subscribe to for free right here: investorhour.com.
