Clashing over Commerce

A History of US Trade Policy

Douglas A. Irwin

• Publisher: University of Chicago Press
• Year: 2017
• ISBN:
  9780226399010
• Topic: Business
• Subtopic: Business generale
• Index: Business

Should the United States be open to commerce with other countries, or should it protect domestic industries from foreign competition? This question has been the source of bitter political conflict throughout American history. Such conflict was inevitable, James Madison argued in The Federalist Papers, because trade policy involves clashing economic interests. The struggle between the winners and losers from trade has always been fierce because dollars and jobs are at stake: depending on what policy is chosen, some industries, farmers, and workers will prosper, while others will suffer.Douglas A. Irwin's Clashing over Commerce is the most authoritative and comprehensive history of US trade policy to date, offering a clear picture of the various economic and political forces that have shaped it. From the start, trade policy divided the nation—first when Thomas Jefferson declared an embargo on all foreign trade and then when South Carolina threatened to secede from the Union over excessive taxes on imports. The Civil War saw a shift toward protectionism, which then came under constant political attack. Then, controversy over the Smoot-Hawley tariff during the Great Depression led to a policy shift toward freer trade, involving trade agreements that eventually produced the World Trade Organization. Irwin makes sense of this turbulent history by showing how different economic interests tend to be grouped geographically, meaning that every proposed policy change found ready champions and opponents in Congress.As the Trump administration considers making major changes to US trade policy, Irwin's sweeping historical perspective helps illuminate the current debate. Deeply researched and rich with insight and detail, Clashing over Commerce provides valuable and enduring insights into US trade policy past and present.

Part I

Revenue

Chapter One

The Struggle for Independence, 1763–1789

The regulation of America’s foreign trade played an important role in shaping events during the critical period around the country’s move toward independence and nationhood. While the conflict between Britain and the thirteen North American colonies was ultimately about political power and sovereignty, many disputes concerned the restrictions and taxes that Britain imposed on colonial commerce. Lacking any political voice in Parliament to influence those policies, the colonists responded by employing the only weapons at their disposal, including economic pressure through the boycott of British goods. After having fought successfully for independence, however, Americans discovered that engaging in trade outside the British Empire was difficult. These problems were compounded by a weak central government under the Articles of Confederation, which prevented Congress from establishing a national trade policy or imposing import duties to raise revenue. These trade-policy difficulties were key factors in setting the stage for the constitutional convention of 1787.

Trade and the American Colonies

For more than a century after the first permanent English settlement in North America was established at Jamestown in 1607, the New World settlers were heavily dependent on foreign trade. Trade was essential to the well-being of the new arrivals, furnishing them with clothing and blankets, nails and firearms, cooking implements and metal goods, and other tools and materials that could not be produced locally. Without these imports, the standard of living of the colonists might have suffered so much that they would not have stayed. As McCusker and Menard (1985, 71) put it, “Overseas commerce did not merely make colonial life comfortable, it made it possible.”

Overseas trade with Britain was an integral part of the economic life of the North American colonies, even though they were separated by some three thousand miles across the Atlantic Ocean. Through the seventeenth and eighteenth centuries, the colonists paid for imports of manufactured goods from Britain by exporting cash crops, such as tobacco and rice, and abundant local produce, such as fish and wood. The terms of trade—the price of exported goods relative to the price of imported goods—was a key determinant of economic welfare in the colonies. A rise in the price of tobacco because of increased European demand, for example, would enable the colonists to import more manufactured goods in exchange for those exports. A decline in the price of commodity exports not only made European imports more expensive to procure, but reduced agricultural income and diminished the economic prospects of the colonies. As a result, fluctuations in the prices of exported and imported goods had a pronounced impact on the growth and welfare of the colonial economy.1

By the early eighteenth century, New World abundance along with overseas trade allowed the colonists to enjoy a relatively high standard of living. Adjusting for the different price levels between Britain and the colonies (that is, using a purchasing-power comparison), real per capita income in the colonies was at least 50 percent higher than in England between 1700 and 1774.2 This brought a steady stream of European migrants to America, and the colonies grew in size and economic importance. By 1770, the population of Britain’s thirteen North American colonies was 2.1 million, most living near the seacoast. By contrast, the population of Great Britain was just over 7 million at the time. In terms of economic output, the colonial economy was about a third the size of Britain’s in 1774. Thus, by the late eighteenth century, North America was by no means a small and insignificant part of the world economy.

The main economic activity in the colonies was the cultivation of agricultural goods and the production of home crafts. About 85 percent of the labor force was employed in the agricultural sector, some producing crops for export but most for local consumption. Even though colonial society was largely rural and agrarian, nearly all Americans were linked in some way to the larger world market. Whether they were raising livestock in New England, wheat and corn in Pennsylvania, tobacco in Virginia, or rice in South Carolina, the colonists did not practice local self-sufficiency unless circumstances—mainly distance to the market—so dictated.3 As Jensen (1969, 108–9) notes,

The American farmers at the outset of the Revolution were utterly dependent, therefore, for their growth and prosperity, on the sale of farm produce in overseas markets, as were American fishermen and lumbermen. Any proper economic map of America at the beginning of the Revolution would show America as a mere fringe between the Atlantic Ocean and the Appalachian Mountains, with a network of lines crisscrossing the Atlantic between America and the West Indies, Africa, the Mediterranean, and the British Isles. Most Americans of the eighteenth century understood this, and they were more concerned with what went on in those areas than they were with what went on a hundred miles inland from the ocean, for it was in the far-flung seaports scattered around the Atlantic Ocean that Americans marketed their surpluses of tobacco, rice, indigo, wheat, and Indian corn. Hence it was that American newspapers were filled with political news, and crop and weather conditions even in such far-away places as Turkey and Russia, for what happened there might well affect the price of American wheat and corn.

The North American colonies could be divided into four economic regions, each endowed with different resources and hence specializing in different productive activities.4 With its forests and proximity to the sea, New England was dominated by shipping-related activities, such as shipbuilding, shipping services, fishing, and whaling. Merchant shipping gave rise to production in related industries, especially wood and lumber (for masts and ship construction, caskets and barrels), finance, and insurance. Although many small farms in the region produced corn, wheat, and livestock, New England had relatively poor agricultural land and was a net importer of food.

The Mid-Atlantic states of New York, Pennsylvania, New Jersey, and Delaware were more economically diverse. The ports of New York and Philadelphia were major urban centers and hubs of commerce, but were linked to the domestic coastal trade as much as overseas trade. New York was a center for commercial services. Philadelphia, the largest city in colonial America, was the home to small manufacturers and craft production, including iron works and flour mills, making the region’s residents somewhat less dependent upon manufactured imports from Britain. The area’s staple products were grain and flour: many small farms in New York and Pennsylvania grew wheat, corn, barley, and rye, some of which was exported to the British Empire.

The South produced major cash crops for bulk export: the upper South (Maryland, Virginia, and North Carolina) specialized in tobacco, while the lower South (South Carolina and Georgia) produced rice and indigo. These crops were produced on relatively large farms employing slave labor that had been transported from Africa. This region had the highest per capita exports and the strongest dependence on the world market, but also had the least diversified economy and relied on British financing and transport to conduct its trade.

Thus, the different regions of the colonies specialized in the production of different exportable goods: tobacco from Virginia and Maryland, wheat and flour from Pennsylvania and New York, rice and indigo from Carolina, and wood products and fish from New England. The top three commodity exports—tobacco (27 percent), wheat, flour and breadstuffs (19 percent), and rice (11 percent)—comprised well over half of total merchandise exports from 1768 to 1772. New England also provided shipping services and earned more income from the carrying trade and insurance than from exporting any single commodity.5

The earnings from merchandise exports and shipping services enabled the colonies to pay for their imports. The port cities were the key points of contact with the rest of the world, and most foreign goods were imported through the seaports of Philadelphia, New York, Boston, and Charleston. About 80 percent of these imports consisted of manufactured goods from Britain. Woolens and linens were among the most important, but imports included a variety of other products, such as paper, glass, and metal goods. Commodities for household consumption, such as tea and alcoholic beverages, also made up a sizeable portion of imports.6

The importance of foreign trade in an economy is commonly measured by the ratio of exports or imports to gross domestic product (GDP). In 1774, imports from Britain amounted to roughly 8 to 9 percent of colonial GDP.7 Because Britain accounted for more than 80 percent of America’s imports prior to the Revolutionary War, the ratio of total merchandise imports to GDP was probably about 10 percent. This is an imperfect indicator of the economic importance of trade, because the prices of all traded goods were determined by the world market and thereby had a pervasive effect throughout the colonial economy. These prices connected all households to the world market, either through prices they received for the produce they sold or the prices they paid for the goods they purchased.

The Economic Consequences of the Navigation Acts

Although the commodity composition of America’s foreign trade was largely determined by regional resource endowments and driven by market forces, the geographic pattern of trade was not. Instead, the British Parliament had enacted the Navigation Acts, which artificially channeled colonial trade through Britain and its territories in the West Indies. These trade regulations and subsequent taxes and customs duties led to friction between Britain and America and helped stimulate colonial demands for independence.

The purpose of the Navigation Acts was to promote Britain’s maritime power and ensure that trade within the Empire served its commercial interests. First applied to the American colonies in 1651, the Navigation Acts involved a complex web of government policies. These mercantilist policies—designed to promote British commercial interests by promoting exports and restricting imports—regulated the nationality of the ships and crews employed in British and colonial commerce, restricted the destinations to which colonial goods could be shipped and the sources of colonial imports, favored selected British industries with subsidies, preferential tariffs, charter monopolies, and other encouragements, and prohibited the development of certain industries in the colonies that might harm producers in Britain.

From America’s standpoint, the most important regulation was the requirement that almost all its exports and imports be shipped via Britain. In terms of exports, all “enumerated” goods had to pass through a British port before reaching their final destination. About three-quarters of American exports to Britain were enumerated, the most important of which was tobacco. Although American tobacco received preferential treatment in Britain (discriminatory duties were imposed on tobacco imported from Spanish and Portuguese colonies), the overwhelming majority of tobacco exports was reexported to Europe. This indirect routing imposed extra costs on American exporters and reduced the prices received by tobacco planters. If tobacco had not been enumerated and could be sold directly to European customers, the income of tobacco planters would have been anywhere from 15 to 35 percent higher, according to Sawers (1992, 269). Thus, the Navigation Acts imposed a significant burden on a politically influential, trade-dependent group, the Chesapeake tobacco farmers of Maryland and Virginia.

Rice exports were partially enumerated; exports destined for southern Europe could be shipped directly, but those for northern Europe required passage through Britain. This limited the adverse impact of these regulations on the prices received by planters in South Carolina. Other exports benefited from British bounties (subsidies). These included exports of indigo, naval stores, and lumber, although the benefit to the colonies was not large because the subsidy margin and volume of exports were relatively small. Other agricultural goods, notably wheat and flour, had limited access to the British market but were given preferential access in the British West Indies.

The Navigation Acts did not significantly distort colonial imports. Most of America’s imports from Britain were made in Britain, the world’s leading producer of manufactured goods. For some of these goods, such as gunpowder, linen, sailcloth, silk, and refined sugar, the colonies benefited from British export subsidies that lowered their price to American consumers. Britain also permitted the colonies to import certain products directly from the British West Indies and southern Europe, such as salt for curing fish and Madeira wine. However, most non-British imports, whether from Europe or Asia, first had to be shipped through Britain. About 20 percent of the colonies’ imports from Britain consisted of foreign goods that originally came from Asia, mainly tea and pepper, or from Europe. This artificial routing through Britain involved extra fees, commissions, warehouse rents, and transportation costs and is estimated to have raised the costs of imports of European and Asian goods by about 20 percent.8

In a pioneering calculation, Lawrence Harper (1939) tallied up the costs and benefits to the colonies from these trade restrictions for the year 1773. He estimated the total cost to be $3.3 million, only about 2 percent of colonial income. The enumeration of tobacco was by far the largest component, accounting for three-quarters of the total cost. Thomas (1965) revised Harper’s calculation down to $2.7 million, but also took into account the benefits to the colonies from being part of the British Empire. These benefits were estimated to be $1.8 million and arose in part from the lower insurance rates on shipping due to the protection provided by the Royal Navy. In this broader calculation, the net cost to the colonies came to just $0.9 million, a slight 0.6 percent of colonial income.9 As McCusker and Menard (1985, 354) conclude, “Whatever the costs of membership in the British Empire, they were largely offset by the benefits: naval protection; access to a large free-trading area; easy credit and cheap manufactures; and restricted foreign competition.”

The fact that the aggregate burden of Britain’s commercial policies on the colonies was small, however, does not mean that these restrictions were unimportant in spurring demands for independence. Only a minority of the colonial population is believed to have actively supported independence in 1776, and this vocal and politically powerful minority may have been precisely those most affected by Britain’s trade policies. In fact, about 90 percent of the economic burden of the Navigation Acts is believed to have fallen upon the southern colonies, particularly tobacco planters in Maryland and Virginia, and might have reduced the region’s income by as much as 2.5 percent in 1770.10

It was not a coincidence that these planters strongly supported independence. Virginians believed, apparently with good reason, that freeing the tobacco trade from Britain’s commercial regulations would make the crop much more profitable. Indeed, in the 1640s, Virginia’s House of Burgesses petitioned for a “free export of their Tobacco to foreign Markets directly,” but their request was rejected by the British Privy Council. In 1774, in a draft of instructions to its delegates to the Continental Congress, the Virginia legislature declared that “the exercise of a free trade with all parts of the world, possessed by the American colonists as of natural right, and which no law of their own had taken away or abridged” was a subject of “unjust incroachment” by the British authorities.11

Another group that held grievances against British policy were urban merchants in Boston, New York, and Philadelphia. These merchants were also dismayed by British commercial regulations that restricted their freedom to trade with other regions of the world. “The merchants of revolutionary America made up but a very small part of the population, but they wielded economic and political power within most of the Colonies far out of proportion to their numbers,” Jensen (1969, 109) notes. Meanwhile, farmers who made up the bulk of the population “did not share the economic grievances of either merchants and tradesmen of the coastal cities or of the tobacco growing planters of Virginia and Maryland...