‘Tariff’ Should Have Been George Carlin’s Eighth Dirty Word
This August President Trump empowered the U.S. Trade Representative, Robert Lighthizer, to investigate China’s theft of American intellectual property (IP), which costs America up to $500 billion annually. However, a new report from Axios reveals that this may just be the tip of the iceberg—President Trump is not content with cracking down on IP theft, he wants tariffs too.
In a high-level meeting, President Trump accused a number of his advisors as being “globalists” who are raising the issue of IP theft to redirect the President’s attentions. Trump reportedly vented:
For the last six months, this same group of geniuses comes in here all the time and I tell them, ‘Tariffs, I want tariffs.’ And what do they do? They bring me IP. I can’t put a tariff on IP… China is laughing at us. Laughing.
…let me tell you why they didn’t bring me any tariffs. I know there are some people in the room right now that are upset. I know there are some globalists in the room right now. And they don’t want them… they don’t want the tariffs. But I’m telling you, I want tariffs.
At this point the colorless, odorless, and tasteless never-Trump crowd feigns jaw-drops—surely the President is joking. Tariffs? Did he not attend the Wharton School of Business? Is he not a multi-billionaire businessman? How dare he even mention tariffs. By their reaction, one might easily assume tariff was one of George Carlin’s seven dirty words.
But it was not always so. High tariffs were the norm in America from 1789 until the 1970s. In fact, the second piece of legislation passed by the United States Congress was the Tariff Act of 1789. The Act’s purpose was twofold: (i) not only was it was designed to raise revenue for the nascent federal government, (ii) but it was intended to incentivize the creation of American industry, and thereby ween America off British imports.
This second, but often ignored purpose, is obvious according to the writings of the Founding Fathers Alexander Hamilton and George Washington. Washington himself remarked:
A free people ought not only to be armed, but disciplined; to which end a uniform and well-digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies…
Washington knew that political independence is often predicated upon economic independence.
Tariffs were a means to an end: they allowed American manufacturers to profit from making guns, tools, and fabric—all things Britain could make more cheaply and efficiently. It is not an understatement to say that without tariffs, America would have remained dependent upon British imports, and the Industrial Revolution would not have occurred.
The Historical Case for Tariffs: Britain
Most Americans are unaware of the nation’s protectionist past, and even more are skeptical of protectionism’s benefits. Therefore, a brief history lesson is in order. All data is sourced from my book: Bobbins, Not Gold: How Countries Get Rich.
America’s Founding Fathers learned the value of tariffs from the British. Ever since the reign of King Edward III England protected its critical industries from foreign competition—doing so was a matter of survival in the medieval world—but it was not until 1721 that a coherent trade policy emerged under Prime Minister Robert Walpole. Walpole embraced the mercantile trade paradigm (distinct from the corporatism Adam Smith reviled) and therefore crafted his policies to grow Britain’s industrial capacity by exporting manufactured goods in exchange for raw or exotic materials.
To do this Walpole: (i) lowered or dropped import duties on raw materials, (ii) abolished export duties on manufactured goods, (iii) boosted tariffs against manufactured goods, (iv) created bounties (export subsidies) for new industries, and (v) increased quality control to ensure British exports were second-to-none. While this government regulation may seem overbearing, a policy must be measured according to its success, not its ideological purity: did it work?
Resoundingly. Between 1721-30 and 1761-70, Britain’s average trade surplus with the American colonies grew from £67,000 to £739,000. Not only did British exports increase, their composition changed. Likewise, between 1700 and 1773, raw materials and agricultural products, as a percentage of overall British exports, declined from 13.2 percent to 8.8 percent, and the share of wool cloth declined from 47.5 percent to 26.7 percent.
Conversely, manufactured goods rose from 8.4 percent to 27.4 percent of British exports. This category included things like glassware, metal products (tools, weapons, nautical instruments), paper, hats, and cotton cloth. Also, Britain cut its imports of manufactured goods by half during the period, (from 31.7 percent to 16.9 percent).
In short: Britain’s economy diversified and moved up the value chain. Britain grew rich, and the Industrial Revolution began largely because Walpole’s policies raised labor costs (creating an incentive for labor-saving machinery), and clustered an artificially high quantity of industry, and technical knowhow in Britain.
Mercantilism was gospel in Britain until the middle of the nineteenth century, when things began to change. In the 1840s Parliament consumed itself debating the merits of a radical new ideology: international free trade. Politicians speculated and deliberated, insults were exchanged, but ultimately free trade became Britain’s credo—after all, it looked good on paper.
The tariff wall that had protected British industry since the Middle Ages was quickly dismantled from highs of over 50 percent in the 1820s, to just 5 percent decades later. Britain became a free trader. For a time Britain managed to convince its less-industrial European neighbors to play along, and reaped the benefits accordingly.
But the Germans, French, and Italians were not blind. They watched mass-produced British goods flood their markets, watched their economies slow. In fact, Europe’s weakest average economic and industrial growth of the century (1.7 percent and 1.8 percent respectively) coincided with the free trade experiment. Something had to be done. The Europeans then did what they had always done, and reverted to mercantilist trade regimes during the 1870s and 1890s. This worked: between 1891 and 1911 GNP growth in continental Europe averaged 2.6 percent, while industrial output grew at 3.8 percent—over twice as fast as the liberal era (and faster than today, I might add).
But Britain stuck to its guns. It doubled down on free trade, keeping its markets open and its tariffs low. You can guess what happened next.
Britain’s manufacturing supremacy eroded as their factories were forced to compete with an unholy alliance of European companies and governments. This asymmetrical competition caused exports to fall, and imports to rise: a trade deficit was born. Between 1873 and 1883 the value of British exports fell by 6 percent—the days of endless growth were over. This led to a full-blown “made in Germany” crisis—Britain even found itself importing steel from Spain, for the first time since the Middle Ages, when Spanish swords were in vogue.
In the late Victorian Age Britain’s economic growth stagnated, and was 55 percent slower than it was during the middle of the century. Slowing growth was caused by a sluggish manufacturing sector, which was forced to compete for market share with government-backed foreign rivals. Between 1870 and 1913 British manufacturing grew by only 2.1 percent on average, whereas German manufacturing grew by 4.7 percent on average.
Adding to this problem was the fact that British investors chased higher returns abroad, rather than reinvesting their profits in Britain. Consider this: in 1815, the British invested only £10 million abroad, but by 1825 this had increased to £100 million, and by 1870 over £700 million left the country. By 1914, fully 35 percent of British wealth was held abroad.
Northern Britain became a rustbelt, and cities like Glasgow or Manchester became the Detroits of their age.
By the outbreak of the First World War, Britain was merely a first among equals, as opposed the unrivaled superpower she had been a half-century earlier. This was Britain’s fate, and America’s will be no different. The same arrogance afflicts us, while global free trade eats away at our prosperity like an incurable infection.
Free Trade As Propaganda
It is funny though, the similarities as to why both countries adopted free trade. Sure, some genuinely believed it was a panacea, but others were more Machiavellian. For example, Lord Goderich said of Britain’s free trade policy that:
other nations knew… that what we meant by free trade, was nothing more nor less than, by means of the great advantages we enjoyed, to get the monopoly of all their markets for our manufactures, and to prevent them, one and all, from ever becoming manufacturing nations.
Lord Goderich recognized that many British politicians thought they could weaponize free trade in order to lock their rivals into agrarian servitude. Perhaps it would have worked if the other nations played ball. Either way, my point is that Britain did not adopt free trade for purely economic reasons, and neither did America.
America became a bastion of free trade to oppose the Communists—free trade was a propaganda tool, an ideological weapon to wield against the USSR. Furthermore, it was a way to export wealth and industry to allies, to dissuade states from joining the Soviets. It was a bribe.
This is all it has ever been: even while Ronald Reagan spoke about the virtues of free trade, he desperately scrambled to protect American industries through non-monetary barriers, perhaps aware of what was to come.
“Tariff” only became a bad word when America’s academics, politicians, and people began to believe their own propaganda: we continued pursuing free trade long after the USSR fell, thinking it was an end unto itself. This has led America down the same path as Britain before it. China is our Germany—it has grown fat off American technology and investment.
Let us hope things end differently this time around.