Land Of The Free Trade

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All laws have unintended consequences. The Embargo Act and the Non-Intercourse Act had almost nothing but. Not only did they gravely injure American foreign commerce, these laws acted also as a prohibitive tariff. Imports, especially manufactured imports from Europe, were largely barred from the country, and local industries, already beginning to grow, prospered mightily as a result. Unfortunately, these new enterprises, once confronted with the threat of renewed trade with competing countries, immediately sought a real tariff.

The New England cloth industry demanded, and received, a duty of twenty-five cents a yard on cheap cotton cloth, effectively excluding competing British cloth from the American market. Other industries immediately sought their own protective tariffs, and some succeeded. A tariff to protect growing young industries always has a surface plausibility that enables politicians to more easily accept it and thus accommodate those self-interested constituents who are calling for it. But, in fact, there are always two solid reasons against a protective tariff, both elaborated at length in The Wealth of Nations .

The first is that the tariffs are ultimately paid not by foreign producers but by domestic consumers, to whom the costs are passed along. The second is that protective tariffs insulate producers from foreign competition. This not only allows them to raise their prices but also makes it less imperative for them constantly to seek ways to cut costs and improve quality. And it is the inescapable necessity to innovate and cut costs—in order to survive in a free market—that powers the great force for the general good that has come to be known, in Adam Smith’s famous metaphor, as the “invisible hand.”

Fortunately, the Smithian inheritance still held. And while specific industries were protected, such protection was always presented as an exception to the general rule, and American tariffs stayed low, compared with those of many other countries. New England shipping interests, of course, fought for a low tariff on all goods. But American manufacturing was growing with astounding speed in these years, and its political power along with it. In 1824 there were two million Americans engaged in manufacturing, ten times the number only five years earlier. American shipping, meanwhile, was stagnant or in decline.

Besides the shipping interests, the other great source of opposition to a high tariff was the South. With few industries, and ever more dependent on the export of cotton to the British market, the Southern planters wanted free trade. In those years it was the tariff, not slavery, that most divided North and South and threatened the Union. Under Northern pressure the tariff rose steadily, and in 1828 Congress passed what the South—as always a major exporter of catchy political phrases—called the Tariff of Abominations. This, in turn, led to the nullification crisis in 1832, when South Carolina declared that states had the power to rule federal laws unconstitutional, including the tariff.

A direct confrontation, and quite possibly civil war, were avoided only when a new tariff calling for gradually lower rates was adopted. After the crisis passed, the tariff continued to decline slowly until the Civil War began for real in 1861.

By that year American exports had topped $400 million, four times what they had been in the best year before the War of 1812. But as a percentage of the whole American economy they were much smaller than they had been then, for the economy had grown far faster than had foreign trade. In 1800 about 10 percent of the American gross national product was being shipped abroad. Sixty years later the United States was exporting only about 6 percent of a much larger gross national product.

There has long been an argument among scholars about whether foreign trade (and foreign capital) drove this dramatic domestic expansion or the other way around. The truth, in all likelihood, is that they acted together, each upon the other. Uniquely, the United States is both a continental and an island power. In the great sweep of its territory and the abundance and diversity of its resources, it possesses the inherent advantages of a Russia or China. Yet in its geographical isolation from possible aggression and its unhindered access to the ocean sea and its trade routes, it has the very attributes that made Japan and Great Britain rich. With the best of both worlds, America’s domestic market and its foreign trade together produced the greatest economic synergy the world had ever seen.

A decade ago we were running record merchandise trade deficits, but they were offset by intellectual trade and foreign investment.

But at the outbreak of the Civil War, American exports were still largely agricultural products and raw materials (cotton would remain the leading agent until the 1930s). More than half of all imports were manufactured goods, especially cloth and iron products, including most of the railroad rails that were quickly knitting the country together. Manufacturing exports, however, were beginning to make inroads. In 1820 only about 5 percent of American exports were finished goods. By 1850 more than 12 percent were.