Historical perspectives on U.S. trade policy.

• Author: Irwin, Douglas A.

In the wake of the contentious debate over the North American Free Trade Agreement and the Clinton administration's failure to obtain fast-track negotiating authority from the Congress, there are growing fears that domestic political support for liberal U.S. trade policies may be waning. It remains to be seen, however, whether globalization will unleash forces that will further erode the postwar bipartisan consensus in favor of an open trade regime and shift policies onto a more protectionist track.

The renewed debate over the future direction of U.S. trade policy, however, provides an opportune moment to reexamine the history of those policies. In a series of recent papers, I have explored the historical evolution of U.S. trade policy to investigate the role of protectionist policies in America's past and to understand the origins of the move toward a more liberal trade policy stance since World War II.

A Tariff Laffer Curve?

The Civil War marked the beginning of a long period of high U.S. tariffs. These tariffs served the dual purpose of raising revenue for the federal government and keeping out foreign goods, ostensibly for the protection of U.S. labor and business. After the war, tariffs (which generated roughly half of government revenue) remained high to service the enormous debt burden that resulted from the war. Yet by the mid-1880s a curious problem had arisen: though much of the debt had been paid off, federal revenues were outstripping expenditures by as much as 50 percent.

Republican and Democratic politicians agreed that the fiscal surplus should be reduced, but they proposed exactly the opposite policies for achieving this objective. Democrats advocated cutting tariff rates in an effort to reduce revenue. Arguing that this would simply encourage imports and raise even more revenue, Republicans proposed higher tariff rates to reduce fiscal revenue. This debate over the tariff "Laffer curve" essentially hinged on whether existing tariffs were above or below the revenue-maximizing rate, which in turn depended on the height of the tariff and the price elasticity of import demand. My estimates of these parameters indicate that the average tariff was below its revenue-maximizing rate; therefore, a tariff reduction would have been an appropriate policy for reducing revenue. Evidence from the McKinley tariff of 1890 supports this finding.(1)

Voting to Protect Infant Industries?

The tariff was an important, and highly partisan, political issue during the late nineteenth century. Republicans supported high protective tariffs and Democrats endorsed moderate tariffs for revenue purposes only. This partisan conflict came to a head in what became known as the Great Tariff Debate of 1888. After President Grover Cleveland devoted his entire State of the Union message to an attack on high tariffs, the presidential campaign of 1888 was contested primarily on the tariff issue. Cleveland won more popular votes than his Republican rival...