When it comes to evergreen political topics, few have more staying power than trade. Americans have been arguing about trade policy — and tariffs in particular — since the earliest days of the republic.
In fact, the second law passed by the nation’s first Congress — “An Act for Laying a Duty on Goods, Wares, and Merchandises Imported Into the United States” — was a tariff bill. Only the Oath Act, prescribing the oath of office for members of Congress and other officials, ranked higher on the legislative agenda.
That first tariff law, moreover, was controversial. James Madison, who introduced the measure in the House, hoped the bill would pass quickly. He was especially keen to postpone a brewing battle over the purpose of import duties. Because while everyone agreed on the need for revenue, lawmakers were deeply divided on a second question: Should tariffs be used to shield domestic manufacturers from foreign competition?
Madison urged his colleagues to delay the fight over protectionism. Instead, he pleaded, lawmakers should focus on the government’s exigent revenue needs. “However much we may be disposed to promote domestic manufactures, we ought to pay some regard to the present policy of obtaining revenue,” he argued.
Madison eventually got his quick and dirty tariff law, which everyone understood to be a temporary measure. But the House still managed a good hard fight over protectionism, underscoring how contentious this topic would prove to be in the decades and centuries to come.
According to Douglas Irwin, the leading historian of American trade policy, that first fight over tariffs shouldn’t surprise anyone. “A country’s trade policy affects the prices that prevail in its domestic market and therefore the allocation of the country’s resources,” he observed in a 2020 article on U.S. tariff history. “As a result, trade policy issues have been a perennial part of the political debate in the United States.”
In that sense, tariffs are just like other kinds of taxation. They are controversial because they shape the fortunes of various regions and industries. But they are also contentious because someone has to pay them. Tariffs are legally levied on importers, but their incidence depends on a range of factors. As Erica York observed recently in a piece for the Cato Institute, any given tariff duty “can be borne by American consumers, businesses, and exporters, by foreigners exporting to the United States, or by some combination of these groups.”
The question of who really pays a tariff lies at the center of trade politics, along with the question of protectionism. And while professional and disciplinary norms tend to wall off tariffs from other forms of taxation, tariffs are ultimately just a particular kind of tax. As such, they raise many of the same issues of efficiency and fairness that surround other taxes.
If you care about taxes, you should care about tariffs, too.
The Three Rs
What drives the formulation of tariff policy? Irwin has identified three principal objectives, which he calls “the three R’s of trade policy”: revenue, restriction, and reciprocity. Policymakers, he wrote, use tariffs “to raise revenue for the federal government, to restrict imports and protect domestic producers from foreign competition, and to achieve reciprocity through agreements that reduce trade barriers.”
These goals have never been exclusive of one another, although they can often work at cross-purposes. A single law can serve several ends, as Congress made clear in 1789 when it emphasized the need for both revenue and restriction. Tariffs, the lawmakers wrote in the first tariff law’s preamble, were “necessary for the support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures.”
While Irwin’s three objectives can coexist, one or another tends to dominate for long stretches. Accordingly, Irwin has periodized the history of American trade policy into three long eras, each dominated by a single objective.
During the first era, stretching from 1789 to the beginning of the Civil War, tariffs were designed to raise revenue, as the young nation cast about for ways to pay its bills. In the second era, lasting from 1861 to 1933, policymakers focused on restriction, using tariffs to shield domestic manufacturers from foreign competition. And in the third era, beginning in 1934 under President Franklin Roosevelt, policymakers sought to encourage reciprocity, negotiating bilateral and multilateral agreements to lower trade barriers around the globe.
Irwin’s periodization is more than just impressionistic; by measuring the average tariff on dutiable goods (tariff revenue divided by the value of total dutiable imports), he identified the three eras by charting their relative emphasis on protectionism. “The average tariff on dutiable imports can be interpreted, somewhat simplistically but still usefully, as the average degree of protection given to domestic producers facing foreign competition,” he explained.
“In the revenue period, from 1790 to 1860, average tariffs rose from about 20 percent to 60 percent and then fell back down to 20 percent,” Irwin wrote. “In the restriction period, from 1861 to 1933, the average tariff on dutiable imports jumped to 50 percent and remained at about that level for several decades. In the reciprocity period, from 1934 to the present, the average tariff fell sharply and then leveled off at about 5 percent.”
Each era featured a dominant objective, but that goal necessarily shared the stage with nondominant objectives. During the first era, for instance, policymakers depended on tariffs to raise revenue for the young federal government. But they also hoped to shield certain industries from foreign competition. Up to a point, any protectionist tariff can yield ample revenue. But raise it too high — provide too much protection — and the tariff will choke off trade entirely, gutting its revenue yield.
Congress has struggled to balance those concerns across the centuries.
The First Era
During the first era of U.S. trade policy, revenue was the dominant objective. Import duties were well understood, easy to administer, and generally well tolerated by the population. They were not, however, uncontroversial. Americans differed over tariff policy depending on where they lived, how they earned a living, and what they believed in (ideology does in fact matter, although probably not as much as material interests).
During this first era, tariffs provided about 90 percent of the federal government’s total revenue, according to Irwin. The need to raise money kept a lid on tariff levels — most of the time. “The average tariff rose from about 20 percent in the early 1800s to nearly 60 percent by the late 1820s because some northern states sought to introduce a protective tariff,” Irwin explained. “This bid was eventually defeated by southern states, which wanted ‘a tariff for revenue only,’ but only after a major political crisis in which South Carolina threatened to secede from the union.”
The Compromise of 1833 unwound the crisis sparked by South Carolina’s vote to “nullify” the protective tariffs enacted in 1828 and 1832. Crafted by the archprotectionist Henry Clay, a Whig senator from Kentucky, the compromise “put tariffs on a downward path until the outbreak of the Civil War, by which time they were below 20 percent,” according to Irwin.
A Shock to the System
Two exogenous shocks have produced regime shifts in the history of American trade policy. The first, according to Irwin, was the Civil War. Almost immediately, the conflict undermined the revenue yield of the prewar tariff structure. But even more important, it realigned political power in the national government; as low-tariff Southerners departed Congress, high-tariff Northerners were able to recast the tariff structure in ways that served the manufacturing interests that dominated their region.
This political shift reflected the durable facts of economic geography. “For more than two centuries, cotton has been produced in Mississippi, tobacco in Kentucky and North Carolina, iron and steel in Pennsylvania, and so forth,” Irwin explained in his longer treatment of trade policy, a 2017 book titled Clashing Over Commerce. “These specialized regions have different interests with respect to trade: some produce goods that are exported, while others produce goods facing competition from imports.”
During the second era of U.S. trade policy, beginning at the start of the Civil War, Congress focused heavily on restricting trade. Eager to protect favored industries from foreign competition, lawmakers boosted the average tariff on dutiable imports from less than 20 percent in 1859 to about 50 percent during the Civil War, according to Irwin. It stayed at that level for decades.
Protectionism had carried the day thanks to the exit of Southern lawmakers from the corridors of power. “This new objective became a priority because the party that controlled the levers of political power changed,” Irwin wrote, “as did the strength of different economic interests that got represented in Congress.”
Ceding Control
In the early decades of the 20th century, tariffs began to decline as a principal source of federal revenue. World War I, like all wars, disrupted international trade and underscored the need for non-trade-based revenue tools. At the same time, a long-running argument over tax fairness prompted lawmakers to revive the income tax they had abandoned after the Civil War. This old-but-new tax quickly began to supplant tariffs as the mainstay of federal finance.
The Great Depression provided the second exogenous shock to American trade policy. And like the first, it prompted a regime change. In 1932 Republicans ceded political dominance to the Democratic Party, which immediately shifted the focus of trade policy toward tariff reduction.
More specifically, Congress in 1934 passed the Reciprocal Trade Agreements Act, authorizing presidents to negotiate trade agreements with other nations. The goal? To lower trade barriers and encourage American exports.
The Reciprocal Trade Agreements Act kicked off the era of reciprocity, according to Irwin, during which the United States sought a general reduction in tariff barriers. Using both bilateral and multilateral instruments, U.S. presidents became vigorous champions of free trade — or at least freer trade.
Passage of the act marked a sea change in the politics of trade policy. Until that moment, lawmakers had jealously guarded their control of tariff policy. “From 1790 to 1930, Congress voted on legislation that set the rates of duty on all imports,” Irwin wrote. But in this new era, Congress agreed that it would “no longer set import duties in long and complicated tariff bills,” according to Irwin. “Rather, the president was authorized to change those duties in trade agreements with other countries. All Congress voted on was whether to grant such negotiating authority (including permission to reduce tariffs) or, starting in 1979, the trade agreements themselves.”
The Reciprocal Trade Agreements Act represented a major sacrifice for lawmakers. Tariffs are a form of political currency, and lawmakers had been spending it like water for 145 years. They used tariffs to mollify constituents, punish opponents, and reward lobbyists. Beginning in 1934, however, they ceded that currency to the White House.
Underlying this sacrifice was a recognition that Congress was especially susceptible to pressure from special interests, Irwin contended. By contrast, the executive branch was at least partially insulated from such forces — and more inclined “to link trade policy to foreign policy and view trade policy in terms of the national interest.”
At least some of the founders had worried about the corruption that might plague tariff policy when it was controlled by vote-maximizing members of Congress. Irwin quotes James Madison in Federalist No. 10 to make the point:
Shall domestic manufactures be encouraged, and in what degree, by restrictions on foreign manufactures? are questions which would be differently decided by the landed and the manufacturing classes, and probably by neither with a sole regard to justice and the public good.
Madison went on to warn about “the spirit of party and faction,” insisting that political leaders would always cave to material interests — especially when it came to taxes of any kind (including tariffs).
“The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality,” Madison wrote. “Yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.”
The delegation of tariff-making authority from Congress to the president was part of a longer effort to make trade policy less political and more “scientific.” This drive had begun early in the 20th century, but it reached an inflection point with passage of the Reciprocal Trade Agreements Act.
The third era of U.S. trade policy was marked by a proliferation of treaties and international trade organizations, including the General Agreement on Tariffs and Trade and the WTO, as well as regional agreements like the North American Free Trade Agreement. All these measures and organizations were created to foster international trade — an appealing prospect for American policymakers of the mid-20th century, who hoped to capitalize on the nation’s economic ascendancy.
A Fourth Era
According to Irwin, America’s three eras of trade policy have been shaped by durable political and economic interests. More specifically, each era has been associated with particular partisan alignments. “Each of the three eras,” he contended, “has occurred in a period in which one political party was politically dominant and could implement its preferred policy.”
The only exception to this pattern came during the early decades after World War II. That conflict “so damaged European and Asian economies that foreign competition was no longer a concern for most American producers,” Irwin wrote, many of whom now wanted access to foreign markets to expand their sales.
The result was a bipartisan consensus in favor of trade liberalization. Republicans abandoned their traditional preference for protectionism and joined the Democrats in seeking to foster international trade through a general reduction in tariff levels. “From the early 1950s to the early 1990s, there was a historically anomalous period of bipartisan consensus and the two parties voted in sync with one another,” Irwin wrote.
More recently, that consensus has started to fray. In the 1990s, champions of NAFTA met with serious opposition in their drive to lower trade barriers with neighboring countries. And by 2016, Donald Trump had marshaled that discontent to help propel his successful drive for the White House. As Irwin noted, Trump is “the first president since 1930 who seems intent on raising import tariffs and import restrictions rather than lowering them through trade agreements.”
It’s reasonable to suggest that Trump’s victory in 2016 might indicate the start of a new era in U.S. trade policy, not simply an aberration within the third regime. But to understand whether Trump’s trade policy was a turning point in U.S. political history, we must examine tariffs within a broader economic context, evaluating their revenue yield, their regulatory potential, and their burden on various taxpayers.
We must, in other words, treat tariffs like taxes. Because that’s what they are.