Note: This is a guest post by Ever Flores
In any debate about free trade, this argument will come out practically inevitably. It usually starts with something like “but the US got rich off tariffs!” followed by “The US had high tariffs and our standards of living skyrocketed!”. The concept and the argument in itself are easy to grasp: if free trade is so needed and important, then why didwe not need it in the first place?
Before putting that question to rest, here are a few basics I’ll review:
I don’t think it means what tariff proponents think it means. What today’s proponents of high tariffs fail to do if define what they mean by tariffs. Is it just the high tariffs they want? Or are they going to cut most of the taxes we have today and replace it with tariff revenue?
Correlation doesn’t imply causation. We could all point to certain factors correlating with a phenomenon and deemed them to be a cause of the phenomenon based solely on that, but that would be committing a massive fallacy, and relying on lazy thinking at best. Even if tariffs correlate with the sizable growth the American economy experienced between 1870 and 1913, That doesn’t mean it was a major factor, contributing factor, or a factor even at all.
To illustrate that claim, let’s split up into two major periods of trade history in the US: 1870-1913, 1950-2000.
We can see that despite a brief period of low tariffs between 1913 and the first part of the 20s, America came to its “roots” with the hike during the depression era. This period however, marks the end of “Protectionist America”.
After 1950 the US embraced free trade in a continuous and steady way. And what have been the results? Comparing the periods 1870-1950 and 1950-2000 yields striking differences.
So we’ll see how their GDP growth, GDP per capita and productivity far off against each other.
We can see that despite almost doubling in population, the protectionist period doesn’t outperform the free-trade period by much. Not only that, but it loses when we account for GDP per capita and productivity. The latter more than outweighing it by a factor of 3.
But how does it fair against other countries? Well, we happen to have a good counterpart to make that comparison: the UK.
We get the same picture: despite compound GDP growth outperforming the UK by a factor of two, productivity remains the same.
So what happened? How did America grow up to be the most powerful nation in the world if not by tariffs?
We can place the answer in three core points: capital accumulation, population size and property rights.
As we’ve seen, tariffs did not have a great impact on growth or at least not as much as capital stock and the population doubling in size did. Furthermore, they did nothing for productivity as we can see that the free trade period triples productivity growth over the same period of time.
The huge amount of savings the post-Civil War US presented drove growth for most of the period but it did not improve productivity due to the barriers presented by the 30% average tariff blocking capital goods from entering the country.
If anything, the manufacturing sector prospered despite tariffs and not because of it.
Douglas A. Irwin. “Tariffs and Growth in Late Nineteenth Century America.” NBER Working Paper No. 7631, April 2000.
Davis, Lance E., and Robert E. Gallman. “Savings, Investment, and Economic Growth: The United States in the Nineteenth Century,” in John James and Mark Thomas (eds.), Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R. M. Hartwell. Chicago: University of Chicago Press, 1994.
Madison Project, 2000.