Given the current state of global trade, it became necessary earlier in the year to gain a historically informed understanding of international trade policy, particularly US trade policy. Interestingly enough, the shelves of the library and Amazon, were very bare when it came to general overviews; Jim Grant kindly sent us a copy of “A Tariff History of the United States”, written by Frank Taussig in 1931, the impresario of Bloomberg’s Morning Show, Tom Keene, mentioned “Clashing over Commerce: A History of US Trade Policy,” by Douglas Irwin, published in 2017, and in 2018, Donald Johnson published “The Wealth of the Nation”, which we have not yet read but is sitting on the shelf just waiting to be read.
Beyond those three books, broad overviews are few and far between. There are a few deep dives into trade during the Jacksonian era, the Civil War era, and niche topics, like early US-China trade relations (A World Safe for Commerce: American Foreign Policy from the Revolution to the Rise of China) but the topic of trade, and trade relations has apparently “engendered narcolepsy among generations of American Historians” according to John Belohlavek. That would seem to imply that the average man or woman on the street is even less informed. We will endeavor to correct this with some historical missives over the next few weeks. To begin, we will present Irwin’s framework for understanding the history of US Trade. With any hope, these short commentaries will make you more informed about trade than anyone in DC, which we suspect is a low hurdle.
The Three R's: Core Objectives of Trade Policy
American trade policy has consistently pursued three primary objectives throughout its history: Revenue, Restriction, and Reciprocity. To be clear, “reciprocal tariffs” do not represent a fourth R with a new objective; reciprocal tariffs are a tactic for achieving a flavor of reciprocity. These "three R's" represent the fundamental purposes that have driven tariff and trade agreement decisions since the nation's founding.
Revenue involves levying duties on imports to fund government operations. This was the dominant objective from 1789 to 1860, when tariffs generated approximately 90 percent of federal government income. The revenue motive created relatively moderate tariff levels designed to maximize customs collections rather than exclude foreign goods entirely.
Restriction focuses on protecting domestic producers from foreign competition through import barriers. This became the primary objective from the Civil War through the Great Depression (1860-1934), when tariffs averaged around 50 percent on dutiable imports. The restriction era reflected the political dominance of manufacturing interests seeking protection from foreign competitors.
Reciprocity emphasizes negotiating agreements with other countries to reduce trade barriers and expand export markets. This has been the dominant objective since 1934, leading to the modern system of multilateral trade agreements and historically low tariff levels.
Three Historical Eras and Structural Breaks in Policy
Within the context of a three R’s framework for understanding US trade policy, the US has experienced only two significant structural breaks over the past two centuries, resulting in three distinct trade policy eras. The remarkable stability within these eras, despite constant political conflict, reflects the deep-seated structural forces that shape trade policy.
The Revenue Era (1789-1860) was characterized by relatively moderate tariffs designed primarily to fund government operations. While protection was sometimes sought by northern manufacturers, southern agricultural exporters successfully maintained "a tariff for revenue only" through most of this period. The era ended with the Civil War's disruption of the existing political equilibrium.
The Restriction Era (1860-1934) emerged from the Civil War's political realignment, which shifted power from low-tariff Democrats to high-tariff Republicans. Protective tariffs became the dominant policy tool, with average tariffs on dutiable imports jumping from less than 20 percent in 1859 to about 50 percent during the war, where they remained for decades. This era was marked by intense political battles over the degree of protection, but the fundamental commitment to high tariffs remained intact.
The Reciprocity Era (1934-present) began with the Great Depression's political realignment and the passage of the Reciprocal Trade Agreements Act of 1934. This landmark legislation shifted trade policymaking from Congress to the executive branch and established the framework for modern trade negotiations. Tariffs have fallen to historically low levels through successive rounds of multilateral negotiations.
Geographic Foundations: Economic and Political Stability
The relative consistency of US Trade policy over more than two centuries owes much to America's stable economic geography, which has historically created predictable political coalitions that persisted across decades. Different regions specialize in various economic activities—cotton in the South, manufacturing in the North, wheat in the Midwest—and these specializations can endure for centuries.
This geographic specialization creates stable regional interests regarding trade policy. Export-oriented regions favor open trade, while import-competing regions seek protection. The correlation between House voting patterns on tariffs in 1828 and 1929—separated by more than a century—was 0.70, demonstrating remarkable consistency in the political geography of trade policy. The stability extends even to modern times: the correlation between 1828 tariff voting and 1993 NAFTA voting was 0.60 for states that existed in both periods. This persistence reflects the deep structural relationship between economic geography and political representation in Congress.
The economic geography of America has also created a "producer-driven" quality to American trade policy, meaning that farmers, miners, and manufacturers have traditionally dominated policy debates, while consumer interests remain largely unorganized. This creates systematic biases toward protection, as the benefits of import restrictions are concentrated among producers while the costs are dispersed among consumers.
Investment Implications
Perhaps most importantly for investors, a historically informed view of trade policy demonstrates that major changes in trade policy require significant external shocks. Only two events in American history—the Civil War and the Great Depression—have been powerful enough to disrupt existing trade policy equilibria and create lasting change. The Civil War shifted political power from the agrarian South to the industrial North, enabling the transition from revenue to restriction. The Great Depression discredited high tariffs and enabled the transition to reciprocity. These disruptions occurred not through gradual political evolution but through dramatic external events that fundamentally altered the political landscape. A future note will deal with the question of whether or not we have experienced the type of shock necessary to create lasting change; we are still uncertain.
Key Takeaways
1) Trade policy exhibits remarkable stability within eras despite constant political rhetoric and conflict.
2) The geographic foundations of trade politics create predictable coalitions that persist across decades.
3) Major policy changes require external shocks of extraordinary magnitude—wars, depressions, or similar disruptions to the existing political order.