Sunday, June 8, 2014

Protectionism and US Economic History

The case for selected protectionism and also “infant industry protectionism” is a strong one.

First, all the theoretical arguments in favour of complete free trade fail, and need not detain us.

Nor is the case for “infant industry protectionism” an endorsement of endless protectionism or tariffs on all goods, but the view that where domestic industries can be developed and generate positive externalities throughout an entire economy, through increasing returns to scale, synergies and cluster effects (Reinert 2007), they can be strongly aided in their early stages of development by selected tariffs on foreign imports.

The crucial point is that the creation of industries that gave increasing returns to scale (often in manufacturing), rather than dead-end “diminishing returns to scale,” is what marks successful economic development. Once the new manufacturing sectors become internationally competitive, it is possible to reduce or eliminate tariffs. Note also that this policy is perfectly compatible with the fact the other types of tariffs or poorly targeted tariffs can be harmful to economic development.

It is, above all, the structure of tariffs not average tariff rates that is the key to successful infant industry protectionism (Tena-Junguito 2009).

The US is a case in point. Protectionism as a modern economic theory was essentially born in the US in the thought of Alexander Hamilton and his Report on Manufactures (1791), although he drew on earlier mercantilist ideas (Bairoch 1993: 33).

Bairoch (1993: 34) sees US economic history as divided into these phases:
(1) 1816–1846
A very strong protectionist phase

(2) 1846–1861
A slightly reduced, but still moderately protectionist phase.

(3) 1861–1945
An era of strong protectionism.
The American Civil War saw the victory of the doctrine of protectionism after a somewhat more liberal era in the 1850s (Bairoch 1993: 35).

Although the average level of tariffs is not necessarily a guide to how effective and well targeted tariffs were in each country, nevertheless we can see the level of protectionism in the United States as compared with other Western nations in 1875 in the following data:
Average Level of Duties on Manufactured goods 1875
(1) United States | 40–50%

(2) Portugal | 20–25%

(3) Spain | 15–20%

(4) Russia | 15–20%

(5) Austro-Hungary | 15–20%

(6) Denmark | 15–20%

(7) France | 12–15%

(8) Belgium | 9–10%

(9) Italy | 8–10%

(10) Germany | 4–6%

(11) Switzerland | 4–6%

(12) Sweden | 3–4%

(13) Netherlands | 3–5%

(14) UK | 0%. (Bairoch 1993: 24, Table 2.2).
The US tariff regime aided manufacturing industries, and Bils (1984) shows how the US cotton textile industry would have been largely wiped out in the early 19th century if it had not been for protectionism.

Bils, Mark. 1984. “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” Journal of Economic History 44: 1033–1045.

Bairoch, P. 1993. Economics and World History: Myths and Paradoxes. University of Chicago Press, Chicago.

Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor. Carroll and Graf, New York.

Tena-Junguito, Antonio. 2009. “Bairoch Revisited: Tariff Structure and Growth in the Late 19th Century,” Economic History Working Papers, 121/09. Department of Economic History, London School of Economics and Political Science


  1. Very good. I did something on this a while back...

  2. I noticed how carefully you qualified your arguments. I would agree with those qualifications. In addition I would doubt that it is possible for politicians to recognize the concept of "increasing returns" industry rather than to apply a sweeping protectionism to all industries! perhaps this is why one of the architects of NTT (New Trade Theory) Paul Krugman was so CAREFUL to not draw sweeping conclusions from his own theories. (Indeed increasing returns can be used, in conjunction with the ideal free flow of labor, to argue that unemployed people in poor countries "ruined" by free trade can migrate to the developed world, where they can find employment in growing industries.

    You said that "although the average level of tariffs is not necessarily a guide to how effective and well targeted tariffs were in each country," I completely agree. Notice the federal governments share of gdp in the post civil war era. Notice that income taxes were nonexistent (save for the civil war era) until 1913)

    Finally the biggest argument for free trade for me is the Cobdenite one NOT the Ricardian one. I don't care particularly if Portugal had a manufacturing industry killed off by free trade, what matters is the welfare of portugal and england's individual consumers, and the fact that when economies are intertwined, its much harder for countries to make war upon one another.
    (Using World War I as an example against this doesn't work, because tariff rates rose dramatically in European Countries decades before World War I, free trade had been faltering)

    1. "Notice the federal governments share of gdp in the post civil war era. Notice that income taxes were nonexistent (save for the civil war era) until 1913) "

      Thanks for that red herring, given that nobody is disputing this fact, and it is not even relevant to the subject at hand.