Henry Clay learned a lesson. Can we?

Tariffs

Tariffs

For as long as there has been trade, governments have tried to tax it. Tariffs, as taxes on trade, especially imports, are called, are tempting to governments for the same reason that sales taxes are tempting. In any sale, money changes hands. All the government does is take a cut. Income taxes and wealth taxes, by contrast, are harder to administer. Income and wealth can be hidden. 

During the first century of the American republic, tariffs formed a staple of American federal revenues, precisely because they were so easy to collect. Henry Clay of Kentucky proposed what he called an “American system" resting on three pillars. The first was tariffs, and the other two were a national bank and federally funded roads. Clay contended that his system would strengthen the federal government and the nation at the same time.

All three pillars were controversial, because not everyone wanted a stronger federal government or even a stronger nation. Advocates of states’ rights roundly opposed Clay's system. They condemned tariffs as more of what had prompted the tax revolt that became the American Revolution.

Clay countered that tariffs were an expedient, a temporary arrangement America's economy would outgrow. American industry was in its infancy, he said, and vulnerable on that account. American manufacturers needed protection against British imports until they developed the expertise to beat the British on a level playing field.

Whether Clay was being candid was hard to tell. Did he really intend to remove the tariffs in a decade or two? His opponents were distrustful. American manufacturers, who contributed to Clay's election campaigns, wouldn't voluntarily relinquish their protection.

The pro-tariff bloc in Congress in 1828 passed a bill that dramatically raised rates. Clay was then secretary of state and rooted from the sidelines. But he returned to the Senate in time to deal with the blowback. Southerners believed the tariff worked against their interests as consumers dependent on northern manufacturers who raised their prices behind the new tariff wall. South Carolinians objected particularly, threatening nullification of the tariff law and secession if the government tried to enforce it.

Andrew Jackson didn't much like the tariff of 1828. But it was a federal law, and upon his inauguration in 1829 he swore to execute the laws. This threw him and Henry Clay into an uneasy alliance, each loathing the other. And it put them in opposition to South Carolina’s John Calhoun, who led the forces of nullification.

Jackson vowed to march an army into South Carolina and hang all the secessionists, if Calhoun pushed things that far. Jackson's threats got the attention of the country and some of the South Carolinians.

But it was Clay's skill at compromise that defused the confrontation. Clay negotiated a gradual lowering of the 1828 tariff—in keeping, he said, with his original promise that tariff protection would be temporary. This satisfied Calhoun and the nullifiers. Their retreat satisfied Jackson, although the volatile Tennessean said on his deathbed he should have hanged Calhoun. (In the same breath he said he should have shot Clay.)

The tariff didn't disappear. It was too handy a source of revenue in an era when the Constitution didn't allow income taxes. It remained a political football between the parties, with the pro-business Republicans pushing it up and the pro-consumer Democrats drawing it down. 

Reliance on the tariff for revenue largely disappeared with the passage of the 16th Amendment, which allowed a federal income tax. Yet protectionists couldn't let it go. In 1930 protectionists in Congress approved the Smoot-Hawley tariff as a way of shielding American jobs against imports during the Great Depression. It failed utterly. Other countries retaliated. Unemployment in America grew worse. Animosities developed among former trading partners. The trade war of the 1930s gave way to the world war of the 1940s.

America learned its lesson. After the war the United States government embraced free trade and used its influence to cause other governments to do the same. The American economy grew. The world economy grew. World War III, which many observers expected imminently, never happened. Nuclear weapons had something to do with its absence, but the growth of world trade contributed too. Vendors and customers prefer each other alive.

Recently the lesson has been unlearned. Donald Trump launched a new tariff war, and Joe Biden continued it. Trump has promised to escalate if elected again. Kamala Harris seems content to continue Biden's policies.

The old arguments are being recycled, with some ironic—indeed perverse—twists. A prohibitive, 100 percent tariff has been placed on imports of electric vehicles from China. Henry Clay defended infant industries that needed time to get up to speed, but the American automobile industry today is the most mature industry in the world. China's carmakers are the babies in this case.

Today, as in Clay's time, American consumers are being asked to subsidize American manufacturers. Actually, that's not right. They are being required to subsidize American manufacturers. If they were merely being asked, no tariff would be required. Americans could simply choose to buy Teslas instead of BYDs.

National security is cited as justification for tariff protection. The United States can't afford to lose out in the race to develop cutting-edge technologies. Henry Clay made a similar argument, referring to shipbuilding techniques. But if security is genuinely an issue, a tariff isn't the right tool. Government subsidies would be more to the point. 

Henry Clay's opponents didn't like the power tariffs conferred on the federal government. This argument is even sharper today, in that Congress has largely abdicated control over tariffs to the executive branch. In the 1820s a new tariff required a majority in Congress. Today it requires only the stroke of a president's pen.

Democrats in the late 19th and early 20th centuries complained that tariffs contributed to the rise of monopolies. Big businesses lobbied Congress to protect them from foreign competition. Succeeding, they raised prices and padded their profits, allowing additional lobbying and further protection.

Today businesses don't have to lobby Congress. They just have to flatter or bribe the president. Contributing to one presidential campaign is much less expensive than contributing to hundreds of congressional campaigns.

By its nature, trade is a positive sum game. If either side to a transaction thinks it will come out worse, it walks away from the transaction. 

By contrast, tariff wars are negative sum games. As retaliation sets in, both sides become worse off economically. Their governments generally ignore the economic costs or rationalize them in the name of national security. But, historically, tariff wars have made actual wars more likely, thereby undoing and overwhelming any short-term security gains.

Tariffs are defended as a means of bringing manufacturing jobs back to America. This is an illusion, for the most part. More manufacturing jobs have been lost to automation than to offshoring. And jobs that might be regained in one sector are offset by jobs lost in other sectors, due to the increased cost of imports used in their manufacturing processes.

Perhaps the country will come to its senses. Perhaps American consumers will refuse to be taxed for the benefit of manufacturers. Perhaps cool heads will tamp down the jingoism that treats trade as combat. Perhaps all this will happen before we experience the international equivalent—or worse—of the crisis that nearly blew up the Union over the tariff of 1828.

Henry Clay learned his lesson from that crisis. America learned a similar lesson from World War II. Let’s hope the lessons aren’t utterly lost on the current generation.