A Little Look into History: The Role of Tariffs in the World Economy

Tariffs have historically played a key role in the trade policy of the United States. Their purposes include to generate revenue for the federal government and to allow for import substitution industrialization (industrialization of a nation by replacing imports with domestic production) by acting as a protective barrier around infant industries. They also aim to reduce the trade deficit and the pressure of foreign competition. Tariffs were one of the pillars of the American System that allowed the rapid development and industrialization of the United States.

The United States pursued a protectionist policy from the beginning of the 19th century until the middle of the 20th century. Between 1861 and 1933, they had one of the highest average tariff rates on manufactured imports in the world. After 1942, the U.S. began to promote worldwide free trade. After the 2016 presidential election, the US increased trade protectionism.

According to Dartmouth economist Douglas Irwin, tariffs have served three primary purposes: "to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers." From 1790 to 1860, average tariffs increased from 20 percent to 60 percent before declining again to 20 percent. From 1861 to 1933, which Irwin characterizes as the "restriction period", the average tariffs increased to 50 percent and remained at that level for several decades. From 1934 onwards, which Irwin characterizes as the "reciprocity period", the average tariff declined substantially until it leveled off at 5 percent.

Tariff revenues: Tariffs were the greatest (approaching 95 % at times) source of federal revenue until the federal income tax began after 1913. For well over a century the federal government was largely financed by tariffs averaging about 20% on foreign imports. At the end of the American Civil War in 1865 about 63 % of Federal income was generated by the excise taxes, more than twice the 25,4 % generated by tariffs. In 1915 during World War I, tariffs generated 30,1 % of revenues. Since 1935, tariff income has continued to be a declining percentage of Federal tax income.

Historical summary:

(The average US tariff rates, 1821 – 2016)

After the United States achieved independence in 1776, under the Articles of Confederation, the U.S. federal government could not collect taxes directly but had to "request" money from each state. The power to levy taxes and tariffs, when proposed by the United States House of Representatives, was granted to the federal government by the United States Constitution after it came into effect in 1789. The new government needed a way to collect taxes from all the states that was easy to enforce and had only a nominal cost to the average citizen. The Tariff Act of 1789 was the second bill signed by President George Washington imposing a tariff of about 5 % on nearly all imports, with a few exceptions. In 1790 the United States Revenue Cutter Service was established to primarily enforce and collect the import tariffs. This service later became the United States Coast Guard.

The UK was the first country to employ a strategy of promoting emerging industry on a large scale. However, its most fervent supporter was the United States; Paul Bairoch called the U.S. “the mother country and bastion of modern protectionism.”

(Source: https://en.wikipedia.org/wiki/History_of_tariffs_in_the_United_States)