By T. Norman Van Cott*
In a recent essay, I noted that the US Constitution, by making the United States a free trade area, increased Americans’ living standards considerably. The story changes when it comes to international trade. Indeed, with the benefit of hindsight (which includes economic insights subsequent to 1787), it turns out that the Founding Fathers’ treatment of US trade with other countries was rife with landmines. Given that this treatment was, in part, the product of compromises between northern and southern delegates at the 1787 convention, its explanation is not as straightforward as the constitutional prohibition on inter-state tariffs.
First, by permitting duties on imports, it guaranteed that the United States was not to be a free trade nation. This is understandable, however, as import tariffs were to be an important source of federal government revenue. Indeed, in only one year between 1789 and 1860 was tariff revenue the most important source of federal government revenue. Tariff revenue continued an important source of federal revenues until the constitution was amended in 1912 to make the income tax constitutional.
Left untouched by the Founders was the fact that any amount of tariff revenue (except maximum revenue) can be obtained with a “low” tariff or a “high” tariff. This is one of the lessons of Laffer curve analysis. Does it make any difference? You bet. The “higher” tariff moves the country further away from free trade and toward a lower living standard.
Interestingly, the tariff-enabling clause in the constitution of the Confederate States of America had language mandating that only the “lower” tariff was acceptable, the only constitution to my knowledge to have ever done so. This is significant because some scholars regard the Confederacy’s constitution as a revision of the 1787 constitution in the light of historical experience. (For a detailed discussion of this point see Robert A. McGuire and my article “The Confederate Constitution, Tariffs, and the Laffer Relationship,” in the March 2002 issue of Economic Inquiry.)
The other tariff landmine relates to the constitution’s prohibition of export tariffs (Article 1, Section 9 Clause 5). This was part of the compromise between northern and southern delegates. At the time of the compromise, delegates had agreed on requiring a 2/3 vote on all tax legislation. Southern delegates ceded a simple majority for tax legislation in exchange for a prohibition on export tariffs and a 20-year moratorium on federal interference in the slave trade (except for what turned out to be a never-imposed $10 dollar import duty per slave).
At the time of the compromise, however, the 13 states had or shortly would have their own slave import restrictions. Thomas Jefferson signed federal legislation prohibiting slave imports effective 1808. The 20-year moratorium was at best a hollow one for southern delegates.
More interesting from an economic perspective is the prohibition on export tariffs. This was also a hollow gain. The reason is that an import tariff is analytically equivalent to an export tariff. Equivalence does not turn on explicit tariff retaliation by trading partners, nor does it turn on a shortfall in foreign exchange earnings by trading partners. It is, rather, a relative price proposition. Abba Lerner is widely credited for this insight in a 1936 article which explains the equivalence using the international economist’s offer curve pyrotechnics. Robert McGuire and I later offered a less obtuse, though by no means simple, explanation in “A Supply and Demand Exposition of a Constitutional Tax Loophole: The Case of Tariff Symmetry.”1
For my money, however, John C. Calhoun deserves at least partial credit for the insight. In the midst of the turmoil over the 1828 “tariff of abominations,” Calhoun’s Exposition and Protest noted:
We export in order to import. The object is an exchange Of the fruits of our labor for those of other countries. … To the growers of cotton, flax, and tobacco, it is the same, whether the Government takes one-third of what they raise for the liberty of sending the other two-thirds abroad, or one-third of the iron, salt, sugar, coffee, cloth, and other articles they may need in exchange, for the liberty of bringing them home. In both cases he gets a third less than he ought. A third of his labor is taken; yet the one is an import duty, and the other an export.2
The hollowness of this export tariff prohibition proved particularly telling in the years leading up to the US Civil War. Upward of 50 percent of US exports were comprised of cotton and tobacco, crops raised in the south. US import tariffs at this time acted, in part, as export tariffs on southern exports. That southern delegates to the 1787 Constitutional Convention thought they were insulating their constituents from the possibility of export tariffs with the prohibition surely counts as a major economic miscalculation. Not only did a simple majority voting rule make it easier to impose import tariffs, but the import tariffs were themselves de facto export tariffs.
Failure to recognize this equivalency between import and export tariffs persists to this day. As President Trump continues to announce import duties, media types wait with baited breath what import duties foreigners will impose on US goods. Beyond the publicity associated with supposed foreign retaliation, the workings of retaliation would have worked its way through the international marketplace.
About the author:
T. Norman Van Cott, an adjunct scholar with the Indiana Policy Review Foundation, is professor of economics at Ball State University, Muncie, IN.
This article was published by the MISES Institute.
- 1. See Constitutional Political Economy 14, no 1 (2003).
- 2. Quoted in Union and Liberty: the Political Philosophy of John C. Calhoun, Ross M. Lence, ed. (Indianapolis: Liberty Fund, 1992), p. 317.
Please Donate Today
Did you enjoy this article? Then please consider donating today to ensure that Eurasia Review can continue to be able to provide similar content.