TARIFF

TARIFF is a schedule of import and export rates paid to a government, but a tariff can also be a duty imposed on a class of items or laws regulating duties used either to raise revenue for the government or protect internal industries and commerce. Tariffs go hand in hand with trade, both of which are subject to the ebb and flow of American social, political, and economic history. Scholars tend to divide the history of the tariff into three periods: the Early Republic to the Civil War (1789–1860), Civil War to the Great Depression (1861–1930s), and from the depression onward.

Colonial Era and the Early Republic

Much of the tariff's early history was colored by the colonists' experience with England. In an effort to earn revenue to pay for the costly French and Indian War as well as the cost of maintaining the colonies themselves, England initiated the TOWNSHEND ACTS OF 1767, which placed duties on certain items such as paper, glass, tea, and other goods the colonies produced in small amounts. Responding to the larger issue of taxation without representation, the colonists sought ways to avoid paying the Townshend tariffs. Sometimes colonists refused to purchase items, and public protests were organized. As the colonies worked toward independence, most were highly suspicious of taxation in any form. For instance, the Articles of Confederation did not provide for the national government to levy any taxes. Individual states voluntarily provided monies and levied their own tariffs. This did not change until 1789 when the new Constitution granted Congress the authority to "lay and collect Taxes, Duties, Imposts, and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States." The drafters of the Constitution included certain limitations: all taxes were required to be applied geographically equally, Congress was not allowed to place duties on exports from states, and states could not impose duties without the approval of Congress. Foreign trade and commerce was now the responsibility of the new federal government.

James Madison, serving as Speaker of the House of Representatives, introduced the very first National Tariff Act on 4 July 1789. Madison's original bill called for a tariff to raise revenue so that the new government could meet its obligations. Northern manufacturers argued for the tariff to include protectionist measures to help the young industries compete with foreign markets. So the final tariff bill combined ad valorem taxes and specific taxes. Ad valorem taxes are based on a percentage of the item's value, while specific taxes are assigned regardless of value. For instance, a specific tax of ten cents a gallon was assigned to all imported wines in the hopes Americans would buy American wine, which in turn would aid American wine manufacturers.

The first National Tariff Act was a moderate one, especially as a protective tariff. Madison tended to favor revenue tariffs while Alexander Hamilton strongly favored a high protective tariff. The nation sided with Madison until the United States and England went to war. Beginning in 1790, England started developing policies that limited U.S. trade with the rest of Europe. In response, the United States placed an embargo on England, and by 1812 the countries were enmeshed in war. With no British imports, American industries expanded rapidly in order to meet demand. When the War of 1812 ended in 1815, now President Madison was faced with a flood of English goods and war debt. Madison asked Alexander Dallas, secretary of the Treasury, to write a tariff bill to address these issues. The resulting Tariff Act of 1816 propelled protectionism to the forefront for the first time.

Dallas's bill divided imports into three classes, with the class depending on how much of the commodity was made in the United States. For instance, the first class included items manufactured in abundance, so these items were assigned a high tariff. Items not produced in the United States at all fell into the third class, which incurred a small revenue tax. The 1816 tariff increased taxes an average of 42 percent, and the U.S. market was flooded with cheap British imports. This, combined with other economic problems, led to the panic of 1819, depression, and a reevaluation of the nation's tariff policy.

Between 1818 and 1827, tariff issues involved constitutional and sectional problems as well as economic problems. A number of tariffs were passed during these years, but the only major act was the Tariff of 1824. Supported by the middle Atlantic and western states and opposed by the South and northeastern commercial shippers, the 1824 tariff increased the duty of a number of goods including hemp, wool, lead, iron, and textiles. The tariff protected certain industries and hurt others. The duties on hemp and iron hurt shipbuilders. The focus, however, was on the wool industry. The English Parliament reduced the duty on imported wool, which meant English wool goods sold cheaply in America. In response, the Mallory Bill, designed to protect American wool, was presented to Congress; it passed the House but not the Senate. Vice President John C. Calhoun's tie-breaking vote defeated the bill.

1828 to 1860

The Mallory Bill's narrow margin of defeat inspired protective tariff supports, sparked debates, and led to the Tariff of 1828, called the "Tariff of Abominations" or the "Black Tariff." This tariff was a political power play. The supporters of Andrew Jackson introduced a very high protective tariff designed so that, when defeated, New England would be isolated and support would be built for Jackson's presidential bid in New York, Pennsylvania, the West, and the South. The scheme's engineers under-estimated the nation's desire for a high protective tariff, and the 1828 bill passed both houses of Congress. The tariff raised the ad valorem duty on raw wool, for example, to 50 percent and added a specific duty of four cents per pound, making it a compound duty. Duties were also raised on iron, hemp, molasses, flax, distilled liquors, and slate. The South was outraged by the increases and even threatened nullification and secession.

After the election of Andrew Jackson, protectionists and opponents faced off in an effort to replace the 1828 tariff. Sectional interests muddled the process, but the resulting Tariff of 1832 did not include the worst features of the 1828 tariff and lowered duties to resemble the duties of 1824. Although Virginia and North Carolina supported the bill, the rest of the South did not. South Carolina so opposed the bill that the state declared the tariffs of 1828 and 1832 "null and void." Jackson was furious and even asked Congress to approve the use of military force. A number of plans were developed, but Henry Clay's bill, the Compromise Tariff of 1833, was the strongest. Clay's bill included something for the South and the protectionists. For the South the bill expanded the list of free items and called for the reduction of ad valorem duties over 20 percent. For the protectionists the reduction was to occur over a ten-year period, gradual enough to allow industries to adjust for the change.

Clay's compromise worked for ten years, but a general depression from 1837 to 1843 and the inability of the government to meet its expenses provided protectionists with ammunition. When President John Tyler, a Whig, called for a bill, the Whigs in Congress drew up a measure that raised duties to their 1832 rates. Items such as molasses incurred a 51 percent ad-valorem duty and railroad iron was assigned a 71 percent ad-valorem duty. The Tariff of 1842 also discontinued the credit system, so payment in cash became a requirement. Despite the 1842 tariff's similarity to that of 1832, it did not elicit the same sectional problems or emotions.

In 1844 prosperity returned, and the Democrats, traditional proponents of a low tariff, returned to power. President James K. Polk's secretary of the Treasury, Robert J. Walker, a firm believer in free trade, set out almost immediately to lower tariff rates. The Walker Tariff of 1846 made a new alphabetical schedule of tariffs that exclusively used ad-valorem duties to raise revenue. For instance, schedule A included luxury items and had the highest duties. The 1846 tariff was very successful and made the tariff a non-issue for eleven years. In fact, the tariff issue only surfaced in 1857 because the Treasury had grown too large. The United States also entered its first reciprocity agreement in 1854. The agreement with Canada established free trade of natural products between the two countries. The agreement, however, became a casualty of the Civil War.

Civil War to 1890

With the election of Abraham Lincoln, the Republicans regained control of the government and the nation plunged into Civil War. Republicans, traditionally in favor of high protective tariffs, raised rates to unprecedented heights. The Morrill Tariff of 1861 raised ad valorem to the 1846 levels. Throughout the Civil War the federal government constantly needed to increase revenue. Besides tariffs the government created systems of excise taxes, an income tax, and professional licensing taxes. After the Civil War, the measures taken to meet the demands of war now produced an excess. In response, the Republicans cut most of the internal taxes and made small efforts to reduce the high protective tariffs characteristic of the post–Civil War period.

Despite a depression between 1873 and 1879, the government's revenue was approximately $100 million per year. Concerned for their popularity, the Republicans decided it was in the best interest to make some effort to reduce high tariffs. First, Congress formed a Tariff Commission charged with reporting on "the establishment of a judicious tariff, or the revision of the existing tariff." President Chester Arthur appointed nine protectionists to the commission, who developed a plan to reduce the tariff an average of 25 percent. Congress, however, ignored the commission's recommendation and even made some rates higher. The 1883 tariff, called the "Mongrel Tariff," remained in effect for seven years.

1890 to 1930

Despite the election of Democrat Grover Cleveland, the party was too divided to effectively exert pressure to ensure tariff reform. The 1888 defeat of Cleveland by Benjamin Harrison and Republican majorities in the House and Senate ushered in Republican control. The McKinley Tariff of 1890 increased duties on items such as wool, dress goods, linens, lace, and cutlery and extended protection to agricultural goods in the hope of courting the votes of western farmers who might be considering a rival party. The tariff also extended the free list and reduced duties on steel rails, structural iron and steel, and copper. The 1890 tariff also introduced commercial reciprocity for the first time.

Weeks after the McKinley Tariff became law, the Democrats won a majority in the House, and in the next presidential election Democrat Grover Cleveland was elected. The Democrats had plans for tariff reform, but the Harrison administration had exhausted the Treasury's surplus, causing a panic. Further, the Democrats were divided over the repeal of the SHERMAN SILVER PURCHASE ACT. Despite these difficulties, William L. Wilson introduced a bill that not only reduced manufactured-goods duties but also put raw materials on the free list. Once in, the protectionists, both Republicans and Democrats, dominated the Senate; 634 amendments were added and the bill was named the Wilson-Gorman Tariff Act of 1894. However, the tariff did reduce duties to 40 percent.

The Wilson-Gorman Tariff was blamed for the 1894 depression, and with the Republicans again in control of both houses and with William McKinley in the White House, the protectionists passed the Dingley Act of 1897, which imposed the highest average rate of customs duties to date. The Dingley Act remained in force (and the Republicans remained in power) for almost fifteen years, longer than any other act. By 1908 the longevity of the Dingley Tariff made the issue hot again, and Republicans decided to reduce duties in the interest of self-preservation. Both Republican and Democrats were influenced by public dissatisfaction with increasing prices on all sorts of goods without a corresponding increase in wages. So, the Republicans basically adopted a lower tariff platform in order to compete politically with the Democrats in the 1908 election. Nelson Aldrich amended the Payne Act of 1909, a moderate House bill, 847 times in the Senate. The Payne-Aldrich Tariff resulted in a decline of 2.38 percent and abandoned reciprocity.

The Payne-Aldrich Tariff was hotly criticized and led to the Democrats regaining control of Congress. The Democrats' first effort, the Underwood-Simmons Act of 1913, proposed to lower duties and rates but was over-shadowed by the Great War. The government did not have to raise tariffs during World War I; instead it raised most of its revenue from the income tax. Once the war ended, the Emergency Tariff of 1921, or the Fordney Emergency Tariff Bill, was developed to protect agricultural goods such as wheat, corn, meat, wool, and sugar. At the same time, the House Ways and Means Committee was working to revise the Simmons-Underwood Tariff. After much debate and revision, the Fordney-McCumber Tariff signaled the return of the high protective tariffs.

The Great Depression

The nation prospered until the stock market crash of 1929 and the Great Depression. Upon taking office, President Herbert Hoover asked Congress to create agricultural relief legislation and to increase the tariff. The result was the Smoot-Hawley Tariff of 1930, which brought rates to an all-time high. Duties increased on agricultural goods, and a number of items were removed from the free list. The 1930 tariff also reorganized the Tariff Commission and created higher salaries for commissioners. It also generated worldwide animosity and initiated a number of defensive tariffs.

Franklin D. Roosevelt made clear in his campaign he intended to break down the barriers created by the Smoot-Hawley Tariff. Roosevelt, with the help of Secretary of State Cordell Hull, developed a series of RECIPROCAL TRADE AGREEMENTS. The first Reciprocal Trade Bill of 1934 granted Roosevelt the authority to negotiate reciprocal agreements with other nations for three years. Similar extensions were enacted until the Trade Expansion Act of 1962.

General Agreement on Tariffs and Trade

At the end of World War II, the United States set out to help rebuild Europe, America's major prewar market. In addition to a number of trade extensions acts, negotiations in Geneva led to the multilateral GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT). The agreement outlined broad terms for international trade, called for tariff reduction of over 45,000 items, and included the "most favored nation" clause, which ensured all members would benefit from each other's agreements. The United States participated in GATT by executive agreements and without express approval of Congress. There were eight rounds of negotiations: Geneva (1947); Annecy, France (1949); Torquay, England (1951); Geneva (1956); Dillon (1960–1962); Kennedy (1962–1967); Tokyo (1973–1979), and Uruguay (1986–1994). The first six rounds concentrated almost solely on tariff reduction.

The last Reciprocal Trade Agreement extension expired June 1962. President John Kennedy outlined the issues to Congress and proposed legislation to make tariff revision internally and to bargain abroad, either within or outside of GATT. The bill enacted was the Trade Expansion Act of 1962. The 1962 act set forth presidential permissions and prohibitions. For instance, the president was allowed to promote trade abroad and prevent communists from taking part in the markets of American friends. But the president was required to set ending dates, and without most-favored-nation status from communist-dominated countries. Kennedy was assassinated just one month after signing the 1962 act, but President Lyndon Johnson carried on Kennedy's foreign trade policy and started a new round of tariff bargaining in 1964. Fifty-three GATT countries, including the United States, concluded negotiations that cut tariffs by 35 percent on more than 60,000 items.

The Tokyo Round attempted to cope with the growing depression and inflation cycle of the 1970s. It lowered the average tariff on industrial products to 4.7 percent and developed a series of non-tariff barrier agreements.

Creation of the World Trade Organization

During the 1980s and 1990s, the members of GATT felt the nature of the international economy needed a more structured and powerful international trade organization. GATT was originally established as a provisional body, but no other proposal or organization was accepted, so it remained the only organization dealing with international trade until 1 January 1995 when the World Trade Organization (WTO) was created.

The Uruguay Round, which was a series of negotiations, ushered in the biggest reforms since the creation of GATT. The agenda included such items as rules for settling disputes, intellectual property, and agriculture and textiles trade reform. Talks broke down a number of times, but the group eventually came up with a number of successful moves. For instance, the Uruguay Round developed a new, more efficient dispute settlement system and a trade policy review mechanism, which called for a regular review of policies and practices. Finally, the round created the WTO. The GATT organization was no longer, but the GATT agreement remained in effect as GATT 1994.

The WTO agreements cover goods as well as services and intellectual property. As the only international body to deal with trade, the WTO has three objectives: to aid the free flow of trade, to come to agreement through negotiation, and to settle disputes impartially. The WTO is made up of a number of different bodies, including the overseeing body called the Ministerial Conference. The 140 member governments administer the WTO, accounting for over 97 percent of world trade.