Successful Protectionism? Evidence from Two US Industries

While protectionism for today’s America is most likely not the proper path for social development, it had its non-negligible benefits for the creation and maintenance of various industries when the country had not already fully developed, industrially and technologically.

Today’s American public has enjoyed relatively free trade for most, if not all, of their lives. In 2020, the mean applied tariff rate was roughly 3 percent; using a weighted mean, this figure falls to a mere 1.5 percent. It thus may surprise some that until World War II, free trade was the exception and not the rule. From 1790 up to the Civil War, average tariff rates rose from 20 to 60 percent, making up roughly 90 percent of all federal government revenue. And during the Gilded Age, when tariff policy switched from revenue collection to essentially explicit protectionism, dutiable tariffs stayed mostly around 50 percent. Although there is a high level of agreement among economists that America’s recent trade liberalization has been a net positive, the nation’s partially autarkic roots were not entirely a mistake. In particular, the protectionist tariffs of the mid-to-late 1800s mostly achieved their goal of promoting the growth of domestic, ‘infant’ industry, although there was societal welfare loss. 

Consider, for instance, the effects of the 1890 McKinley Tariff on the United States’ tinplate industry. Before 1890, foreign tinplate had 15 to 30 percent duties, instead of the roughly 50 percent national average; as a result of this and high prices for raw materials like iron, there was little domestic production. Indeed, the US was dependent on foreign imports from the United Kingdom, with three-fourths of Wales’ exports going to the United States. After the passage of the McKinley Tariff, the duties rose from 30 to a staggering 70 percent, temporaly conditional on if the value of domestic production reached one-third of that of imported tinplate by 1897. By 1899, roughly 90 percent of the market was captured by domestic production, and imports from Britain plummeted. Analysis by Dartmouth’s Douglas Irwin found that had the tariff not been in place, the tinplate industry would most likely have grown to its eventual stature a decade later than actually observed, as input prices, particularly the price of iron, would have fallen regardless and allowed domestic production to arise. However, the tariff may have been set somewhat too high, as overall welfare would have been higher under a more liberal tariff regime.

Similar effects - increased domestic production - can be seen with the Antebellum tariffs on manufacturing industries, particularly cotton textiles. The industry in question had long been protected by federal legislation, such as with the Tariff of 1842, which imposed a 30 percent ad valorem tax on manufactured cotton. The exact effects of tariffs like these on manufacturing have been debated by economic historians, as just how much the tariff boosted domestic production depends on, among other things, imperfect estimates of the elasticity of substitution between domestic and foreign goods among consumers. Nonetheless, recent analysis shows that, without the tariff, domestic production in the most plausible cases would have been lowered by at least a third, and related manufacturing would be lowered by 17 to 25 percent of its value. If one assumes greater factor mobility in response to changing import prices, cotton textile production would fall by an even greater amount.

There are thus three clear takeaways from these case studies. First, protectionist tariffs can cause high consumer and input prices, thereby potentially lowering overall welfare and can restrict the development of industries dependent on cheap imports. Indeed, one side effect of the high cotton tariffs was a decrease in the expansion of agriculture by roughly 10 to 15 percent, as lower overall imports ultimately decreased America's export of foodstuffs. Second, while society overall may be worse off, tariffs in industries necessary for a general domestic industrialization, along with conditions to promote eventual international competitiveness, such as expiry dates on the original duties, can result in increased domestic production in those sectors. Third, the time for protection is fixed: even if tariffs succeed in building up domestic industry, continued protectionism may only hurt efficiency and competitiveness, making tariff removal a beneficial option. In the tinplate case, duties gradually decreased after the initial large spike; without this, perhaps the so-called ‘infant’ industry would never have ‘grown up.

While protectionism for today’s America is most likely not the proper path for social development, it had its non-negligible benefits for the creation and maintenance of various industries when the country had not already fully developed, industrially and technologically. The modern United States is not like South Korea and Taiwan in the post-war era: export-oriented protectionism may have helped the latter become developed, but conditions today are nothing like they were in the 1950s. But disregarding the US’s protectionist past as inherently irrational because tariffs would not work well in the contemporary economy is rather anachronistic.