Commercial War: George III to Present
In the spring of 2002, Bush signed into law a witches-brew of protectionist legislation designed to stifle foreign trade in the name of free trade. In March, he imposed various tariffs ranging from 8 to 30 percent upon imported steel. In May, he signed a $170 billion farm bill lavishing $10 billion of annual subsidies upon
First, let us review the one area in which the Bush administration excels—hypocrisy. Since early in his presidency, Bush has asked Congress to give him the authority to negotiate unamendable trade treaties. He has vowed to use this so-called "trade promotion authority" to negotiate treaties opening foreign markets to American products and expanding worldwide free trade. In March 2002, he denounced the opponents of this "fast track" legislation as practitioners of "a new kind of protectionism" and implied that they were immoral; for free trade was a "moral imperative." Yet Bush has done nothing to reduce the massive export subsidies (e.g., Export-Import Bank programs, Foreign Sales Corporation tax rebates, or foreign military aid that is funneled back to
His justification for the Farm Bill has to be read to be believed. He actually claimed that it would "allow farmers and ranchers to plan and operate based on market realities, not government dictates." He also boasted that "it reduces government interference in the market and in farmers' and ranchers' planting decisions." There is more. "The farm bill supports our commitment to open trade, and complies with our obligations to the World Trade Organization." Every one of these claims was the precise opposite of the truth. The expanded subsidies of the Farm Bill represented a massive interference in the market designed to evade "market realities" and diminish foreign trade. Bush's support for steel tariffs was even more egregiously hypocritical, for just six years before, during the 1996 Republican primary, the Republican establishment, of which Bush is the creature, demonized Pat Buchanan for advocating just this kind of "protection" for domestic steel producers. In 1996, the Republicans claimed that Buchanan's steel tariffs would raise domestic prices, slow economic growth, and provoke retaliation. In 2002, with the votes of such crucial states as
Bush's arguments for imposing steel tariffs restated three classic protectionist arguments as old as the republic. First, while conceding that free trade was the best policy, and assuring everyone that his administration was committed to it, he claimed that steel production was an exception. Even the World Trade Organization, he claimed, "recognizes that sometimes imports can cause such serious harm to domestic industries that temporary restraints are warranted. This is one of those times." James Madison, who has the false historical reputation of being a free trader, said the same thing 215 years ago during the first session of the House of Representatives, while advocating protective tariffs and discriminatory duties on foreign shipping. Of course, the congressman claimed to be "the friend of a very free system of commerce" who recognized that industry and commerce—if left alone—would be far more productive than if regulated "by the most enlightened legislature. Yet I concede that exceptions exist to this general rule." The historian William Graham Sumner commented: "He [Madison] was one of those who believe that a doctrine can be true and its application unwise." Sumner did not think that this accorded with reason or logic. "To say that a thing is true in theory but bad in practice is a radical absurdity."
Bush's announcement of steel tariffs included the repeated assurance that they would be only "temporary," lasting just long enough to allow domestic producers "to adapt to the large influx of foreign steel" and "restructure" their industry so "to adapt to changing economic circumstances." The president does not seem to be aware that such a rationale would apply to every kind of domestic manufacture that is not exclusive to this country, for they are all subject to "changing economic circumstances" and to a "large influx" of competing products when the latter is better or cheaper. Furthermore, the president's assurance of the temporary nature of the new tariffs is likely to go the way of previous promises made by the advocates of new government programs and regulations. In the experience of this country, temporary legislation usually means permanent legislation.
The First Congress enacted tariffs averaging 8.5 percent (in 1789), but they promised they were temporary and would expire in 1796. All that was temporary were the rates of that year. Congress raised duties again in 1790 and 1792, and by 1796 the promise of 1789 was forgotten. In the aftermath of the second war with
Just two years later, under pressure from the already powerful
Bush's third argument for tariffs was the classic we cannot practice free trade until our competitors do. He claimed that protection was warranted because foreign governments were subsidizing their steel industries thus giving them an unfair advantage. According to the president, "50 years of foreign government intervention in the global steel market" has led to "excess global steel capacity" and falling prices, hence the need for government to raise the price of steel by imposing tariffs. Such an argument amounts to the doctrine that if country A is willing to sell a product to country B at a loss, country B should refuse the gift and smite itself by raising prices, thus diminishing the wealth and buying power of its citizens. Sumner reduced the essence of commercial warfare to "an effort to spite another by an injury done to one's self." He recognized that even if every other country in the world practiced protectionism, it was in the interest of the remaining country to practice free trade, for to do otherwise would be only to deprive itself of the advantage of buying inexpensive goods from overseas.
Bush explained that his steel tariffs were really not protectionist. Rather, they were part of his three-part initiative "to restore market forces to world steel markets." Bush was here reviving the long tradition of commercial war, in which retaliatory tariffs and sanctions are used as a weapon to lower foreign trade barriers. The idea is that the only way of opening closed or restricted foreign markets is by closing or restricting our own in retaliation. The foreign government will then see the error of its ways and drop its tariffs. A cynic might be forgiven for noting the parallel between waging wars to bring about world peace and imposing tariffs to advance free trade.
The great American political economist from the early nineteenth century, Condy Raguet (1784–1842) made the definitive argument against commercial retaliation in an 1842 essay in Hunt's Merchants' Magazine, titled "The Impolicy of Countervailing Duties." First, Raguet argued that countervailing duties violated the principle of national sovereignty. Each nation had an absolute right to order its own internal affairs, and no other nation had a right to coerce its people into changing their laws, no matter how wrongheaded those laws might be. Second, given the pride and obstinacy of human nature, retaliation was more likely to harden than soften the policy of the targeted nation. "Nations, like individuals, must be reasoned with rather than chastised. . . . If the offending nation be ignorant, or proud, or held in bondage by powerful interests which control its legislation (and what nation on earth is not one or the other?), so far from being driven from its ground by a countervailing duty, it would be more apt to make its restrictions tighter, by a retaliatory law." American protectionists had sometimes justified industrial tariffs by citing the British Corn Laws, which restricted the sale of American wheat to that island kingdom. Yet when the British repealed these laws in 1846, they did so in response not to the rising tide of American protectionism in the 1810s and 20s but to the liberalizing of American trade during the 1830s and 40s. Finally, Raguet brilliantly pointed out that the laying of retaliatory duties created "a new set of vested interests" dependent upon the protecting duties and motivated to lobby for their retention even if they should accomplish their object of forcing down tariffs abroad.
Part II: Commercial War During the Revolution and the Nineteenth Century
Bush has also waged the more severe form of commercial warfare (i.e. embargoes and sanctions) to force political change in foreign governments. He has continued the trade embargo with
(Someone might interject here and cite the "success" of the sanction regime of the 1980s in overthrowing apartheid and Afrikaaner rule in the
In response to the Stamp Act of 1765, the merchants of the Atlantic cities signed nonimportation agreements. British merchants responded by successfully pressuring Parliament to repeal the stamp tax, which it did early the next year. In 1767, Parliament tried a second time to raise taxes on the colonists. They passed the so-called Townshend duties, and the colonies again responded by organizing a non-importation movement which by 1769 had reduced British imports by nearly half. Again, Parliament relented, repealing all but the tea duty in 1770. Here were two cases in which commercial war had been successful. This had the effect of persuading the Americans that their commerce was indispensable to the British and that by withholding it they could coerce that nation at will without resorting to arms. It became a kind of faith impervious to subsequent experience which demonstrated again and again that the power was limited, would provoke foreign powers instead of intimidating them, and would do equal or more damage to themselves than to the commercial enemy.
In October 1774, in retaliation for Parliament's Coercive Acts, the first Continental Congress passed the Continental Association, prohibiting the importation of British goods into the colonies after the first of December. This time it did not work. The British responded by retaliation and blockade. In March 1775, they passed the New England Restraining Act, forbidding those colonies from trading outside of
The Association utterly failed. Its impact was softened as the British were able to find new markets for their goods and to surreptitiously continue some trade with their rebellious subjects. For their part, the Americans could not sustain the policy because it violated their own interests. From the beginning, the terms of the Association were evaded by merchants and sometimes by whole colonies. Smuggling was rampant, and British goods continued to find their way into the country. Sumner concluded that "the commercial war was an entire mistake. It pledged the colonists to abstain from doing just what it was their greatest interest to do, and they no sooner began to put their resolution in practice than they were forced to act in direct contradiction to it." As the colonies were neither self-sufficient nor capable of carrying on the war by means of their own resources, they had to trade; and as many of the things they needed were readily available from
According to Sumner, the Americans' faith in commercial war rested on a series of mercantilist fallacies that they had inherited from the colonial period—the notion that in international trade one country gains at the expense of another; that national trade was "a concrete entity" and an essential matter of state policy. Hence, the Americans believed they could dispose of their trade to gain political or economic advantage over other countries. They believed they could coerce
Two Other Instances of Failure: 1807–12 and 1861–65
Americans learned little from their experience of commercial warfare during the Revolution, or rather they chose to remember the success of nonimportation after the Stamp Act and forget the abysmal failure of the Association during seven years of war. One of the chief reasons cited for giving the new federal government the power to lay duties and regulate commerce was to empower it to practice commercial coercion to open foreign markets, and
During the Napoleonic Wars, American merchants made huge profits in the carrying trade between
The most calamitous and self-defeating experiment in commercial warfare was that put in place by the Southern Confederacy in 1861. Oblivious to the lessons of the Revolutionary War,
What are the lessons of this history? Commercial freedom is the best policy in peace and war. Cooperation is more fruitful than coercion. And if one wants the friendship or assistance of others it is better to appeal to their interests instead of their fears. Above all, foreign trade should be as free and unrestricted as trade within a nation.
Historian Scott Trask is an adjunct scholar of the Mises Institute. firstname.lastname@example.org