How a Free-Trade Zone Made the United States Great
Article 1, Section 10, Clause 2 in the Constitution of the United States has been instrumental in making the US economy the powerhouse that it is today. How so, you say? It did so by curbing individual states’ ability to impose tariffs on goods and services coming from or going to other states. This has made the United States a free trade area from its founding in 1789.
In fact, next time you’re driving on one of America’s inter-state highways and you notice 18-wheel semis barreling along the highway in either direction, paying no attention to state lines, say a prayer of thanksgiving for the Founding Fathers endowing us with shackled state tax authorities. Your living standards are immeasurably higher as a result.
Abstracting from the effects of international trade, the constitutional clause guarantees that goods and services are produced by their lower cost American producers and consumed by Americans who value them most highly. This is a sure prescription for higher living standards. It is also filled with lessons for US trade relations with other countries.
The founders’ prescience is magnified by the fact that the clause initially applied to thirteen eastern states where inter-state transportation was daunting. However, it soon began to apply to an increasingly large geographic area with diverse resource endowments, and as transportation technology improved, Americans’ economic inter-connectedness increased dramatically. So much so, I wager that most Americans today take it as a given, not even giving it a first or second thought that the United States is a vast free trade area.
Fast Forward to Today — Indiana Apples
To grasp the implications of this shackling of state tax authorities, let’s fast-forward to today, casting our discussion in terms of a product widely produced/consumed in the United States-- apples. According to the United States Apple Association (USAA), my state, Indiana, ranks 15th in the country in terms of apple production (Washington is first, producing 50% of US apples). Hoosiers’ apple consumption is about four times its in-state production, meaning Hoosiers “import” apples from other states.
By the way, the United States is virtually self-sufficient in apples, importing only 5% of its consumption from Chile and New Zealand during the off season. There is no tariff on these imports.
Absent the above clause in the Constitution, it is easy to imagine Hoosier apple growers crying crocodile tears to their legislators about a playing field tilted against them, demanding “protection” from apple producers in other states. Indiana legislators would “feel their producers’ pain” and enact protective tariffs against out-of-state apples.
This would raise Indiana apple prices. This cost would be widely dispersed over more than six million Hoosier consumers. Even those following the maxim “an apple a day keeps the doctor away” would probably find the tariff has a minimal effect on their overall budgets. This is why one should not be surprised to see the Indiana legislative agenda manipulated by apple growers.
So individual Hoosier apple orchardists would be better off (by a lot); individual Hoosier apple consumers would suffer (only slightly). Can we say how this balances out? Yes and the answer is not good, sorry to say. Hoosiers, along with Americans in general, should be grateful for the Founding Fathers’ prescience in shackling state tax authorities.
The tariff, by increasing the price of apples in Indiana, would turn some previously uneconomic in-state production into being economic. This means Hoosiers would be substituting higher cost in-state apples for previously lower-cost out-of-state apples. Cost is a yardstick for things we give up to obtain a product. This substitution necessarily lowers Hoosiers’ living standards. Yes, they’ll have these apples either way, but less of other things
In addition, the increase in Indiana apple prices would discourage otherwise economic Hoosier apple consumption. Maybe this will take the form of “an apple 6 days a week is good enough to keep the doctor away.” Or maybe it’ll be smaller servings of apple sauce. This will be another loss.
Hoosiers import apples from the state of Washington. Recall that Washington accounts for 50% of US production. Would any of the above conclusions change if Washington were a part of Canada instead of the United States and the US government were to levy tariffs on apple imports?
No. Not at all. The tariff would encourage the same uneconomic production and the same reduction in otherwise economic consumption, spread across the entire country. Why the Founding Fathers’ prescience did not extend to inter-country tariffs awaits another essay.
T. Norman Van Cott, an adjunct scholar with the Indiana Policy Review Foundation, is professor of economics at Ball State University, Muncie, IN.