Tariff Act of 1789

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Tariff Act of 1789

Michael P. Malloy

The Tariff Act of 1789 (1 Stat. 24), signed into law by President George Washington on July 4, 1789, was the first substantive legislation passed by the first Congress. This act, together with the Collection Act of 1789, operated as a device both to protect trade and to raise revenues for the federal government. The constitutional authority for the act is found in the powers given to Congress "to lay and collect Taxes, Duties, Imports and Excises" and "to regulate Commerce with foreign Nations." Among other things, the act established the first schedule of import duties and created an additional duty of 10 percent on imports carried on vessels "not of the United States."

U.S. TRADE POLICY

The specific provisions of the act are of little interest (by 1799 it had been superseded by subsequent, more detailed legislation). However, the act remains significant for setting the basics of U.S. trade policy. In supporting its enactment, Alexander Hamilton argued that tariffs would encourage domestic industry. Other nations offered their industries significant subsidies, or money given by a government to support a private business. Hamilton contended that a tariff would protect U.S. industry from the effects of these subsidies. (Concerns over "dumping"—imported goods sold at less than their fair value to gain unfair advantage over domestic goods—would also be addressed in the Tariff Act of 1816.) Another argument in favor of tariffs is now easy to forget. Before the income tax was authorized by the Sixteenth Amendment in 1913, the tariff was a key source of federal revenue. Thus, for over a century import duties (along with domestic excise taxes) were the major source of government revenue, with sugar duties alone accounting for approximately 20 percent of all import duties.

CONSTITUTIONAL CRISIS

The politics of tariffs soon became intertwined with disputes between legislators from the North and South. For example, a Northern manufacturer of cloth would benefit from a tariff on cloth imported from England, which would make English cloth less competitive. However, a Southern planter who sold cotton to an English cloth manufacturer would benefit if there were no tariff on imports of English cloth, which would keep English cloth (made from U.S. cotton) cheaper and more competitive on the U.S. market. Thus Northern manufacturers favored high tariffs, whereas Southern planters, dependent on exports, favored free trade. However, the North wanted tariffs without public expenditures for a costly upgraded transportation system that would be paid for by tariff revenues, and the South was opposed to any tariff supporting the price of manufactured goods because the tariffs would make it harder for the South to export its agricultural products to nations affected by the tariffs. A high tariff did pass Congress as the Tariff Act of 1828. Legislators from Southern states called this the "Tariff of Abominations," and it nearly brought about a constitutional crisis.

In December 1828 South Carolina endorsed the South Carolina Exposition, a document asserting that the tariff was unconstitutional and thus could be nullified by individual states. It was an open secret that the document had been drafted by Vice President John C. Calhoun, acting more as a Southern partisan than a national leader. By February 1829 five Southern state legislatures had protested the tariff as unfair. In 1832 a South Carolina state convention passed an ordinance (a law or order issued by a local government) to nullify the act, but President Andrew Jackson responded with a proclamation that acts of nullification were themselves unconstitutional and treasonous. One great effort at political compromise based on tariffs was Senator Henry Clay's "American Plan." Under Clay's proposal, the manufacturers of the North would be protected by relatively high tariffs and would become a large market for agricultural products of the West and the South. Revenue from the tariffs would support the construction of the transportation system needed to make internal trade feasible. In a compromise, Congress enacted the Force Act, authorizing the president to use armed force to enforce the tariff, but also amended the act to substantially reduce the tariff rates. The crisis was defused when South Carolina finally accepted the lowered rates.

A series of judicial decisions later upheld the constitutional authority of the Congress and the president to regulate international trade. These decisions imply that the Southern states' attack on the Tariff of Abominations was unconstitutional. For example, in United States v. Curtiss-Wright Export Corp. (1936) the Supreme Court ruled that Congress could delegate authority to the president to impose an arms embargo because the president holds authority over foreign affairs. In United States v. Yoshida International, Inc. (1975) the Court of Customs and Patent Appeals upheld the president's power under the Trading with the Enemy Act (1917) to impose an import duty surcharge (an extra fee) of 10 percent to counteract a balance of payments crisis.

TARIFF ADJUSTMENTS

After the Civil War, domestic policies continued to favor high tariffs, strengthened perhaps by the fact that industry was spreading through more of the nation. By the 1890s Congress had added an important innovation to the legislation: a delegation of power to the executive branch to adjust tariffs in specific circumstances. An early example was what are now called "countervailing duties." These were tariffs the executive branch would order to counteract foreign subsidies on products exported to the United States. The executive branch, without further action by Congress, could measure the foreign subsidy and determine the duty to countervail, or compensate for, that duty. This became one of a large number of such adjustment devices.

Another such device was the antidumping duty, designed to prevent foreign exporters from outselling competing U.S. products by underpricing their goods. Also, the "peril point" or "escape clause" measure was designed to protect an industry suffering serious injury from competition by imports. The United States Tariff Commission, an administrative agency created in 1916 and renamed the United States International Trade Commission (ITC) in 1974, played an important role in these tariff adjustments.

EFFECTS OF THE SMOOT-HAWLEY TARIFF

President Woodrow Wilson, an ardent supporter of free trade, sought to reform tariffs. He argued against a "tariff which cuts us off from our proper part in the commerce of the world, violates the just principles of taxation, and makes the government a facile instrument in the hands of private interests." His efforts were eventually repudiated by the Tariff Act of 1930, known as the Smoot-Hawley Act. This act increased duties on more than a thousand items. By the end of 1931, twenty-six foreign nations had retaliated by raising their tariffs against the United States. The resulting harm to international trade undoubtedly contributed to the severity of the Great Depression. The economic misery of the 1930s eventually led to a change in tariff law that reflected free-trade principles.

This new approach was called the "reciprocal trade agreement" concept and was based on the idea that nations trading with each other might agree to reduce their tariffs in a mutually corresponding way. Each nation's increase in exports would lead to a larger number of jobs (because more workers would be needed to make more goods for sale to other nations). If that increase in jobs was greater than the number of jobs lost to increased imports, such an agreement might be politically beneficial and would almost certainly be economically desirable. Franklin D. Roosevelt's secretary of state, Cordell Hull, obtained from Congress the delegation of authority needed to facilitate this process. The Reciprocal Trade Agreements Act, passed in 1934, contributed to major reductions in tariffs through negotiations with other nations. By 1940 twentyeight agreements had been concluded under the Trade Agreements Program.

See also: North American Free Tade Agreement Implementation Act; Smoot-Hawley Tarriffs; Trade Act of 1974.