According to Paul Bairoch, since the end of the 18th century, the United States has been "the homeland and bastion of modern protectionism". In fact, the United States never adhered to free trade until 1945. A very protectionist policy was adopted as soon as the presidency of George Washington by Alexander Hamilton, the first US Secretary of the Treasury from 1789 to 1795 and author of the text Report on Manufactures which called for customs barriers to allow American industrial development and to help protect infant industries, including bounties (subsidies) derived in part from those tariffs. This text was one of the references of the German economist Friedrich List (1789–1846). This policy remained throughout the 19th century and the overall level of tariffs was very high (close to 50% in 1830). The victory of the protectionist states of the North over the free trade southern states at the end of the Civil War (1861–1865) perpetuated this trend, even during periods of free trade in Europe (1860–1880).
Hamilton explained that despite an initial “increase of price” caused by regulations that control foreign competition, once a “domestic manufacture has attained to perfection… it invariably becomes cheaper.” George Washington signed the Tariff Act of 1789, making it the Republic's second ever piece of legislation. Increasing the domestic supply of manufactured goods, particularly war materials, was seen as an issue of national security. Washington and Hamilton believed that political independence was predicated upon economic independence.
In the 19th century, statesmen such as Senator Henry Clay continued Hamilton's themes within the Whig Party under the name "American System." The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade, and implemented a 44-percent tariff during the Civil War—in part to pay for railroad subsidies and for the war effort, and to protect favored industries.
From 1871 to 1913, “the average U.S. tariff on dutiable imports never fell below 38 percent and gross national product (GNP) grew 4.3 percent annually, twice the pace in free trade Britain and well above the U.S. average in the 20th century,” notes Alfred Eckes Jr., chairman of the U.S. International Trade Commission under President Reagan.
In 1896, the GOP platform pledged to “renew and emphasize our allegiance to the policy of protection, as the bulwark of American industrial independence, and the foundation of development and prosperity. This true American policy taxes foreign products and encourages home industry. It puts the burden of revenue on foreign goods; it secures the American market for the American producer. It upholds the American standard of wages for the American workingman.”
Milton Friedman held the opinion that the Smoot–Hawley tariff of 1930 did not cause the Great Depression, instead he blamed the lack of sufficient action on the part of the Federal Reserve. Douglas A. Irwin wrote: "most economists, both liberal and conservative, doubt that Smoot–Hawley played much of a role in the subsequent contraction.".
Peter Temin, an economist at the Massachusetts Institute of Technology, explained that a tariff is an expansionary policy, like a devaluation as it diverts demand from foreign to home producers. He noted that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff. He concluded that contrary the popular argument, contractionary effect of the tariff was small.
William Bernstein wrote "most economic historians now believe that only a minuscule part of that huge loss of both world GDP and the United States' GDP can be ascribed to the tariff wars "because trade was only nine percent of global output, not enough to account for the seventeen percent drop in GDP following the Crash. He thinks the damage done could not possibly have exceeded 2 percent of world GDP and tariff "didn't even significantly deepen the Great Depression." ( A Splendid Exchange: How Trade Shaped the World)
Nobel laureate Maurice Allais maintained that tariff was rather helpful in the face of deregulation of competition in the global labor market and excessively loose credit prior to the Crash which, according to him, caused the crisis in financial and banking sectors. He noted higher trade barriers were partly a means to protect domestic demand from deflation and external disturbances. He observes domestic production in the major industrialized countries fell faster than international trade contracted; if contraction of foreign trade had been the cause of the Depression, he argues, the opposite should have occurred. So, the decline in trade between 1929 and 1933 was a consequence of the Depression, not a cause. Most of the trade contraction took place between January 1930 and July 1932, before the introduction of the majority of protectionist measures, excepting limited American measures applied in the summer of 1930. It was the collapse of international liquidity that caused of the contraction of trade.
Introduction of Harmonized System code in 1990s has largely replaced the Standard International Trade Classification (SITC), though SITC remains in use for statistical purposes. In drawing up the national tariff, the revenue departments often specifies the rate of customs duty with reference to the HS code of the product. In some countries and customs unions, 6-digit HS codes are locally extended to 8 digits or 10 digits for further tariff discrimination: for example the European Union uses its 8-digit CN (Combined Nomenclature) and 10-digit .
Companies use ERP software to calculate duties automatically to, on one hand, avoid error-prone manual work on duty regulations and formulas and on the other hand, manage and analyze the historically paid duties. Moreover, ERP software offers an option for customs warehouse, introduced to save duty and VAT payments. In addition, the duty deferment and suspension is also taken into consideration.
When incorporating free international trade into the model we use a supply curve denoted as (diagram 1) or (diagram 2). This curve represents the assumption that the international supply of the good or service is perfectly elastic and that the world can produce at a near infinite quantity of the good. Before the tariff, there is a quantity demanded of Qc1 (diagram 1) or D (diagram 2). The difference between quantity demanded and quantity supplied (between D and S on diagram 2, respectively) was filled by importing from abroad. This is shown on diagram 1 as Quantity of Imports (without tariff). After the imposition of a tariff, domestic price rises, but foreign export prices fall due to the difference in tax incidence on the consumers (at home) and producers (abroad).
The new price level at Home is Ptariff or Pt, which is higher than the world price. More of the good is now produced at Home – it now makes Qs2 (diagram 1) or S* (diagram 2) of the good. Due to the higher price, only Qc2 or D* of the good is demanded by Home. The difference between the quantity supplied and the quantity demanded is still filled by importing from abroad. However, the imposition of the tariff reduces the quantity of imports from D − S to D* − S* (diagram 2). This is also shown in diagram 1 as Quantity of Imports (with tariff).
Domestic producers enjoy a gain in their surplus. Producer surplus, defined as the difference between what the producers were willing to receive by selling a good and the actual price of the good, expands from the region below Pw to the region below Pt. Therefore, the domestic producers gain an amount shown by the area A.
Domestic consumers face a higher price, reducing their welfare. Consumer surplus is the area between the price line and the demand curve. Therefore, the consumer surplus shrinks from the area above Pw to the area above Pt, i.e. it shrinks by the areas A, B, C and D. This includes the gained producer surplus, the deadweight loss, and the tax revenue.
The government gains from the taxes. It charges an amount Pt − Pt* of tariff for every good imported. Since D* − S* goods are imported, the government gains an area of C and E. However, there is a deadweight loss of the triangles B and D, or in diagram 1, the triangles labeled Societal Loss. Deadweight loss is also called efficiency loss. This cost is incurred because tariffs reduce the incentives for the society to consume and produce.
The net loss to the society due to the tariff would be given by the total costs of the tariff minus its benefits to the society. Therefore, the net welfare loss due to the tariff is equal to:
The political impact of tariffs is judged depending on the political perspective; for example the 2002 United States steel tariff imposed a 30% tariff on a variety of imported steel products for a period of three years and American steel producers supported the tariff.
Tariffs can emerge as a political issue prior to an election. In the leadup to the 2007 Australian Federal election, the Australian Labor Party announced it would undertake a review of Australian car tariffs if elected. The Liberal Party made a similar commitment, while independent candidate Nick Xenophon announced his intention to introduce tariff-based legislation as "a matter of urgency".
Unpopular tariffs are known to have ignited social unrest, for example the 1905 meat riots in Chile that developed in protest against tariffs applied to the Argentine beef. Primeros movimientos sociales chileno (1890–1920). Memoria Chilena.Benjamin S. 1997. Meat and Strength: The Moral Economy of a Chilean Food Riot. Cultural Anthropology, 12, pp. 234–268.
This is related to the infant industry argument.
In contrast, in economic theory tariffs are viewed as a primary element in international trade with the function of the tariff being to influence the flow of trade by lowering or raising the price of targeted goods to create what amounts to an artificial competitive advantage. When tariffs are viewed and used in this fashion, they are addressing the country's and the competitors' respective economic healths in terms of maximizing or minimizing revenue flow rather than in terms of the ability to generate and maintain a competitive advantage which is the source of the revenue. As a result, the impact of the tariffs on the economic health of the country are at best minimal but often are counter-productive.
A program within the US intelligence community, Project Socrates, that was tasked with addressing America's declining economic competitiveness, determined that countries like China and India were using tariffs as an integral element of their respective technology strategies to rapidly build their countries into economic superpowers. However, the US intelligence community tends to have limited inputs into developing US trade policy. It was also determined that the US, in its early years, had also used tariffs as an integral part of what amounted to technology strategies to transform the country into a superpower.