Two Trade Wars: 1807 and 2018

The legal uncertainties surrounding trade with China have sent people looking for historical precedent for this mess. One jumps out: the targeted trade embargo that the US imposed against Britain in 1807. Let’s look at the parallels and lessons.

It’s War

For months now, the Trump administration has been threatening every manner of taxes on imports from many countries but on China in particular. The policies would directly attack American consumers and producers of goods in which China has some role in the supply chain. China has responded with taxes on imports that would directly hit the economic prospects of Trump’s political base.

Most recently, in order to escalate further, the president picked a big round number of $100 billion and sent aides out to round up enough products to meet that target. China, the spokesmen of which cannot say enough how much they would far prefer peace and economic cooperation, has retaliated with promises to close more markets to American producers.

Among the latest imported products from China affected are medical supplies and equipment, including pacemakers, artificial limbs, knee replacement parts, defibrillators, fillings for teeth, birth-control pills, vaccines, and that’s just what is on the list. Many other secondary products and services will be affected. The supply of all of these will be restricted and hence the price will increase, provided you can get the products at all. At best it means raising health-care costs, which is pretty much the last thing Americans need.

To be sure, aides to the president, including his new adviser (however temporary; the last one resigned in protest against protectionism) Lawrence Kudlow, has taken it upon himself to tell everyone in public or private that this is not that serious really. The tariffs aren't yet implemented, though every American business that relies on imports and exports is working to retool for them to become real. The panic is unwarranted, says Kudlow, since this is all a negotiating tactic. Trump is just being a good businessman here, with his art of the deal and so on. The point is not to shut down trade but to extract concessions so that we can have even more. The end game, Kudlow implies, is freer and more open markets in all directions.

The problem with these assurances is the absence of evidence that there is truth to them. Consider the huge range of complaints about China that have been variously cited as a case for trade war: intellectual property violations, subsidies, currency manipulation, too-low wages, and the trade deficit itself, which Trump has erroneously claimed is a measure of how much China “owes” the US.

There is no possible agreement that could address all of these complaints. It seems like Trump is using all these conditions as excuses to roll back international commerce, essentially nationalizing economic production while letting the rest of the world go its own way.

Historical Precedent

One reason this feels so alarming is that there is almost no historical precedent for a US president using personal authority over trade and tariffs directly to target a single country to make its people (and our own) suffer as much as possible. “We haven’t seen anything like this in centuries,” confirms Douglas Irwin, the Dartmouth College professor and author of the most comprehensive history of American trade policy ever written.

Intrigued by this “centuries” remark? It turns out that American history does record an instance in which US ports were closed for both exports and imports, with the desire to harm Britain. The year was 1807 and the president was Thomas Jefferson, of all people.

The US was trying to stay neutral in a conflict between France and Britain (the latter days of the Napoleonic wars) but British ships started pilfering American goods and sailors for the war effort (still considering Americans to be subjects). Jefferson wanted to avoid a shooting war, but still wanted the US government involved to defend human rights against what seemed to many to be a form of terrorism. Jefferson was talked into using trade power (a supposedly more peaceful solution) in an effort to get Britain to stop.

The result was a near-total embargo, and probably the closest modern example we have of how national autarky would actually work in practice. Jefferson wrote in a letter that Congress has never been “more solidly united in what they believed to be the best for the public good." It’s not possible to ramp up a trade war beyond a complete shutdown. In other words, this is a case wherein the president threatened trade intervention of a form far more extreme than has thus been proposed even by Trump.

The Results of 1807

The decision turned into the worst disaster of the Jefferson presidency. The trade war of 1807 led to the loss of lucrative trading routes, the breakdown of mutually beneficial trading relationships, a revolt among Jefferson’s electoral base, a victory for the Federalist Party, the rise of black market trading activity, a huge rise in the price of imported goods and a fall in the price of exports, and huge popularity blow against the Jefferson presidency, which was supposed to be about reducing government’s role, not cutting off business opportunities for the American people.

The entire trade-war effort failed and ended up undermining both American prosperity and the Jefferson presidency.

Irwin writes (“The Welfare Cost of Autarky: Evidence from the Jeffersonian Trade Embargo, 1807–09”):

The highly controversial embargo was in effect for just 14 months. Growing domestic opposition to the trade restrictions, particularly in New England, forced Congress to repeal the measure in March 1809. The consensus among historians is that the embargo failed to achieve its objective because Britain and France refused to change their policies regarding American shipping. This was not due to the failure to eliminate trade, but the failure of the trade measures to weaken the political resolve in Britain to suppress neutral shipping in its effort to strangle the French economy.

So much for the politics of trade embargoes: it undid a presidency and bolstered the enemies of liberty. The tensions of this period continued into the next presidency and resulted in the War of 1812 in which the president had to flee the White House, which ended up being burned by British troops. The trade war became real war. The long-simmering dispute in American history between the nationalists and the decentralists ended up being lost by the good guys precisely because of a trade war.

The Economic Results

As for the economics, writes Irwin, “The embargo had a dramatic impact on prices in the United States, driving down the domestic prices of exported goods and driving up the domestic prices of imported goods.” Further: “The best-guess calculation of the static welfare cost of the embargo is about 5 percent of GNP. The cost does not represent the total gains from trade, however, because the initial trading equilibrium was one of restricted trade. Still, the embargo inflicted substantial costs on the economy while it was in effect.”

It’s stunning to think of: fully 5% of national output. That’s depression levels. These calculations are interesting but don’t come near including the unseen costs of the embargo, the loss of trade routes, the ruined relationships, the diverted resources, the ruined businesses, and so on. All this wealth that was wrecked could have been invested or saved and formed new capital for business expansion during what was otherwise a time of great economic growth.

I personally adore Jefferson, the man of letters, the great champion of liberalism and human rights. But this was an egregious decision. Remember that he was the author of the protest letter called the Declaration of Independence. One of the indictments against the British king was “For cutting off our Trade with all parts of the world.” Talk about hypocrisy! Jefferson’s supporters made him and his party pay the price.

An Autarkist as President?

The great fear of financial markets today is that no one really knows what Trump is going to do next, much less why he is going to do it. My worry, which I expressed back in 2015, is that he is a convinced economic nationalist. He believes in national control of economic life. He is convinced that trade relations with foreign nations diminishes collective attachments to the nation and therefore to its leadership. This outlook is a rejection of everything we’ve learned about the economics of international trade since the 18th century. As with Jefferson, the people who will pay the price the heaviest price will be the president’s main supporters.

Thomas Jefferson’s motivation was not personal aggrandizement, nor was it the motivation behind the Smoot-Hawley tariff. But it hardly matters. International trade is a delicate business, with countless and unpredictable downstream effects. It can be upset profoundly with taxes and other impositions that disturb the commercial life of the nation. It can lead to depression and hot war. This is the history, and it doesn’t bode well for our future.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn