The Constitution’s Negative Effects on Free Trade

Samuel Gregg recently gave a lecture at West Virginia University. Gregg is an engaging speaker and a good antidote to the shift of the Christian right to Christian nationalism or Catholic integralism. However, we should be skeptical of some of what he argues with respect to free trade. Gregg argues that the Constitution is a free-trade agreement between the states, which in part allowed the subsequent uptick in growth in the US. While this is partially true, the Constitution is a double-edged sword.

On the one hand, trade restrictions between the states were eliminated, but on the other hand, the power to impose trade restrictions was transferred to the new central government. One could conceive of a scenario where a state had relatively low tariffs, but in the aftermath of the Constitution, witness tariffs increase by federal edict. This seems to be what happened. 

Patrick Newman states that, at the time of the Articles of Confederation, “Revenue from state tariffs was low, so most of this money came internally from excise and property taxes” and that “in reality, New York’s tariffs ranged around 5 percent, similar to those of other states, and New York City enjoyed little competition with nearby ports.” The tariffs of states like New York, South Carolina, and others did not break 10%. This all changed in 1789—only two years after the ratification of the Constitution.

Newman states, “The Tariff Act of 1789, passed in July by an unrecorded vote. The law intended to raise revenue and protect industry, and rates as a percentage of total imports averaged 12.5 percent.” In about two years, after the Constitution was ratified, most states saw their average tariff rate increase, and, from 1790 to 1810, the US tariff rate ranged from 12% to about 35%.

Newman helps us understand why this happened:

Other business interests experienced setbacks. Inefficient northern manufacturers and shippers clamored for state tariffs and navigation laws to block other states’ products and Great Britain’s goods and ships. However, interstate competition minimized actual regulations: if one state imposed high restrictions, other states undercut them to acquire additional imports. In addition, the South’s limited manufacturing and shipping motivated the region to pass milder regulations. On the national level, unanimity and supermajority requirements neutered mercantilist proposals: New York had defeated the 1783 impost and Congressman Lee successfully defeated a navigation act in 1785. Northern manufacturers and shippers wanted to outlaw state competition and set one large net to ensure uniform protection.

Newman continues,

The convention outlawed interstate tariffs, granting vague interstate regulatory oversight (the commerce clause) to only a simple majority in both chambers. This made it easier for Congress to cast a mercantilist net on all states to benefit select business groups.

Due to interstate competition, policymakers found it difficult to give advantages to business interests through state legislatures, so they resolved to throw their support behind the establishment of a new central government, which requires neither unanimous consent of the states nor supermajorities to pass crony policies. Of course, this does not negate the positive consequences from outlawing tariffs between states, but the establishment of a centralized trade policymaker cuts against the gains that occurred due to the establishment of an interstate free trade zone.

Libertarians should also be careful to embrace the Constitution’s “free trade” agreement on normative grounds. It is one thing for a state to support free trade, but it is another matter entirely for a central authority to impose it.

The Constitution established a new, federal government on top of the state governments—effectively increasing the size and scope of aggressive intervention into the affairs of Americans, and though there was a decrease in the scope of state aggression with respect to trade between the states, the result is the transfer of the authority to implement trade restrictions into the hands of a central power.

This power implies that if a state implements a trade restriction without the assent of the federal government, then the feds are entitled to oppose said restriction with force. Even though state trade restrictions are undesirable, imposing free trade with force is undesirable as well because to do so requires the state to raise a police force through taxation, debt issuance, inflation, conscription, or some other aggressive means to threaten or invade a state. The citizens of said state will become victims of military invasion. All for the unjust enforcement of an illegitimate compact made between governments. Evaluated in these terms, the authority to establish tariffs—though illegitimate—should be decentralized. This would allow interstate competition and eliminate a layer of institutionalized aggression.

None of this is to say that Gregg is completely wrong, but defenders of the free market should be more skeptical of the Constitution’s free trade advantages.

A lot of what Gregg says is correct. He somewhat shares Rothbard’s skepticism of so-called “trade agreements.” Gregg states that free trade agreements are actually “managed trade” agreements that are “full of conditions and restrictions agreed upon by governments.” He suggests that free traders should “critique trade agreements for adding layers of complication to free exchange and creating new opportunities for cronyism” while cautiously promoting the agreements and minimizing these non-free conditions.

Gregg also argues for alternative explanations for the US growth after the Constitution’s ratification. The Constitution established political certainty, thereby allowing businesses to be more certain about the future of their long-term investments, perhaps leading, in part, to the growth in the number of corporations. Anyone familiar with Robert Higgs’s theory of regime uncertainty should be sympathetic to this view. Gregg also suggests that the abandonment of complex British regulations allowed corporations to flourish.

Gregg clearly gets a lot right, but his view of the American Revolution and the Constitution is more statist than what a libertarian should accept. We should be skeptical of the American Revolution and its consequences for a number of reasons—some of which are summarized by Gary North here. We should also be clued into the ways that cronyism influenced the Revolution and the later adoption of the Constitution. To have a more complete economic evaluation of the Constitution, we must consider the negative consequences and the crony motivations, and from a free market/libertarian perspective, it seems like the history of the Constitution is more of a mixed bag than the portrait painted by Gregg.

Regardless of Gregg’s endorsement of the Constitution, his defense of a liberal economic order from an economic and moral perspective should be welcomed in an age of Patrick Deneens and Michael Antons. His recent book The Next American Economy sets straight the errors of these new nationalists and provides an alternative economic program. I recommend reading the book, especially the chapter on industrial policy, to anyone enamored by the present nationalist political movement.

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