Kicking Away the Ladder. Development Strategy in Historical Perspective

Indeed, many point out that it was Alexander Hamilton, in his Reports of the Secretary of the Treasury on the Subject of Manufactures (1791), and not Friedrich List as is often thought, who first systematically set out the infant industry argument.[56] In fact, as Henderson and Reinert point out, List started out as a free trade advocate and only converted to the infant industry argument following his period of exile in the USA (1825-30). While he was there, he was exposed to the works of Alexander Hamilton and the then leading US economist and strong advocate of infant industry protection, Daniel Raymond.[57]

In his Reports, Hamilton argued that competition from abroad and ‘forces of habit’ would mean that new industries that could soon become internationally competitive (‘infant industries’)[58] would not be started in the USA, unless their initial losses were guaranteed by government aid. This aid, he said, could take the form of import duties or, in rare cases, prohibition of import.[59] It is interesting to note that there is a close resemblance between this view and that espoused by Walpole (see section 2.2.1) – a point that was not lost on the contemporary Americans, especially Hamilton’s political opponents.[60] In turn, it should also be noted that both the Walpole an and the Hamiltonian views are remarkably similar to the view that lies behind East Asia’s postwar industrial policy (see section 2.2.7.).

Initially, the USA did not have a federal-level tariff system, and an attempt to grant the Congress tariff power in 1781 failed.[61] When it acquired the power to tax, the Congress passed a liberal tariff act (1789), imposing a five per cent flat rate tariff on all imports, with some exceptions, such as hemp, glass, and nails. Many tariffs were increased in 1792, although they still fell far short of Hamilton’s recommendations, which called for an extensive system of infant industry protection and subsidies. After that, until the war with Britain in 1812, the average tariff level remained around 12.5 per cent, but in order to meet the increased wartime expenses, all tariffs were doubled in 1812.[62]

A significant shift in policy occurred in 1816, when, as List noted (Chapter 1), a new law was introduced to keep the tariff level close to that from wartime as a result of the considerable political influence of the infant industries that had grown up under the ‘natural’ protection accorded by the war with Britain. This was done despite the fact that the revenue was no longer needed – especially protected were cotton, woollen, and iron goods.[63] In the 1816 tariff law, almost all manufactured goods were subject to tariffs of around 35 per cent.[64] Table 2.1 shows that the average tariff level for manufacturing products in the USA in 1820 was around 40 per cent. Initially, this measure was welcomed by everyone, including the Southern states, which hoped that it would help industries to grow in their territories. However, the Southern states soon turned against it because of their interests in importing superior quality British manufactures and because of the failure of the industries to emerge in their own territories.[65]

The Southern agrarian interests, with the help of the New England (and especially New York) shippers, were able to defeat bills calling for higher tariffs in 1820, 1821 and 1823.[66] However, in 1824, a new, still higher, tariff was enacted. In 1828 the so-called Tariff of Abominations further divided the country. This was because this time the northern and western agricultural interests were adding high tariffs on the raw materials or low value-added manufactures that they produced (e.g., wool, hemp, flax, fur and liquor), thus creating tension with the New England manufacturing states.[67]

Yet another tariff law was passed in 1832. This offered a 40 per cent tariff rate on average for manufactured goods – a much lower cut than the Southerners had wanted – and particularly high protection was accorded to iron and textile goods (e.g., 40—45 per cent on woollen manufactured goods and 50 per cent for clothing). This led to the so-called Nullification Crisis, started by South Carolina’s refusal to accept the law. A compromise bill was passed in 1833, which offered few immediate reductions but made a provision for gradual reduction over the next ten years, down to about 25 per cent for manufactured goods and 20 per cent for all goods. However, as soon as this ten-year reduction ended in 1842, a new tariff act was passed, raising duties back up to about the 1832 levels.[68]