United States

International trade has enriched the U.S. economy from the beginning of European settlement to the present. Over the years the volume of trade has generally expanded, driven by declining transportation and communication costs and other technological advances, although restrictions on trade and international tensions have, at times, dampened the trend. However, the size of the growing domestic market has meant that international trade has never dominated the U.S. economy. In the late colonial period exports equaled about 9 to 12 percent of total output. This fell to about 7 or 8 percent after the Revolutionary War but climbed to perhaps the highest level ever in the early nineteenth century due to U.S. neutrality during the Napoleonic Wars. In the years between 1820 and 1860 exports averaged between 6 and 9 percent of output, then collapsed during the Civil War. Exports averaged about 6 to 7 percent of output in the late 1800s, rose temporarily to about 11 percent at the height of World War I, fell to about 5 percent during the 1920s and 3 percent during the 1930s, then slowly rebounded to about 5 percent in the period from the end of World War II to 1970. Since then trade has expanded at a remarkable rate, with exports climbing to about 10 percent of gross domestic product (GDP) during the 1990s.

COLONIAL PERIOD

Foreign trade probably played its most powerful role in shaping and transforming the economy during the colonial period. The British colonies in North America were generally established with the purpose of trading extensively with the mother country, and exports made up a larger share of output than during any other extended period. The era's dominant economic philosophy, mercantilism, asserted that international supremacy could be achieved by establishing an empire which traded among its component parts to the detriment of rivals. Colonies were expected to aid the mother country by promoting a favorable balance of trade (exports exceeding imports), allowing the empire to build up reserves of gold and silver, which were especially valuable in time of war for buying supplies, paying troops, and winning allies. The colonies would ship raw materials and foodstuffs to the mother country and buy from it finished goods. Colonies were believed to be especially valuable when they could produce goods that the mother country would otherwise need to import from rivals, or which they could export to rivals. Overall, the U.S. colonies played these roles fairly well, helping Britain emerge during the seventeenth and eighteenth centuries as the world's leading power. In 1701 the colonies were the destination of about 10 percent of England's exports. This figure rose to 37 percent by 1772.

Beginning in the 1650s, Parliament passed a series of Navigation Acts, which governed colonial trade. The most important provisions were the exclusion of foreign vessels from carrying trade between ports within the British Empire; the requirement that manufactured goods from continental Europe must pass through Britain first; the payment of subsidies for some colonial products, such as indigo; and the specification of certain "enumerated" products—such as tobacco, rice, furs, and ship masts—that could be shipped from the colonies only to British ports. Economic historians have concluded that these restrictions imposed only a small burden on the colonial economy, reducing national income by perhaps 1 or 2 percent, with the greatest negative impact on tobacco growers. Meanwhile, the colonies enjoyed the protection of the British navy. Only after this protection's value disappeared, with the decline of French and Spanish power in the region, could the colonists realistically consider independence.

Colonial trade was based on its comparative advantages—the abundance of natural resources, especially land, and a climate that allowed it to become the low-cost producer of some important goods. Furs, fish, and ship masts were the northern colonies' primary exports in the seventeenth century. By the 1770s the major exports of New England included fish to the West Indies and Southern Europe, plus horses, boards, whale oil, cattle, potash, and candles. Its trade was mainly with the West Indies, and the alleged rum-for-slaves trade with Africa is largely a myth. The Middle Atlantic colonies exported mainly bread and flour to the West Indies and Southern Europe, plus iron to Britain. Both these sets of colonies earned substantial "invisible" earnings via shipping services. The South's leading export was tobacco—a luxury product in strong demand in Europe—which grew uniquely well in the soil and climate of the Chesapeake region. South Carolina exported rice and indigo, used for dyes. Tobacco exports transformed Virginia from a struggling settlement into a booming economy in the 1620s, and changes in international demand were directly linked to the colony's prosperity. When tobacco demand stagnated in the first quarter of the 1700s, for example, Virginia's prosperity suffered. In the early 1770s tobacco accounted for about half the value of Southern exports, followed by rice (20%), indigo, wheat, flour, and corn. British merchants reexported up to 85 percent of American tobacco to continental Europe. Per capita exports were about twice as high in the Southern colonies as in the North.

International trade allowed British America to attain one of the highest standards of living in the world—specializing in agricultural production, which employed the vast majority of the population—while importing manufactured goods, which could be produced more cheaply in Europe. (The other major imports were rum, molasses, and sugar from the West Indies, and, in the eighteenth century, slaves from Africa.) The gains from trade should not be overstated, however. U.S. prosperity relied mostly on the immense amount of fertile land per worker, along with legal, economic, and cultural institutions which encouraged economic activity. Trade certainly had a profound impact on the organization of the colonial economy, however. Without trade, the Southern colonies probably would have looked much more like their northern neighbors, abstaining from producing staples such as tobacco, rice, and indigo for self-sufficient agriculture. Without the ready market for export crops in Europe, the Southern economy probably would not have imported most of its slaves, nor would its politically powerful planter elite have arisen.

REVOLUTIONARY WAR TO THE CIVIL WAR

During the Revolutionary War Britain's naval blockade substantially limited trade and handicapped the U.S. economy. After the war trade rebounded, but with several important changes. The value of exports rose by over one-third between 1768 to 1772 and 1791 to 1792, but exports' share of output fell to well below prewar levels. South Carolina saw exports per capita fall by more than half as indigo subsidies ended and the rice market stagnated. Tobacco was displaced by flour as the top export, and, as that suggests, exports from the Middle Atlantic region, especially grain products, surged.

Tariffs (taxes on imports) played an essential role in funding the new federal government—generally providing 90 percent of its revenue from 1789 to the Civil War. The burden of tariffs was easier to hide than internal taxes on land or consumption and thus they were easier to collect. Moreover, tariffs seemed fair, as they generally fell on nonessential goods. The Whiskey Rebellion of 1794, in reaction to an internal tax, convinced many of the superiority of tariffs.

When Britain and France began warring in 1793 the United States declared neutrality, claiming the right to unrestricted trade with all countries, including Britain and France. Subsequently, Americans did significant business in shipping goods into and out of Europe and the Caribbean, with shippers' earnings climbing nearly six-fold. At the height of this prosperous period of neutral trade, in 1807, earnings from exports and shipping services reached about 13 percent of national income.

Although this trade benefited the nation economically, it brought the United States into several conflicts, including the undeclared Quasi-War with France (1798–1801)—in which each side raided each other's vessels in the Caribbean—and the Barbary Wars (1801–1805)—in which the U.S. navy successfully halted raids on U.S. ships off the coast of North Africa, ending the need for paying substantial ransoms and tributes. Eventually, neutral U.S. shipping irked the British government enough that it declared that any neutral ships that did not stop in British ports were liable to capture. Napoleon Bonaparte (1769–1821) subsequently declared that any ships that did stop in Britain were liable to capture. President Thomas Jefferson (1743–1826) and Congress responded by enacting an embargo that made it illegal for U.S. ships to sail to any foreign ports and for foreign ships to take on any cargo in the United States. The aim of this "peaceable coercion" was to punish Britain and force it to drop its policy of interfering with U.S. shipping.

The embargo ran from December 1807 to March 1809. Because it was fairly well enforced, the embargo had significant effects on both the U.S. and British economies. Despite some smuggling, British trade statistics show that the value of goods imported from the United States fell by about 73 percent. British textile production fell by about one-third due to the severe reduction of cotton exports, and overall British output fell by about 4.8 percent in 1808. In the United States the embargo was equally harmful. The price of previously imported commodities rose by roughly one-third, and the average domestic price of important exports fell by about one-quarter. One study estimates that overall GDP in the United States fell by approximately 5 percent because of this cessation of trade. The effects of the embargo, therefore, indicate the gains that Americans had been receiving from international trade. Trade helped the United States prosper, but income per person would still have been among the highest in the world without it.

As opposition to the embargo grew—especially in the most affected regions, such as New England—it was replaced by the Non-Intercourse Act, which permitted U.S. trade with nations other than France and Britain, and then removed altogether in 1810. In 1812, however, the United States and Britain went to war, largely due to continued British interference with U.S. shipping (although U.S. designs on Canada also played an important role). These trade interruptions induced Americans to move resources into the production of previously imported goods. During the embargo period and the War of 1812 (which ended in early 1815), the number of incorporations of factories producing previously imported goods, especially textiles, soared—although this protection of domestic industry does not seemed to have changed the overall trend toward industrialization in the United States.

Tariff levels were initially relatively low, with an across-the-board tariff of 5 percent on most goods and higher rates on a few luxuries and other goods. The tariff schedule soon became much more complicated, however, due to the protectionist rent-seeking of domestic industries. By the early 1820s average tariffs (calculated as duties collected to total imports) were over 40 percent, and this soared with the so-called Tariff of Abominations passed in 1828 to 57 percent—the highest-ever average tariff level. This tariff and the somewhat lower tariff of 1832 sparked South Carolina to declare these acts null and void within its borders. This nullification prompted Congress to pass the Force Bill and President Andrew Jackson (1767–1845) to send naval forces to the state to enforce the law. The situation was defused by a compromise that reduced tariff rates to around 20 percent. Rates stayed in the range of roughly 15 to 30 percent between 1830 and the Civil War. One argument favoring high tariffs was the "infant industry" argument, influentially promoted by Alexander Hamilton (1755–1804) in his Report on Manufactures (1791), which said that tariffs could be used to jump-start U.S. industries—such as cotton textiles—that needed temporary protection before they could achieve greater experience and lower costs, allowing them to compete successfully with imports. Ironically, most of these industries continued to enjoy tariff protection long after they matured.

Economic historians analyzing antebellum tariffs have concluded that they had a noticeable impact on income distribution. One study concluded that a tariff of about 25 percent (roughly the era's average) increased the incomes of industrial workers by about 2 percent and capitalists by about 1.5 percent, while reducing incomes of the majority, which consumed manufactured products rather than making them. Incomes of landowners (such as farmers) fell by about 4 percent and those of slave owners fell by about 12 percent. The tariff seems to have deepened the division between the North and the South, but few think that it played a decisive role in precipitating the Civil War.

During the early nineteenth century cotton emerged as the nation's leading export, surpassing tobacco around 1803, when it made up about 19 percent of U.S. merchandise exports. Its share of exports rose to 36 percent in the 1820s, and to roughly 50 percent during the 1830s, 1840s, and 1850s. The rise of cotton, which was produced primarily for the international market, helped entrench and expand slavery within the South, and thereby precipitated the Civil War. Southern prosperity during most of the nineteenth century hinged on the international demand for cotton.

CIVIL WAR TO WORLD WAR II

During the Civil War international trade dropped precipitously, primarily because of the Union's blockade of southern ports. After the war cotton exports reached new highs but steadily lost their dominant place as other exports surged. By 1880, for example, cotton exports were twice their level in the 1850s, but made up only about 25 percent of export value, whereas exports of wheat and flour climbed to over 20 percent. Other leading exports in the late 1800s included meat products, animal fats and oils, and petroleum. In 1900 primary products still made up over two-thirds of exports, but manufactured goods comprised 31 percent, following a dramatic escalation of iron and steel exports beginning in the mid-1890s.

In the late nineteenth and early twentieth centuries the United States emerged as the world's preeminent manufacturing nation. Its share of world manufacturing output, which had been 7 percent in 1860, rose to 24 percent in 1900 and 39 percent in 1928. The United States became a net exporter (exports exceeding imports) of manufactured goods around 1910. The U.S. comparative advantage, as demonstrated by the products that it exported, was in goods that were produced using high capital-to-labor ratios and nonrenewable natural resources. Simultaneously, the United States became the world's leading producer of nonrenewable natural resources. In 1913 it produced more than half of the world output of natural gas, petroleum, and copper, and was also the top producer of phosphates, coal, zinc, iron ore, and lead. Its leading manufacturing exports in the early twentieth century—including iron and steel products, machinery, and automobiles—directly or indirectly used many of these resources.

U.S. exports spiked during World War I, when the United States became the "arsenal of democracy" and turned the tide of the war, exporting vast amounts of war materiel to Britain, France, and their allies. The war also brought boom times to farmers. The ratio of prices received by farmers to prices paid by farmers rose by 27 percent from 1915 to 1918. At the war's end, overly optimistic farmers, assuming that revolution and disarray in Europe would continue to keep prices high, increasingly borrowed to expand. However, the return of farm prices to their usual levels in the early 1920s made it hard for many farmers to repay these debts and helps to explain the high rate of farm failures and foreclosures in the 1920s.

U.S. exports climbed from 6 percent of national output in 1914 to 11.5 percent in 1916, before dipping to 9 percent in 1918. To pay for these imports, Europeans sold their holdings of U.S. debt, shipped gold, and incurred massive debts. In 1912 the market value of U.S. investments abroad was $3.9 billion, much less than the $6.8 billion value of foreign investments in the United States. By the end of the war, however, the United States had swung from its position of debtor to become the world's largest creditor, with investment abroad climbing to $12.2 billion in 1919, compared with foreign investments in the United States of $3.7 billion. Thus, trade during World War I helped shift the center of the world's financial markets from London to New York.

From the Civil War to World War II average tariff levels generally rose when Republicans held power and fell under Democrats. Tariffs exceeded 40 percent in the late 1860s, and averaged around 30 percent in the 1870s and 1880s. More and more goods went onto the duty-free list, however, the Underwood-Simmons Tariff of 1913 substantially reduced pulling down the average tariff, which ranged between 20 and 30 percent from 1890 until it. A return toward protectionism under the Ford-ney-McCumber Tariff (1922) and the Smoot-Hawley Tariff (1930) increased average taxes on imports to roughly 15 percent. However, tariffs on taxed imports soared to levels above 50 percent in the early 1930s, inviting retaliation by U.S. trading partners. Both imports and exports collapsed during the Great Depression, falling nearly 70 percent. Most of this was due to the overall economic downturn, but critics blamed much of the decline in trade and the breakdown of international economic cooperation during the period on Smoot-Hawley, paving the way for initiatives to reduce tariffs—such as the Reciprocal Trade Agreements Act (1934), which shifted powers for tariff setting and negotiation from Congress toward the executive branch. U.S. tariff levels were generally higher than the international average during this period, but moved in rough accord with trends in average international tariff levels, which rose from 1865 to 1900, decreased to half from 1900 to 1920, and tripled from 1920 to 1934. The shift in the twentieth century to reliance on income taxes helped reduce the need for tariff revenue.

SINCE WORLD II

After World War II the United States took the lead in establishing international institutions that encouraged trade and the reduction of trade barriers. Part of the reasoning was that strong trade ties would reduce international tensions, a component of a Cold War strategy to defeat communism and the Soviet Union. The United States played the leading role in the establishment of the General Agreement on Tariffs and Trade (GATT) in 1948 and its rounds of negotiations designed to reduce tariffs, quotas, and other protectionist barriers. Average U.S. tariffs fell into the single digits at the end of World War II and generally declined thereafter.

The United States continued to be a large net exporter of agricultural products after World War II, but its comparative advantage in manufacturing products shifted toward high-technology goods and those based on an educated, skilled workforce. Eventually this comparative advantage diminished as other nations caught up to the United States in terms of education and technological capabilities, just as the earlier comparative advantage in natural-resource-intensive goods waned as international raw-material markets became integrated, equalizing access to and prices of raw materials around the globe. In the post–World War II period, manufacturing goods were both the major export and the major import of the United States. In many categories the country imported and exported goods in the same detailed industrial category, for example, autos, aircraft, pharmaceuticals, and computer equipment. Its largest trading partners were economies most like itself, such as Canada, Japan, and Europe—a pattern typical of modern economies. This international competition forced U.S. firms to charge lower prices and spurred them to innovate.

Around 1950 the United States became a net importer of natural resources, especially petroleum, and this had important economic implications. Fueled by lower prices, the economy became ever-more energy intensive until the international price of oil began to skyrocket in the mid-1970s following the Arab oil embargo, climbing even higher in the early 1980s amid war in the Middle East. The inflation-adjusted price of oil quadrupled, throwing the world's industrialized economies into a period of stagnation and inflation. At about the same time, U.S. producers were buffeted by increased competition from exports, especially from Germany and Japan, in their traditional strongholds, such as steel and autos—where big U.S. productivity leads had been narrowed and reversed. Foreign automakers' share of the U.S. market rose from approximately nothing in the late 1940s to 10 percent in the late 1960s, 20 percent in the late 1970s, and 28 percent in the late 1980s. The restructuring of the U.S. economy in the face of these trade-related developments was somewhat painful, as the unemployment rate rose above 10 percent (late 1982 to early 1983) for the first time since the Great Depression.

Recovering from these readjustments in the 1990s, the United States continued to be a leader in pushing for increased international trade and reduced trade barriers. The United States was also active in negotiating bilateral free-trade agreements. The most important of these was the North American Free Trade Agreement (NAFTA) with Canada and Mexico in 1993. Many observers were especially wary of free trade with Mexico, arguing that U.S. firms could not compete with its low-wage labor force. Third-party presidential candidate H. Ross Perot (b. 1930) dramatically warned in 1992 that signing the accord would lead to a "giant sucking sound," as millions of jobs were sucked south of the border. Perot's lack of success in a prime-time television debate with Vice President Al Gore (b. 1948) assured the agreement's passage, and subsequent events belied these predictions, as the 1990s were a period of strong economic and employment growth. Subsequently, free-trade pacts were negotiated with a wide range of global trade partners including Israel, Jordan, Morocco, Australia, Singapore, Thailand, Chile, and most Central American countries.

The U.S. commitment to free trade was far from complete during the post–World War II period, however. Examples include the "voluntary" restrictions of auto exports from Japan insisted upon during the 1980s, the international multifiber agreement protecting the textile industry, export subsidies, and antidumping laws that could be used to protect uncompetitive industries. New concerns about the extent of trade emerged in the early twenty-first century, including fears about the "outsourcing" of skilled jobs, especially to India. The biggest worry arose due to an unprecedentedly large trade deficit, much of it with China, which emerged as the nation's number two source of imports behind Canada.

U.S. exports and imports have rarely been equal. Imports generally exceeded exports, from the nation's founding until about 1840. After the Civil War the United States racked up consistent trade surpluses, often exceeding 1 percent of GDP. These peaked during and after World War I, reaching as high as 5.8 percent of GDP. The trade surpluses ended temporarily during the Great Depression but returned in 1941 and continued until the 1970s. After 1980 the United States consistently ran trade deficits, peaking around 3 percent of GDP in the mid-1980s, subsiding, then climbing above 6 percent of GDP in 2004. By 2003 these persistent trade deficits, driven by strong investment opportunities in the United States and a low national savings rate, made the United States the largest debtor nation in the world, with foreign-owned U.S. assets exceeding U.S.-owned foreign assets by about $2.6 trillion—almost one-fourth of annual income. Despite the objections from critics of "globalization," however, Americans continued to enjoy the highest standard of living in the world, generally embracing the benefits of free trade, especially in the form of low-priced consumer products.

SEE ALSO Agriculture; American System; Anglo American Corporation; ARAMCO; Astor Family; Automobile; Brazil; Balance of Payments; Baltimore; Banking; Baring, Alexander; Blockades in War; Bonaparte, Napoleon; Boston; Boycott; Bretton Woods; British-American Tobacco; Brown Family; Canada; Canals; Cargoes, Freight; Cargoes, Passenger; Charleston; Chicago Board of Trade; Climate; Coal; Coffee; Colombia; Containerization; Copper; Cotton; Cuba;Deng Xiaoping; Depressions and Recoveries; DÍaz, Porfirio; Dole Family; Drugs, Illicit; Duke Family; du Pont de Nemours Family; eBay; Eastman, George; Egypt; Empire, British; Empire, Dutch; Empire, French; Empire, Japanese; Empire, Spanish; Ethnic Groups, Africans; Ethnic Groups, Armenians; Ethnic Groups, Cantonese; Ethnic Groups, Fujianese; Ethnic Groups, Gujarati; Ethnic Groups, Huguenots; Ethnic Groups, Irish; Ethnic Groups, Jews; Ethnic Groups, Native Americans; Ethnic Groups, Scots; Famine; Ford, Henry; Free Trade, Theory and Practice; Furs; Gates, Bill; GATT, WTO; Gold and Silver; Gold Rushes; Great Depression of the 1930s; Guggenheim Family; Hamilton, Alexander; Harbors; Hearst, William Randolph;Hong Kong;Hong Kong and Shanghai Bank; Hoover, Herbert; Imperialism; Import Substitution; Industrialization; Information and Communications;International Trade Agreements; Iran; Iron and Steel; Jamaica; Japan; Japanese Ministry of International Trade and Industry (METI); Korea;Laborers, Coerced;Laborers, Native American, Eastern Woodland and Far Western;Law, Common and Civil;Los Angeles–Long Beach;Markets, Stock;Mercantilism;Mexico;Mining;Monroe, James;Morgan, J. P.;NAFTA;Nationalization;Navigation Acts;New Orleans;Newport;New York;OPEC;Packet Boats;Peddlers;PEMEX;Perry, Matthew;Persian Gulf;Petroleum;Pharmaceuticals;Philadelphia;Philippines;Port Cities;Privateering;Regional Trade Agreements;Rice;Rockefeller Family;Roosevelt, Franklin Delano;Rubber;Russia;Salem;San Francisco–Oakland;SaEud Family;Shipbuilding;Thailand;Silk;Singapore;Slavery and the African Slave Trade;Smuggling;Sports;Staples and Staple Theory;Subsidies;Sugar, Molasses, and Rum;Taiwan;Tea;Textiles;Timber;Tobacco;Toys;Treaties;United Fruit Company;United Kingdom;Venezuela;Vietnam;Wars;Watson, Thomas, Sr., and Thomas, Jr.;Wheat and Other Cereal Grains.

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Robert Whaples