When George Washington was President, consensus existed that tariffs should be used for both (1) federal revenue purposes, and also (2) to protect domestic production. This consensus was embodied in the first sentence of the first U.S. Tariff Act, passed on July 4, 1789.
While the rough consensus existed, the precise extent to which tariffs should protect domestic producers has been debated in Congress ever since. Tariffs’ suitability as the ideal federal revenue source, however, was accepted from 1789 at least through 1913, when the modern federal income tax was created.
Tariffs for federal revenue are now making a comeback. Recently, former President Trump sat down with Bloomberg News Editor-in-Chief John Micklethwait at the Economic Club of Chicago to talk tariffs. Channeling George Washington and and the founding fathers, Trump educated Micklethwait and his audience on the dual benefits of tariffs, stressing the revenue component to a disinterested Micklethwait.
Trump was able to cite to his real world success with tariffs, which bring in roughly $50 billion annually in federal revenue paid by Chinese producers, as well as offering protection to American industry.
Despite Micklethwait’s lack of curiosity on the matter, the former President went into a level of tariff policy design detail unheard of in living memory. Trump explained:
“Now if you want the companies to come in, the tariff has to be a lot higher than 10 percent because 10 percent is not enough,” Trump said. “They’re not going to do it for 10 but you make a 50 percent tariff, they’re going to come in.”
President Trump is correct. Depending on the product and the rate, a tariff could result only in revenue, a mix of revenue and protection, or be totally protective against imports.
But, how should we decide whether products are assigned a ‘revenue’ tariff rate, or protected from with a higher tariff rate?
Well, the U.S. Treasury has thought about this, and has a plan!
Treasury Secretary Dallas’ Plan For Tariff Revenue and Protection
Alexander J. Dallas served as the U.S. Secretary of the Treasury for two years, from October 1814 until October 1816
Sure, that was a long time ago from some perspectives, but tariff history is akin to geological history. In America’s 235 years, we’ve only had a handful of truly seismic tariff changes.
The Tariff Act of 1816, also known as the ‘Dallas Tariff’, was one of them.
The War of 1812 had just concluded in 1815, and left the United States on the verge of bankruptcy. While the country’s finances were in rough shape, the interruptions in trans-Atlantic trade from 1808 to 1815 due to the Napoleonic Wars and then the War of 1812 had the happy effect of breaking import reliance and bringing the Industrial Revolution to America.
Congress wanted Secretary Dallas’ help in balancing the desperate need for new federal revenue, while also providing protection to America’s infant industries.
To that end, on February 23, 1815, the U.S. House of Representatives passed the following resolution:
“Resolved, That the Secretary of the Treasury be directed to report to Congress, at their next session, a general tariff of duties proper to be imposed upon imported goods, wares, and merchandise.”
Secretary Dallas’ ‘Three Great Objectives’ For Tariff Design
In his report, Secretary Dallas began by outlining “three great objectives”. These were:
- Raise enough money to fund the operating expenses of the federal government;
- Balance the interests of manufacturers who need protection with our export-focused agricultural sectors, as well promoting a U.S.-flagged merchant marine; and
- “Rendering the collection of duties convenient, equal, and certain.”
The first objective was straight forward. Dallas estimated that the federal government needed annual revenue of $24,000,000 to fund operating expenses. He figured $6,925,000 could be raised from domestic excise taxes, and the remaining $17,075,000 would need to come from tariffs.
Dallas thus intended for the federal government to be funded 71% from tariffs. Consider how far we’ve fallen: in Treasury’s Fiscal Year 2023, tariffs provided $111B out of $4.5T in revenue, or just 2.5%.
Dallas’ objectives are still as good and relevant today as they were back then. For example, Dallas’ balancing of manufacturing and agricultural interests spoke directly to the recent Vice Presidential debate of 2024, where Governor Tim Walz criticized U.S. Senator JD Vance’s desire to protect domestic manufacturing by arguing it would jeopardize soybean exports. And promoting a U.S.-flagged merchant marine remains the law of the land, yet our merchant fleet has steadily declined from well over 400 ships after World War 2, to roughly 250 ships in 1980, to about 100 ships today with a record low 2,000,000 DWT (deadweight tonnage).
Secretary Dallas’ balancing of agricultural versus manufacturing interests in tariff design influenced the ultimate address on the issue by U.S. House Speaker Henry Clay in 1824, which would go on to be U.S. policy until 1913. In short, both men promoted preservation of the domestic market for U.S. agricultural producers, and a belief that increased protection for the home market would benefit American farmers.
As to manufacturing, Dallas’ report stated that “There are few, if any, Governments, which do not regard the establishment of domestic manufacturing as a chief object of public policy.” Acknowledging this reality, and the need for self-reliance, the case for protective tariffs was made.
How Secretary Dallas Decided Whether a Revenue or Protective Tariff Should Apply To A Given Product
If all goods received protective tariffs, then the federal government would be short on revenue. But how to decide which products should receive protective tariffs, and which products should be assigned a revenue tariff?
Assign Industries to One of Three ‘Classes’ to Determine Revenue or Protection
Dallas’ solution was to assign manufacturing industries to one of three ‘classes’. He did this with humility – “sometimes seem to render the classification of particular manufacturers doubtful or arbitrary” – but in modern parlance, Dallas knew you couldn’t let the perfect be the enemy of the good.
This is how Dallas described each class, and the products he assigned to each class:
- First Class: “Manufactures which are firmly and permanently established, and which wholly, or almost wholly, supply the demand for domestic use and consumption.”
- Included: articles of wood, cabinets, carriages, cables, hats, iron castings, firearms, window glass, leather goods, paper, and printing types.
- Second Class: “Manufactures which, being recently or partially established, do not at present supply the demand for domestic use and consumption, but which, with proper cultivation, are capable of being matured to the whole extent of the [domestic] demand.”
- Included: coarser cotton and woolen goods, metal buttons, plated wares, iron tools and fasteners, larger iron goods, things made of pewter, tin, copper, and brass, and beverage alcohol (wine, beer, and spirits).
- Third Class: “Manufactures which are so slightly cultivated as to leave the demand of the country wholly, or almost wholly, dependent upon foreign sources for a supply.”
- Included: finer cotton and woolen goods, linens, cloths, silk, hosiery, certain hardware, chinaware & porcelain, and all other glass except for window glass.
Dallas outlined his considerations for each class of industry as follows:
- Tariff considerations for ‘First Class’ (Mature, Well-Established) Industries: seventy five years before antitrust law was legislated (with the Sherman Act of 1890), Dallas was thinking about competition.
- Dallas wrote that tariff design for the First Class of producers was the easiest, because even if the tariff was set far too high and stopped all imports, “competition among the domestic manufacturers alone would sufficiently protect the consumer from exorbitant prices”.
- On the flip side, Dallas cautioned against too low a revenue tariff, even for this ‘First Class’: “a wise Government will surely deem it better to sacrifice a portion of its revenue, than to sacrifice those institutions which private enterprise and wealth have connected with public prosperity and independence.”
- Summary: walk a close line between revenue and protective rates, being mindful of import penetration into an industry.
2. Tariff considerations for ‘Second Class’ (Infant, Young) Industries: this was the “most interesting” to Dallas, and where he believed Congress should “place them, within a very limited period, upon the footing on which the manufacturers in the first class have been so happily placed”.
- In uncanny relevance to the 21st century, Dallas notes that the Congress’ approach to infant industries has been to prefer subsidies over tariffs: “but it appears to have been the early and continued practice and policy of the Government to afford encouragement to domestic products and manufacturers, rather by the imposition of protecting duties than by the grant of bounties and premiums”.
- Dallas wrote that, in concert with the subsidies, tariffs for the second class “should be such as will enable the manufacturer to meet the importer in the American market upon equal terms of profit and loss”.
- Summary: set a tariff that ensures that foreign products don’t undercut domestic products.
3. Tariff considerations for ‘Third Class’ Industries (where USA is nearly all or totally import dependent): for Dallas, a revenue tariff should be deployed on products where we were (i) import dependent and (ii) private industry was not actively investing capital.
- However, Dallas did have one caveat, and that was for situations where America was dependent on imports of a raw material necessary for manufacturing: “Where the demand for raw materials, or manufactured articles in any of the departments of domestic industry, is wholly, or almost wholly, dependant upon the supply form foreign nations, the access to the American market should be easy, if not entirely free.”
- For these manufacturing inputs which should be “easy, if not entirely free” to import, Dallas nonetheless saw them as an attractive avenue to promote American shipping. Unless a treaty prohibited the practice, Dallas suggested specific taxes for ‘free’ imports that arrived on foreign vessels; and even if the foreign vessel was from a treaty country, if it carried goods from a non-treaty country, those imports should be taxed.
- Summary: revenue tariff, but perhaps ‘free’ for necessary manufacturing inputs, and special taxes to promote the U.S. merchant marine.
Dallas’ Five Principles for Effective Revenue Tariffs
Having established his considerations for tariff protection, Dallas moves on a set of general principles for revenue tariffs. In his words, these are his five revenue tariff principles:
- “Articles intended as the source of revenue should never be so heavily charged with duties as to prevent importation, or much to diminish it.”
- “Articles should never be so heavily charged with duties as to create a temptation to smuggle.”
- “Articles of great size and weight, of comparatively small value, are difficult to be smuggled; and, other things being equal, they may be charged with higher duties.”
- “Articles of small size and great value are easily smuggled, and must be charged with low duties, to destroy the otherwise fatal temptation to evade the law.”
- “Articles imported to a great amount should rather be charged with specific duties upon their weight and measure, in order to guard against evasions and frauds, than with ad valorem duties on their value.”
All of these are important and correct. The last principle, about specific tariffs (i.e., $ per unit of measure) versus ad valorem tariffs, has been a massive issue throughout the history of international trade.
The Ad Valorem Tariff Problem, and Dallas’ Verification Solution
The ad valorem tariff problem is as follows: talking about a “10 percent” or “25 percent” tariff sounds simple to lay people accustomed to sales or property taxes. But when we’re talking about an imported good, assessing an ‘ad valorem’ (percentage of value) tariff means relying on what the importer claims they paid for it overseas. As Henry Clay decried: “It is evident that on the ad valorem principle, it is the foreigner who virtually fixes the actual amount of duty paid.” Before World War 2, most U.S. tariffs were ‘specific’ , but the GATT pushed us mostly back to ad valorem.
Dallas had a clever mitigation measure that actually lasted well into the 20th century: for products subject to ad valorem tariffs, the importer would have to have their invoice stamped by an American consul abroad. In Dallas’ words, “all invoices upon which entries may be effected, shall be endorsed by the American consul, by a notary public, or by some other trustworthy agent or officer, to be designated, by law, at the place of exportation, certifying the merchandise to be priced “at the then current market price;” that entries shall only be permitted upon invoices so endorsed; and that the invoices shall be conspicuously stamped with the seal of the custom-house at the time of entry.”
Furthermore, if the customs officer had a bad feeling, he could add an additional ten percent: “authorize the collectors, in all cases of suspicion, to add to the invoice price of the merchandise ten per cent.”
Dallas’ Final Point On Effective Tariff Making: Keep Product Categories Relatively General
Everything Dallas has written so far constitutes urgently needed advice today, and that is especially true with this last point. Dallas cautioned that “in the classification of manufacturers, there were several articles, differently classed, which can scarcely be distinguished from each other, and which could not be separately described with such distinctness and precision as is requisite in a tariff to mark the line of discrimination for different rates of specific duties.”
Dallas offered up examples in textiles and apparel, “whose names are arbitrary, and continually changing, and whose texture and quality are so various, and so easily altered or disguised, as to elude the vigilance and skill of the custom-house.” In the 21st century, over-complication of our textile and apparel tariffs is a huge problem, such that textiles and apparel has the distinction of being the only manufacturing industry constituting a U.S. Customs & Border Protection “Priority Trade Issue”.
Dallas thus advises to keep the descriptions general: “A general description designates the article, renders the imposition of the duty uniform and certain at all ports of entry, and effectually guards against mistakes or evasion.”
Applying All The Above Principles, Secretary Dallas Writes His Tariff Schedule
A tariff schedule is a list of everything under the sun, and its accompanying tariff rate. Anything not mentioned in a tariff schedule falls into one or more ‘catch-all’ rates. Civilizations have done this for longer than recorded history.
Here is what Secretary Dallas proposed for the ‘free list’ (no tariff), and the various ad valorem tariffs he proposed:
And here are Secretary Dallas’ recommended specific tariffs (note that ‘do’ means ‘ditto’, as in the same unit of measure indicated above):
