America's Original Free Trade Agreement
Under the original U.S. Constitution (the Articles of Confederation), states were placing import taxes on goods produced in other states. By the time 1787 rolled around, Congress realized that impeded trade was not good for the union, and included a provision in the new Constitution, under Article I, section 10, clause 2, that states are prohibited from taxing goods made in other states. This empowered Americans to produce commercially and freely, and to sell their goods across the country without unduly burdensome taxes.
Economics Professor T. Norman Van Cott said the U.S. forming itself as a free trade zone created the foundation for its current level of prosperity. By tearing down barriers to trade among the original 13 states, commerce flowed more smoothly, raising the living standard for everyone involved.
Abstracting from the effects of international trade, the constitutional clause guarantees that goods and services are produced by their lower cost American producers and consumed by Americans who value them most highly. This is a sure prescription for higher living standards. It is also filled with lessons for US trade relations with other countries.
The founders’ prescience is magnified by the fact that the clause initially applied to thirteen eastern states where inter-state transportation was daunting. However, it soon began to apply to an increasingly large geographic area with diverse resource endowments, and as transportation technology improved, Americans’ economic inter-connectedness increased dramatically. So much so, I wager that most Americans today take it as a given, not even giving it a first or second thought that the United States is a vast free trade area.
Free trade exposes producers to new markets to sell their goods. For consumers, they can purchase new products that compete with other existing products, putting downward pressure on prices.
Van Cott discusses a contemporary hypothetical to show how barriers to free trade end up hurting almost everyone in the long term. Some individuals may benefit from barriers like import tariffs, but overall everyone pays for this "benefit" to a few concentrated special interests.
To grasp the implications of this shackling of state tax authorities, let’s fast-forward to today, casting our discussion in terms of a product widely produced/consumed in the United States — apples. According to the United States Apple Association (USAA), my state, Indiana, ranks 15th in the country in terms of apple production (Washington is first, producing 50% of US apples). Hoosiers’ apple consumption is about four times its in-state production, meaning Hoosiers “import” apples from other states.
The United States is mostly self-sufficient when it comes to apples to start off. Only about 5% are imported during the off-season, and there is no import tariff.
But what if the U.S. Constitution did not have the clause that prohibited tariffs on other states' goods? Von Cott imagines Hoosier apple-growers pleading for "relief" in the state legislature.
Absent the above clause in the Constitution, it is easy to imagine Hoosier apple growers crying crocodile tears to their legislators about a playing field tilted against them, demanding “protection” from apple producers in other states. Indiana legislators would “feel their producers’ pain” and enact protective tariffs against out-of-state apples.
This would raise Indiana apple prices. This cost would be widely dispersed over more than six million Hoosier consumers. Even those following the maxim “an apple a day keeps the doctor away” would probably find the tariff has a minimal effect on their overall budgets. This is why one should not be surprised to see the Indiana legislative agenda manipulated by apple growers.
These same principles apply to international trade as well as to interstate trade. Tariffs only increase prices for everyone across the board, only to help a select few individuals. It's a form of government picking winners and losers, and it doesn't make a society more prosperous.
Our Founders recognized the importance of unimpeded trade between the states. Why are there still myths that international trade is somehow exempt from these basic principles of economics?