International Trade Theory and Policy
by Steven M. Suranovic

Trade 20-2

Trade 20-2


CLICK HERE for a Lecture Video related to this content.

CLICK HERE for a Survey of International Economics Online Course.


US Trade Policy Highlights

Article 1, section 8 of the US Constitution states clearly and succinctly: " the Congress shall have the power ... to regulate commerce with foreign nations ..." This means that decisions about trade policy must be made by the US Senate and House of Representatives, and not by the US President.

This clause is rather interesting today because one of the key agencies involved in US trade negotiations is the US Trade Representative's office. This office administers the Section 301 trade cases, has negotiated free trade agreements such as NAFTA, and has negotiated trade liberalization agreements such as the Uruguay round under the GATT. All this from an Executive branch agency which acts as an agent for the President. It would seem, then, that the President does indeed make trade policy. Is this a violation of the constitution? Actually no.

The only reason an Executive branch agency, like USTR, can make trade policy is because the US Congress has granted this agency the authority to do so. This issue was in the news recently when the Clinton administration attempted, unsuccessfully (as of Feb 1998), to acquire fast track negotiating authority for new free trade agreements with other countries. Fast track authority would not only give the President and his agents negotiating powers; it would also require the US Congress to vote on any trade agreement presented by the President without amendment. This means that Congress must vote "yea" or "nay" to the entire agreement and cannot make changes to it before the vote. The purpose of fast track authority is to give more credibility to the President and his agents in negotiations with other countries, and hence raise the likelihood that an agreement can be reached.

Probably one reason that the framers of the US Constitution reserved trade policy formation for the US Congress was because at the time of US independence and for well over a century after that, tariff revenue was the primary source of funds for the federal government. It must have been thought unwise for the purse strings of the government to be controlled by the President.

The adjoining diagram shows US customs duties as a percentage of federal government revenue from 1821 to 1996. Notice that in the early 1800s tariff revenue comprised more than 90% of the federal government budget. This fell during and after the US Civil War in 1860 as alternative sources of funds became necessary to finance the war. Another major decline occurred in the early part of the 1900s shortly after the Constitution was amended to allow the collection of personal income taxes. In the 1990s, more than 70% of federal government revenue came from payroll taxes which consists of both personal income taxes and social security taxes. In contrast, less than 1.5% of revenue came from customs duties. Of course, due to the size of the US federal budget, that still amounts to over $18 billion in tariff revenue.

Comparisons with Other Countries

Often it is informative to compare one country's experience with others during the same period. Click on the country below to see graphs showing customs duties as a percentage of government revenue in Britain (1821 - 1964), France (1847 - 1988), and Brazil (1937 - 1985).

International Trade Theory and Policy - Chapter 20-2: Last Updated on 6/14/06