One view of this period contends that US manufacturing owed its success in part to protectionism. According to this view, US tariffs removed British and other foreign competitors from American markets, helping US industry to thrive.
Other scholars dispute the idea that tariffs made a crucial difference for US manufacturing. Even without tariffs, international competition would have been low because of America’s large domestic market and relative geographic isolation from other economies. Moreover, lobbying and other political forces, always at play in the United States, potentially led to inefficient outcomes. Finally, natural resources may have mattered more than tariffs. For example, massive iron ore deposits near Lake Superior reduced input costs for US iron and steel producers, boosting US competitiveness on the international stage. Access to other resources, such as coal, petroleum, and other mineral inputs, allowed US industry to offer competitive prices relative to foreign firms.
Our research contributes to this debate by digitizing official data on tariffs and imports to develop a database of tariffs by industry. We included data from the Census of Manufactures for over 80 manufacturing industries between 1870 and 1909. These data include the output, nominal wages, number of firms, number of workers, material input costs, and other costs for each industry. We calculated labor productivity for each industry by dividing its value-added (output value minus material costs) by the number of workers in the industry.
Our analysis tests the claim that tariffs incentivized domestic manufacturers to invest and/or innovate by clearing the US market of foreign competition. If tariffs raised domestic investment, industries with relatively higher tariffs should have had relatively higher productivity. Tariffs could also promote productivity, especially in emerging industries, by allowing domestic manufacturers to claim a larger market share, enabling increasing returns to scale.
However, our research finds no evidence that higher US tariffs promoted labor productivity in the manufacturing sector. On the contrary, our findings suggest that tariffs reduced labor productivity. Therefore, tariffs played a minimal role in raising the US share of global manufacturing output during the Gilded Age. Additionally, tariffs induced the entry of firms that produced less output. The entry of these smaller, less productive firms may explain the reduction in average labor productivity. Moreover, reduced competition from imports may have discouraged US manufacturers from investing in new products and processes.
Our findings also provide evidence that lobbying and politics contributed to the enactment of tariffs. Thus, tariffs could have been the effect, not the cause, of US industrial fortunes. Tariffs may have merely transferred money from consumers to manufacturers, potentially reducing societal well-being by raising the prices of inputs and final goods.
Our research finds that the effect of tariffs on labor productivity varied between industries. For instance, some evidence suggests that in two dozen emerging industries associated with the Second Industrial Revolution, higher tariffs were associated with higher labor productivity. However, this effect was small and may have been caused by other factors. Moreover, these industries were a small share of US manufacturing.
Furthermore, tariffs seem to have played a significant role in allocating resources during the Gilded Age. On average, tariffs increased output, value-added, the number of workers, and the number of firms within industries. However, even these effects varied by industry. Industries with low barriers to entry that produced lower-quality products, such as textiles, increased their output, value-added, number of workers, and number of firms. But in other industries, tariffs appear to have reduced these variables, especially in industries where ownership was concentrated, such as processed foods and tobacco.
