I. The Historical and Economic Relationship
The Sherman Act, the Clayton Act, and the FTC Act were enacted over a century ago, and they continue to be the fundamental competition laws of the United States. All three were enacted against the historical backdrop of a long period of protective tariffs, which ultimately collapsed in the early 1930s with the passage and subsequent repudiation of the Smoot–Hawley Tariff Act.
The immediate impetus for “anti-trust” law was public concern regarding “the trusts.” Nothing memorializes that concern better than Joseph Keppler’s drawing, “The Bosses of the Senate,” circulated in 1889 by the popular magazine Puck. It depicts the steel beam trust, the copper trust, and numerous other businesses or industries as gargantuan figures filing into the Senate through the monopolists’ entrance, while the peoples’ entrance is closed. In the context of the Great Tariff Debate of 1888, the drawing in Puck clearly depicts powerful business interests lobbying for protective tariff legislation.
Many politicians blamed protective tariffs for collusive or monopolistic market conduct. In 1887, President Grover Cleveland devoted an entire congressional address to the tariff issue, arguing that protective tariffs not only lead to the direct pass on of tariff costs to consumers (“tariff laws . . . raise the price to consumers of all articles imported and subject to duty by precisely the sum paid for such duties”), but also enable anticompetitive price increases by domestic producers (“[consumers] who buy domestic articles of the same class, pay a sum at least approximately equal to this duty to the home manufacturer”). He argued that domestic price competition “is too often strangled by combinations . . . frequently called trusts.”
President Cleveland’s remarks set off the Great Tariff Debate of 1888, which consisted of “one hundred fifty speeches . . . that took more than a hundred hours” and attracted public attention to the tariff issue on the eve of a presidential election. Sympathetic legislators struck much the same tone as Cleveland: “While the Government has thrown up its tariff walls without, monopolists have joined hands within for the purpose of putting up prices and plundering the people through the devices known as trusts, pools, and combines.” Meanwhile, in the House, then-Congressman William McKinley led counterattacks against legislative efforts to reduce protective tariffs. President Cleveland ultimately lost reelection.
McKinley’s counter-reform efforts before the election were rolled into new legislation imposing additional protective tariffs, in the McKinley Tariff Act of 1890. Antitrust legislation nevertheless remained on the table even after the “heated controversy over tariff bills.” Indeed, the Republican Party’s winning electoral platform in 1888 had declared uncompromising support for both protective tariffs, and antitrust legislation. Some would question whether “the same Congress that protected the trusts at the expense of the consumer, by enacting tariff legislation, would also seek to protect the consumer from the pricing tactics of the trusts.”
Yet enthusiasm for tariffs in this period can be harmonized with popular enthusiasm for antitrust legislation, under the premise that the Sherman Act was designed to “mitigate the harm that the high tariff was doing to the people.” That is, “one of the leading theories—one that is most believable—for what motivated antitrust law, is that it was counterbalancing the harm done by the tariff.” By all appearances, Senator John Sherman and his political allies “saw no inconsistency between anti-trust legislation and protectionist policies that strengthened the trusts.” “Like many of his contemporaries, Sherman thought that vigorously enforced laws against anticompetitive practices, especially the abuse of market power, would make a protectionist foreign economic policy compatible with an efficient market economy domestically.” The tense political compromise struck by the Sherman Act effectively guaranteed ongoing debate about the tariff, the trusts, and antitrust.
About a decade later, competition-minded critiques of protective tariffs crystallized in “the populist rallying cry that ‘the tariff is the mother of the trusts.’” The same phrase was explicitly debated in the 1899 Chicago Conference on Trusts, which offers a window into the ideas of the “clear majority” of participating economists or policy leaders who “believed that the trusts presented a serious problem.” The participants primarily differed on “the best legal tools for confronting” the problem, as “many of the speakers professed strong disappointment in Sherman Act legislation to that time” and many others sought tariff reform. The host organization issued a questionnaire concluding with the question, “What shall be done with combinations?” The query yielded 61 responses favoring unspecified new legislation, 60 responses favoring non-intervention, and 45 responses favoring tariff revision.
These themes came to a head in the 1912 presidential race, which led to the Clayton and FTC Acts as well as short-lived tariff reform. Once again, “high protective tariffs were under attack for promoting the growth of monopoly trusts and the high cost of living.” “What is particularly interesting for antitrust policy is the degree to which the candidates linked the issues of trade policy and domestic antitrust law.” Thus, “[t]he two central economic questions of the 1912 election were the continuation of tariffs on imported goods and how to respond to the growing power of the trusts.” All four candidates supported aggressive antitrust or regulatory actions of one form or another, “mirroring emerging national consensus.”
Woodrow Wilson “was the candidate that most fully articulated a theory on the linkage between the tariff and the trusts.” During the campaign, Wilson asserted that William Taft and Theodore Roosevelt would “accept these evils and stagger along under the burden of excessive tariffs and intolerable monopolies as best they can through administrative commissions.” Wilson himself was firmly committed to “opening the door to foreign competition by lowering the tariff,” and upon his electoral victory, Wilson first sought tariff reform before carrying on to the antitrust reforms which became the Clayton and FTC Acts. Importantly, those new antitrust laws continued to persist even after the political tides later turned on the tariff issue and the United States reverted to protectionism: “partisan debate . . . shifted from ‘protective’ versus ‘revenue’ tariffs to ‘high’ versus ‘moderate’ tariffs—‘with a not-too-great emphasis upon the word moderate.’”
To sum up several decades of tariff and antitrust debate in modern terms, the premise of the “mother of the trusts” argument was that “domestic producers who had worked out collusive agreements among themselves could not raise prices and exploit consumers without help from tariffs, which kept import competition away.” Whatever the ultimate distribution of costs and gains across the U.S. economy, it is clear that the effective rate of protection and implicit subsidy that protective tariffs conferred to domestic producers of final goods was substantial in this period. Most contemporaneous critics of “the tariff and the trusts” did not believe that reducing tariff rates on foreign goods would be “the complete or final solution of the trust problem,” but nevertheless, many believed that “high tariff levels enabled the formation and monopolistic preservation of the trusts by insulating them from foreign competition.”
II. Some Practical Implications
The drafters of the antitrust laws and contemporaneous tariff laws apparently believed that antitrust enforcement can serve as a mechanism to mitigate price pressures associated with protectionist policymaking. Under the framework of modern antitrust law, the best avenue for antitrust analysis is to scrutinize markets protected by tariffs for anticompetitive behavior that can occur in such a setting.
For example, several characteristics of tariffs may increase the likelihood of explicit collusion among domestic producers in particular product markets, both as a matter of economic analysis and commonplace judicial precedent. Trade barriers can be entry barriers, and will likely impair the ability of foreign producers to undercut domestic producers on price and therefore diminish the disciplining effects of potential foreign competition, which in turn increases the likelihood of explicit pricing collusion among domestic producers in violation of the antitrust laws. That is, “the speed with which new entry can be expected to bring about a substantial expansion in the output of the market is crucial in evaluating how the possibility of new entry will affect the expected gains from collusion.” Furthermore, if tariffs on foreign imports entirely exclude foreign producers from particular domestic product markets, then domestic producers in those protected markets will—absent significant new domestic entry after the removal of actual foreign competitors—gain greater market share in those protected markets and those markets will commensurately become more highly concentrated. It is generally understood that a high level of market concentration increases the risk of anticompetitive collusion on pricing because there are fewer players with whom to coordinate.
In some instances, the imposition of substantial new tariffs could eject every single one of a domestic producer’s actual competitors from its product market, leaving the domestic producer as the sole survivor—and, by definition, a monopolist. Of course, a business that gains and holds onto market power for no other reason than an unforeseen shift in national tariff policy is easily argued to fall into the exception for monopoly acquisition and maintenance via “historic accident” under Grinnell. Moreover, merely being a monopolist is not an antitrust violation, and neither are short-run monopoly profits. One would hope that monopoly profits will attract new domestic entrants, and such entry should be encouraged, but the Supreme Court has recognized that monopoly acquisition—even if legally legitimate at the outset—can equip a company to take additional steps to improperly exclude competitors. Being handed a monopoly by the government does not excuse a subsequent course of conduct excluding future domestic producers from the area of effective competition so as to extract monopoly rents from American consumers indefinitely.
Finally, the Federal Trade Commission has issued a warning that new protective tariffs “should not be interpreted as a green light for price fixing or any other unlawful behavior” and “the FTC will be watching closely to make sure American companies are vigorously competing on prices.” Such an antitrust policy accords with President Trump’s executive order that federal agencies deliver emergency price relief to the American people and defeat the cost-of-living crisis. The Antitrust Division of the U.S. Department of Justice has also signaled interest in closely related issues: “In an era of rising prices, pocketbook issues are front of mind, and we will prioritize these markets.”
III. Conclusion
Antitrust enforcement is not necessarily the best tool for curing the price increases that may arise from the pass on of tariff costs to consumers of foreign goods under protective tariffs. Nevertheless, antitrust enforcement could possibly help mitigate the overall price impact by deterring or otherwise remedying the antitrust harms that may occur in protected markets. Antitrust is not the one-size-fits-all solution to every problem in the modern economy, but history suggests that tariffs of a sufficient magnitude and duration may increase the risk of antitrust harms in particular markets, and that antitrust enforcement could counterbalance such harms. In today’s altered economic environment, it may be called upon to do so again.