The Tariff of 1816 was introduced to safeguard American industries from the threat of being virtually wiped out by the relatively cheap imports. In those days, the federal government primarily used tariffs to raise money to pay the outstanding debts of the nation. As opposed to this, the Tariff of 1816 was more of a protective tariff―the first of its kind in the history of the United States, which was imposed to protect domestic industries from the competition they faced in the form of goods coming from Britain. The Tariff of 1816 was also known as the Dallas Tariff, as it was introduced in response to the report sent by the then Treasury Secretary, Alexander J. Dallas.
Before the War of 1812, the United States had largely relied on Britain and other European nations for manufactured goods. When the war began in June 1812, Britain refused to indulge in any sort of trade with the enemy. However, the production of iron and textile goods continued, and the finished goods were stocked in large warehouses. After the war came to an end, they exported these goods to the United States. When these goods began to flood the American markets, their price came down by a significant margin, thus making them cheaper than their American counterparts.
When the American consumers turned their attention towards relatively cheap British goods, the then American President, James Madison, and the then Speaker of the House, Henry Clay decided to resort to an economic plan based on the ideas of Alexander Hamilton to save the American manufacturing units which were still in their infancy. It came to be known as the American System or American Way. The American System had a two-pronged approach: (i) stimulate economic growth and (ii) do away with the dumping of cheap foreign goods from Britain.
As a part of the American System, the Tariff of 1816 imposed high import duties on the British goods entering the American market. The intention was to stop the flood of British goods in the United States. It caused the prices of British goods to rise and brought them at par with goods manufactured in the American industries, thus making the competition between the two even. The tariff plan was approved by the 14th Congress on April 27, 1816, during the presidency of James Madison. As opposed to other revenue measures in practice back then, this was the first actual protectionist measure in the United States.
There was a mixed response for the Tariff of 1816 in the United States. The Northern and Western states, which had a strong industrial base, came out in support of this tariff. As opposed to this, the Southern states, which primarily relied on agriculture, were not pleased. There were two reasons: first, the tariff made manufactured goods costly, and second, they were worried that Britain would retaliate with some similar measure.
These states had export ties with Britain and therefore, their concern was not unfounded. If the British were to impose similar duties on American goods they imported, it would have had affected the economy of the Southern states. Somewhat similar was the condition of merchants from the New England region, who were looking forward to restore their trade relations with the European markets.
The protective Tariff of 1816 helped the American industries compete with foreign goods in the domestic market. Acknowledging its significance, notable Southern politicians, including the likes of Thomas Jefferson and John C. Calhoun, came out in its support. They knew that the future of the Southern states was also dependent on industrial development. Except for a few politicians who opposed the tariff―they were worried that industrial development would make agriculture-based states from the South less important, everyone was on board.
However, when the stipulated three-year period of the Tariff of 1816 came to an end and the Northern states began lobbying for permanent protection, the Southern states opposed the move from the word go.
Its significance was not just restricted to protection for the American industrial sector. It also formed a base for the Compromise of 1833, which brought an end to the Nullification Crisis of 1832 when the state of South Carolina, annoyed with the Tariff of Abominations (Tariff of 1828) and the Tariff of 1832, threatened to secede from the United States.