Front Page Titles (by Subject) CHAPTER 16: THE POLICY OF A PROTECTIVE TARIFF - Economics, vol. 2: Modern Economic Problems
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CHAPTER 16: THE POLICY OF A PROTECTIVE TARIFF - Frank A. Fetter, Economics, vol. 2: Modern Economic Problems 
Economics, vol. 2: Modern Economic Problems, 2nd edition, revised (New York: The Century Co., 1923).
Part of: Economics, 2 vols.
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THE POLICY OF A PROTECTIVE TARIFF
§ 1. Military and political motives for inteference with trade. § 2. Revenue and protective tariffs. § 3. Growth of a protective system. § 4. The infant-industry argument. § 5. The home-market argument. § 6. The “two-profits” argument. § 7. The balance-of-trade argument. § 8. The claim that protection raises wages. § 9. Tariffs and unemployment. § 10. Exports and exhaustion of the soil. § 11. Protection as a monopoly measure. § 12. Equalizing “costs of production.” § 13. Tariff legislation and business depressions. § 14 Harm of sudden tariff reductions. § 15. Some lessons from our tariff history.
§ 1. Military and political motives for interference with trade. The considerations set forth in the last chapter raise a strong presumption in favor of the sovereign state permitting its citizens to trade freely across its boundaries, as the best way to further their own prosperity and, on the whole and in the long run, that of the nation. Indeed, this presumption and belief has been held by nearly all serious students of the question, with more or less of modifications and qualifications, ever since Adam Smith published his work on the “Wealth of Nations” in 1776.1 But in conflict with this belief has been the all but unanimous policy of nations from early times, throughout the Middle Ages, and down to this day, of interposing some special hindrances (of varying degrees and kinds) to this kind of trade. Sometimes this has been done by prohibitions, but more often by taxes imposed upon either imports or exports. Sometimes the attempt is made to justify the policy of governmental interference with foreign trade by arguments which crumble before the slightest examination, and again it is admitted that free trade is true in theory, but it is declared to be false in practice. The latter view is not to be entertained for a moment. If free trade in theory (as an explanation) is complete and true, it will in practice (as a plan of action) be sound and workable. In truth, however, the practical policy of governmental interference with foreign trade has always in part rested on other than simple economic grounds.
Interference with free trade with the foreigner has always been in large measure due to political motives. In every petty medieval state or self-governing city, the aim was to make the economic boundaries coincide as nearly as possible with the political boundaries. Except for the trade in a few articles of comparative luxury, this aim was at that time nearly attainable. The peasantry surrounding a fortified town and enjoying its protection were compelled to trade there. Down to our own time it has seemed to statesmen expedient to forbid or discourage trade that might nourish the economic power of future enemies. Sometimes governments have used embargoes, bounties, or tariffs as weapons to injure the trade of other nations and to secure diplomatic or commercial concessions. Often they have sought by tariffs to encourage the building of ships and the manufacture of armaments and of all kinds of munitions by private enterprise within their own borders, even when the immediate cost of these products was greater than if they were purchased abroad. In such cases it is always a question whether an outright expenditure would not be better, whether the government could not build its own arsenals and shipyards more economically than it can foster private enterprise by means of a protective tariff. However, the political (or military) argument for protection recognizes that it is in itself a costly (not a profitable) policy, and that the cost is justified only on the grounds that military necessity warrants the outlay.
The military argument as applied to the preparation of ships and munitions has no application to a tariff on those articles that have no bearing upon military power. But the most recent application of chemistry, physics, and the mechanical arts to the uses of war has given new significance to a larger policy of industrial preparedness for military purposes. The year 1914 probably ushered in for the world a new epoch of protective and discriminatory tariff legislation determined by political rather than by direct economic considerations. Yet it is possible that if the nations agree to limit armaments they will, at the same time, move toward freer trade and the open-door policy.
§ 2. Revenue and protective tariffs. An important distinction in principle is to be made between a tariff for revenue and a tariff for protection. A revenue tariff is a schedule of duties on goods entering or leaving a country, so arranged that the collection of taxes may cause the least possible disturbance to domestic industry. Speaking generally, the duties may be on either imports or exports; but, as export duties are unconstitutional in the United States, our tariff discussions are concerned only with import duties. The purest type of revenue tariff is one touching only articles that, even at the higher prices, are not in the least to be produced profitably in the home country. A good example is that of England with most of the duties levied on tropical products.
A protective tariff is a schedule of import duties so arranged as to give appreciably higher prices to some domestic enterprises than they could obtain with free trade. It shuts out some foreign goods that would otherwise enter, and in so far it “protects” the domestic producer from the foreign competitors who would sell at lower prices than those at which he can or will sell. In other words, “protection” means governmental interference with the freedom of trade.
The distinction between revenue and protective tariffs, thus clear in principle, is not always easy to make in practice. It does not lie in the intention of the taxing power, but in the actual effects produced. Most tariffs combine the characteristics both of revenue and of protective measures. A tariff that reduces imports but does not cut them off entirely may be called either a revenue tariff with incidental protection or a protective tariff with incidental revenue. The difference is one of degree. But notice particularly that the two features of protection and of revenue are mutually exclusive. To the extent that one is present the other is impossible. A tariff rate that in whole or in part excludes the foreign article to that extent affords “protection” but does not yield revenue. Whenever the government collects a cent of tariff taxes, the domestic producer in so far and as respects that unit of goods is “unprotected.” Likewise, whenever a tariff gives to the domestic producer “protection” in respect to any unit of goods, it does so by prohibiting the importation of the goods, and the government is deprived of any revenue whatever derived from the importation and sale of that unit of goods. In short “protection,” just in so far as it “protects,” is prohibition of imports. Non-importation and revenue are mutually contradictory.
§ 3. Growth of a protective system. The protective policy developed at first accidentally, as it were, out of the practice of levying taxes for revenue only. Tolls, dues (or duties), customs (that is, in former times the customary dues paid by merchants, now the dues fixed by law), tariffs (that is, schedules or lists of rates of duties) were at first intended to raise revenues for the sovereign, the city, or the state. The unintended, and to some degree inevitable, result of the taxation of goods in commerce, whether imports or exports, is to prevent and discourage trade and to raise the prices of the goods imported. Any change in tariff duties, therefore, at once alters the previously existing adjustment of profits and of industries in a country.
The first effect of the tariff is the same as that of any new factor in enterpriser’s cost; the same, for example, as that of a new domestic tax on an article or as that of a rise of freight rates—the domestic price of the taxed article tends to rise. Other results then follow. If the article cannot, even at the higher price, be produced within the country (as in the cases of oranges, spices, and coffee in England, Norway, and Sweden), its consumption is reduced. The lessening of demand may, however, depress somewhat the price in the producing country. But as such a tariff does not increase home production of the taxed article, it is therefore for revenue, not for protection.
But if the article can be profitably produced in the importing country at the new price, “home industries” will start. Where the transportation charges are low, as on the coasts and on the main lines of railways, some imported goods may be bought, while farther inland, where transportation charges are higher, home production of some or all grades of such goods may take place. If the whole demand at home is supplied and all imports stop, therewith cease all revenues to the government from that source. A completely protective tariff is completely prohibitive.
Experience abundantly shows that, with a few exceptions, due to climate and natural resources, it is impossible to put into effect the most moderate schedule of duties without the increase in price at once causing some men to shift their occupations, and to begin producing articles of the kinds that have risen in price. At once appears a group of “protected industries,” the owners of which are dependent for the safety and profits of their investments, and workmen in which are dependent for the security of their present jobs (possibly for the chance to continue the pursuit of highly skilled trades), on the continuance, if not the increase, of the existing tariff rates. A tariff may be adopted mainly from stress of financial need (as in our own history in 1789 or in 1861), but its modification or repeal cannot be decided by fiscal considerations. The “incidental protection” it affords has created a wealthy and influential group of employers and a large body of employees who are irresistibly tempted to exercise their influence in politics almost solely in favor of continuing and of increasing the rates to the sacrifice of the higher civic life of their communities. Of course, the beneficiaries of the tariff usually believe sincerely that it is indispensable for the prosperity of the country as a whole, and they can do much to persuade others to the same opinion. This commercial motive for maintaining existing protective tariffs explains in large part their wide prevalence, whatever other reasons may be adduced in their justification.
§ 4. The infant-industry argument. Most free-trade writers concede a limited validity to the claim that protection may be used to encourage infant industries and thus diversify the industries of the country. If the natural resources of a land are adapted to an industry, it may be called into being earlier by a fostering protective tariff. This is merely anticipating and hastening the natural order of progress. In the American colonies the manufactures of such goods as iron, cloth, hats, ships, and furniture sprang up and continued not only without “protection,” but despite numerous harassing trade restrictions made in the interest of English merchants. Can it be doubted that many of these industries would have developed and flourished after the adoption of the Constitution with no other favoring influences than those of rich resources and of economy in freights? In the Mississippi Valley since 1880 natural gas, abundant coal, ore, and timber have made possible a great growth of industries without protection against the eastern states. Industries capable of eventual self-support must in most cases naturally appear in due time. Economic forces will bring them out. Protection of infant industries may be likened to a hothouse, anticipating the season by a few weeks and at great cost. The question is whether the mere possession of the hothouse is a luxury worth the price, if meantime the products can be got more cheaply by trade. English manufacturers flourished in the nineteenth century because they were well established, had excellent coal supplies, good stores of iron ore, and low-paid labor which did not have the opportunity of better alternatives, as did the American workman. If America had imported more (it would not have been all) of her iron and coal, the English mines would have begun to shown signs of exhaustion earlier, and America’s advantage surely would have asserted itself in time. Her iron manufactures undoubtedly were hastened—they cannot truly be said to have been created—by the protective tariff.
The peculiar advantages of a new country attract labor and enterprise into a few lines. Industries are forced into an earlier diversification by tariffs. Which is the better economic situation? Contrast the life of the workers in Iowa, the Dakotas, and Minnesota, or Kansas, if you please, with that in crowded tenements of New York and in the mining regions of Pennsylvania. Is it so certain that a dense population congested in cities and crowded in factories and mines is a more ideal social aggregation than is a community of prosperous farmers? The smoky industrialism fostered by protection often puts a premium on a low grade of immigrants, crowds them into city slums and into forlorn mill towns, and keeps them aliens to the American spirit. It would be surprising if Americanism on the western plains were not as sound as in the crowded cities. But the infant-industry argument appeals strongly to the enterprise and the speculative spirit of Americans, who like to do all things rapidly and on a large scale. Every village aspires to be a great industrial center. Americans are impatient of the suggestion that things “will come in time”; they like things to come at once.
It must, however, be recognized that in a new country there is often a certain monotony and poverty of life because of the lack of diversified industries. There are not sufficiently varied avenues for the expression and use of the manifold talents of the nation. There are unused materials and opportunities; but the initial expense of experimentation, the initial difficulties of gathering and training a working force, are discouraging to individual enterprise, prices being as they are. A protective tariff is not necessarily and always the best way, but it is one way of helping private enterprise to establish and conduct such industries through their initial period. But, as has been pointed out by many writers, the infant-industry argument is self-limiting, and involves always the assumption that the industries selected as fit for protection are such as ultimately, and within a moderately short period, can grow into self-dependence. The infant must sometime grow to be a man and stand on his own legs, or he is either a chronic invalid or a degenerate.
§ 5. The home-market argument. The home-market argument seeks to show a more permanent need for a tariff. At the same time it appeals to the farmers, whom it has been hard to reconcile to a policy that in America2 has been peculiarly favorable to manufacturers. The home-market argument extols the advantages of having near to the farms customers for agricultural products, and dwells on the greater steadiness of domestic trade. War or political changes, it is said, may change the demand for products. This is true, but no other changes have affected American agriculture so radically as the peaceful development of domestic transportation and the opening of the West.
The main economic claim made in the home-market argument is that the shipping of food to Europe and the importing of manufactures involve a great cost for double freights that could be saved by manufacturing at home. The farmer is supposed to pay this cost. The obvious defects in this view are: first, there is nothing to show that the freight is not partly or entirely paid by the European, either the manufacturer or the food consumer; secondly, home trade “saves the freights” for the farmer only in case he can buy goods under a tariff with less of his own labor and products than under free trade. The payment of freight charges is true economy when the goods can be bought at a distance on more favorable terms than near home. The freight argument attempts to prove too much, for it condemns every trade within the country of goods produced a stone’s throw away from the consumer.
The home-market appeal is strongest when addressed not to all farmers, but to one class of farmers—those whose lands are situated nearer the manufacturing cities. As city population grows, some land is converted from the extensive cultivation of corn and wheat to dairying, fruit- and market-gardening in the neighborhood of cities, and perhaps at length is used for factory sites or as city lots. There is, thus, a partial validity in the argument as applied to a comparatively small number of farmers, who gain as landlords, not as tillers of the soil. Even greater gains have sometimes been reaped by the owners of timber-lands, ore-mines, coal-lands, and other natural resources, the values of which have been raised by tariff legislation. But, unless these gains come from truly productive additions due to the tariff, there is no benefit to the community as a whole.
§ 6. The “two-profits” argument. Somewhat related to this idea of the home-market and the saving of two freights is the “two-profits” argument. It is said that the tariff keeps “two profits” at home; foreign trade gives but one. The word “profits” is here used in the popular sense of gain from a single transaction. Both parties are said to profit, and both profits are thought to be secured at home when two citizens are forced to trade with each other. The view that there are “two profits” in a trade is an advance upon the notion that “one man’s gain is another’s loss,”3 but there is an error in elementary arithmetic here, both as to the number and as to the aggregate amount of profits. The purpose of a protective tariff is to compel two citizens of a country to trade with each other instead of trading with two citizens of a foreign state; the number of profits made by each country is therefore not increased by substituting domestic for foreign trade.
What, then, as to individual size and aggregate amount of the profits? The gain is not the same in all trades; the trade is made if there is a gain to each party, no matter how small it is; but the generous “profit” on one transaction where the conditions of the two parties are very different may be greater than the total of petty gains on a dozen trades between two traders of evenly matched powers. Indeed, the greater the difference in the conditions and capacities of two groups of traders, the greater is the sum of the profits that they may secure through the members of each group trading with those of the other, rather than by the members of each group trading only among themselves. Can it safely be assumed that every trade with a foreigner is less advantageous than one with a fellow citizen? Diamond cuts diamond, but two Yankees left to themselves should not be worsted in bargains with the universe. If they could exchange to better advantage with each other, they probably would discover it as soon as the interested manufacturers and political orators who can prove so eloquently that they know the other man’s business better than he knows it himself. Forcing the home trade by making our citizens trade with each other, whether both wish or not, may be to the advantage of one citizen, but it is not likely to be to the advantage of both citizens.
§ 7. The balance-of-trade argument. At the foundation of nearly all belief in the virtues of a protective tariff will be found the “favorable balance-of-trade” notion. The ideal of the more thoroughgoing upholder of a protective policy is to keep merchandise constantly flowing out of the country, and to have nothing coming in—in any case, nothing that by any fair amount of effort (whatever that be) could be produced at home. This is called maintaining a “favorable balance of trade.” Sometimes the emphasis is more on the advantages of an excess of exports of goods, sometimes more on the importance of the need “to keep money at home.” The simple error in these opinions is clearly apparent in the explanation of foreign exchanges and of the principles regulating the international flow of money.4
An interesting commentary on the opinion before us is the fact, already noted,5 that an excess of exports is the usual situation in poor debtor countries having constant interest payments to meet; while, on the contrary, rich creditor countries have an excess of merchandise imports.
The “favorable balance-of-trade” argument, with the emphasis on money rather than on goods, is that the protective tariff keeps money at home which, if trade is free, will be sent abroad to buy foreign goods, thus impoverishing the country. This doctrine, as presented in the seventeenth and eighteenth centuries in Europe, was known as mercantilism. It had great influence upon the commercial policies of all the great European nations. A superficial glance at the trade relations of an old rich country with a new province seems to give evidence for such a belief. A richer country that is lending capital (sent to the debtor country in the form of goods) has at the same time a larger supply of money. The lack of money and the poverty of the newer country are looked upon by the protectionist as due to the importation of goods. The common cause of the imports to newly settled districts and of their scanty stocks of money, it need hardly be repeated here, is the comparative poverty of settlers and pioneers.6 Often these are paying for imports by means of loans, and in any case their monetary stocks are not decreased either by their foreign trade or by their domestic trade with the older and richer parts of the same country. Europe and the United States, in their trade with China and South America, usually do not get gold in exchange, but merchandise of various sorts. It is true that in the trade of England and New York with great gold-producing districts, such as California, South Africa, and Alaska, gold is received in return for merchandise, for much of the gold in gold-producing districts is merely merchandise, and its export does not drain them of their due portion of money. There was a time when the states of Kansas, Nebraska, Iowa, and their neighbors were filled with resentment against the money-lenders of the eastern states. There was a widespread belief that hard times were due to an insufficient currency.7 Attempted action took the form of the greenback and free-silver movements, which were defeated by the opposition of the East; but there can be little doubt that if the Federal Constitution had not forbidden it, the discontented states would have established a protective tariff “to keep their money at home.” Few advocates of protective tariffs are ready to admit that the monetary stock of the country is dependent on the general wealth of the country and on the methods of doing business, rather than on a protective tariff.
§ 8. The claim that protection raises wages. The most effective popular claim made for protection is that it raises, or maintains, the general scale of wages in the country. This argument takes two forms: first, when wages are low in a country it is claimed that a tariff is needed to raise them; and, secondly, when wages are high it is argued that a tariff alone can preserve them. In Germany the fear was of the higher paid and more efficient labor of England. In America, where general wages at all times have been higher than in England, it was first argued (in the time of Henry Clay) that because of the greater cost of production, due to high wages, the tariff was needed to start certain industries; but after the tariff had long been established and the old argument had been forgotten (even since 1865), it has been urged that the tariff is the cause of high wages, and must be maintained to protect against the “pauper” labor of the older countries. The higher wages in new countries where a tariff exists are always claimed to be the fruits of a protective policy.
The true cause of the high general scale of wages in America is the greater efficiency of industry under existing conditions.8 Labor is surrounded here with advantages in the forms of rich natural resources and of mechanical appliances such as never before were combined. Because of the scarcity of workers in particular protected industries, wages may be temporarily higher in them than in some other industries; but such workers form a small fraction of the population, and it is impossible to show that the general scale of wages in all occupations is raised by the tariff protecting this fraction.
There is, of course, no question that every tariff change affects certain enterprises and classes of workmen. Enterprisers already acquainted with and engaged in a business always may hope to gain by the higher prices immediately following a rise in the tariff rates on their particular products. Though they are granted no enduring monopoly by the protection, they for a time enjoy the advantage of being on the ground, and may reap the first fruits of the favoring conditions. The enterpriser usually profits when the price of his product suddenly rises. Usually skilled workmen are affected slowly by competition when there is any considerable increase of prices in their special industries. The important question is, Who bears the burden of the higher prices that result from a tariff? The burden is very soon distributed. A part of it may be for a short time borne by the retail merchants, but ultimately nearly the whole of it must be borne by their customers, the unfortunate, less favored citizens. The weight falling on each is usually small, often unsuspected, always hard to measure. The increased benefit is concentrated in a few industries and accrues to a comparatively few producers. Here is a recipe for riches: get everybody to give you a penny; it’s so little that no one will miss it, and it will mean a great deal to you. Something like this happens in the case of many protected industries; every consumer of the article pays a few cents more, a small group of wage-earners temporarily gains, and a few enterprisers wax wealthy.
§ 9. Tariffs and unemployment. The claim that a low tariff is bad for the workers is made with peculiar success in any period when unemployment is greater than usual. It is usually unconvincing to reply that again and again equally bad periods of unemployment have occurred when a high tariff was in force, and that often the most highly protected industries are most affected. It is unconvincing to suggest that fluctuations of unemployment are related rather to the rhythm of industrial cycles and panics, than to any particular level of the tariff, whatever it be.9 The fact that at the moment is seen is that here are some men for the time out of work, and here are some foreign goods coming in. Of course, what is not seen is that if we stop importing goods we thereby eventually will stop the exportation of goods of equal value now being sent in payment, and this must throw as many men out of jobs as we helped into jobs by raising the tariff. But the view easy to take is the short view, and the ulterior consequences seem to the popular mind to be vain imaginings.
An explanation of periodic unemployment involving the same error in a smaller degree is to attribute it to immigration. It is true that after a crisis has occurred, and during the period of widespread unemployment, limitation or prohibition of immigration may prevent aggravating the evil at the time. But immigration as a continuing policy is not the cause of periodic unemployment, but its bad effects will rather be shown in the permanent lowering of the general level of wages.10 But, whatever be the general level of wages, periods of unemployment will recur as long as means have not been found to control marked credit and price fluctuations within the business cycle.
§ 10. Exports and exhaustion of the soil. It has been ingeniously argued that a tariff may keep some of the natural agricultural resources of a new country from becoming quickly exhausted. The export of food takes out of the soil and out of the country fertile qualities never to be returned. The shipment of several hundred million dollars worth of food products year after year represented a tremendous drain from the soil of the United States, but this has now largely ceased. The assumption, however, that the use of the food in this country preserves the fertility of our own fields is in the main mistaken. The fertile material in the food for human consumption hauled to a town five miles away from the field is almost as entirely lost as if it were shipped to Europe. Engineering skill has as yet succeeded in returning economically to the fields from which it comes hardly a fraction as much fertile organic matter as that which flows into the sewers, that is dumped into river and ocean, and that is buried in heaps at the borders of our own cities. Artificial fertilizers are increasingly used, to be sure, but they are obtained in other ways. On the other hand, the increased use of iron, coal, and timber, as a result of encouraging manufacturers, has very effectually hastened the exhaustion of the natural resources of the country.
§ 11. Protection as a monopoly measure. It has rightly been observed that a new country has a limited potential monopoly in certain kinds of products and that a tariff may make it effective. The rapid opening up of America with its rich natural resources greatly benefited the average consumer in western Europe, although it caused a loss to a special class of landowners.11 Whether the citizens of the older or of the newer country shall reap the greater benefit in the trade depends on the reciprocal demand for the two classes of goods, as was seen in discussing the equation of international demand. A wide margin of advantage may go to one party and a narrow margin to the citizen of the more favored land. To put it concretely: America, having great natural resources for agriculture, might continue to trade food for manufactured goods even though England reaped most of the benefits of the trade. An American tariff on manufactures from England would, under such conditions, check the demand for English products and compel some Americans to leave farming. This reduction of the American supply of wheat or corn and of the American demand for English manufactures compels a new ratio of trade (expressed in prices). It is conceivable that trading fewer goods with a larger gain on each trade would give a larger total of gain to the favored nation. Thus, foreigners may conceivably be compelled to pay a part of the tariff duties to enjoy the favored market. This is but a special case of the monopoly principle; the government by law artificially limits the supply of goods offered by its citizens.
This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed conditions seldom occur in a marked measure, but they may exist, and probably have existed in America. When the great system of internal transportation was developed in the United States before that of the other new countries (say from 1840 to 1894), this country had such peculiar advantages for the production of food that the quantity was enormously increased and agricultural prices fell.12 At such a time the tariff may have worked toward checking the fall and earlier reëstablishing a more favorable ratio. It did this by making prices of manufactured goods in this country artificially higher and thus tempting men from rural to urban callings. But the limited application of the principle must be recognized. The potential competition of undeveloped countries on all sides, seeking to develop their resources, and profiting by the higher prices of food in the world-market caused by our tariff, threatens the peculiar advantages of the favored land. Russia, Argentine, and Australia have rapidly taken the place of America in supplying food to western Europe, in part, no doubt, because we refused to take Europe’s goods in trade. A great nation with its manifold interests is not eminently fitted to practise the gentle art of monopoly.
The period in America from about 1840 to 1890 shows certain absurd contradictions in economic policy. By governmental action, national, state, and municipal, enormous grants of money and lands were made in aid of transportation. Canals, roads, and railways were built into new agricultural territory far faster than was healthy and normal. A prodigal land policy put a premium upon a wastefully rapid extension of the farming area. These things were done to favor the agricultural states; but agricultural prices fell so greatly that our farmers for a long period were nowhere prosperous, and great numbers of them, both in the East and in the West, were ruined. At the same time a high tariff on nearly everything the farmers needed to buy was the political spoil obtained by the eastern and middle states. This further depressed the condition of the farmers and forced them or their sons into urban industries. A slower development would have occurred without the waste of national resources in such conflicting policies of artificial stimulation.
§ 12. Equalizing “costs of production.” An idea advanced incessantly by American advocates of a protective tariff is that the tariff on every article imported ought always be high enough to equal the difference between the higher costs here and the lower costs abroad. The equalizing-cost rule was laid down in different words by each of the two leading political parties in the campaign of 1912. The Republican platform set forth what it called the “true principle.”13 The fallacy of this rule appears, however, in the study of the confusion connected with the idea of monetary costs.14
“Costs of production” in the “true principle” means the monetary costs of the enterpriser. Now a first difficulty is that costs are not uniform for all establishments in any one industry, and a tariff high enough to protect some is entirely too low to protect others. As long as a tariff rate is too low to exclude every unit of the foreign product, its importation is conclusive proof that for some home producers the tariff rates fall short of the “true principle” (better proof, indeed, than the most elaborate investigation by any tariff board could be). The indubitable truth is that no trade ever can take place (in a monetary régime) unless the monetary price is lower in the exporting than it is in the importing country. This virtually means that the product cannot be profitably exported unless the monetary costs of production (“together with a fair profit”) of the article exported are for each party less than those of the other party in the other country. The so-called “true principle” would lead thus to absolutely prohibiting the importation of every article to which it was applied.
In the enactment of the Underwood tariff, the Democratic party, traditionally committed to a tariff for revenue, applied what was called the “competitive principle.” This “competitive principle” is essentially the same as the Republican so-called “true principle” of equalizing the cost of production. It is a prohibitive, not a free-trade, principle. Strictly applied, it would cause complete exclusion of imports. But, as applied to selected articles which it is desired to exclude in order to “protect” the domestic producer, this principle would simply prevent the rate being placed appreciably higher than was needed to exclude them. Anything beyond that point but offers temptation and opportunity for the formation of a monopoly by domestic producers. Then, too, the rate may intentionally be fixed so as to make just possible the survival of the most favorably located or most efficiently operated establishments, while compelling the abandonment of other establishments.
It will be seen that the rule of equalizing the cost of production is really not an additional argument for protection, but rather is a rule for fixing the proper rate, on the assumption that “protection” is desirable on grounds of any or all of the staple arguments offered in its support. Just how high ought and must the rate on a particular article be to start an infant industry, to preserve the home market for any group of producers, to retain both profits, to give a “favorable balance of trade,” to raise wages, and to prevent unemployment? The answer given by the rule is: high enough to prohibit the importation of goods. Either the rule of equalizing monetary costs, or the competitive principle, if strictly applied in favor of all producers, would prohibit all imports. If applied in varying measure in favor of the more favorably situated producers (as regards location, transportation, natural resources, skill, capital, etc.), the rule would protect some and eliminate other home producers. Here again is seen the truth that protection, if it protects, is prohibition of imports.
§ 13. Tariff legislation and business depressions. The relation between new tariff legislation and the business conditions following it has been the subject of much debate in political campaigns. In the few cases where a relationship has been most often asserted to exist, it is more probable that the tariff change was the result of business conditions preceding it than that it was the cause of the conditions following it. For usually a tariff has been revised downward because a few years of prosperity with large imports had so increased customs duties that the government has had surplus revenues. Just when the tariff was reduced, the conditions were ripe for a crisis. This happened in 1857 (already in 1856 there had been a preliminary halt of business), again in 1872, and on a small scale in 1883. But the main reduction resulting from the compromise act of 1833 did not occur until after the crisis of 1837-39; the Walker Act of 1846 was passed just as business was starting upward on a long wave of prosperity; and the act of 1894 was passed a full year after the severe crisis of 1893, when business had already entered upon a period of depression. In none of these cases does it seem reasonable to attribute business depression to the reduction of the tariff, as is commonly done in protectionist arguments even to the point of attributing the panic of 1893 to the reduction of the tariff a year later!
At several times the tariff has been raised soon after a crisis when a good occasion was presented by the need of larger revenues, as in 1842, 1860, 1875, and 1897. Business at such times is just at the point of the cycle when prosperity is due. The higher tariff of 1842 was succeeded by the low tariff of 1846 without any check to business. The war obscured the ordinary industrial effects of the tariff acts of the sixties. The increase in the year 1875 was followed by four years of hard times and slow recovery. The increase of the tariff in 1890 occurred as business was nearing the top of the cycle, and was followed by two years of prosperity, culminating in the very severe crisis of 1893. The authors of the tariff of 1897 were peculiarly fortunate in the time of their action, for the country was just fairly recovering from the very severe crisis of 1893, and prosperity was to continue (with brief hesitation in 1900 and 1903) until the severe crisis and panic of 1907.
The advocates of higher rates are, of course, correct in declaring that the great business prosperity of the years 1915 and 1916 resulted from the unexpected demands in foreign trade growing out of the war, and is not to be credited in large measure to the act of 1913. But reason requires that the same restraint be exercised in crediting to higher protective acts the prosperity that has in some—not all—cases followed their enactment; and requires further that the act of 1913 be not held accountable for the reaction of trade in 1920, inasmuch as a reaction was sure to occur soon after the war ended no matter what kind of tariff act we might chance to have at the time.
§ 14. Harm of sudden tariff reductions. It is rarely appreciated how great is the tactical advantage which the advocates of a high tariff enjoy in popular political discussion. They can so easily impress the popular judgment with the evident fruits of their own policy and with the immediate dangers of the policy of their opponents. When a protective rate is first applied or is increased, it calls into existence something visible and tangible, which can be measured in terms of factories built, men employed, and products turned out. The increased cost of these results is diffused among many consumers and reaches them in such indirect ways and in such small increments of price that they are quite unaware of the way they are affected.15
On the other hand, reduction of the tariff works in a direction the reverse of its enactment. It may cause local crises and may even bring on a general crisis. The benefits of the lower prices are diffused and lost to view; the immediate injury is concentrated and strikingly evident. Factories are closed, investments depreciate, laborers are thrown out of employment. The organic nature of local industry causes these evils to be felt by many classes. Merchants, professional men, servants, and skilled laborers, that are tributary to the depressed industry, suffer. The effects are transmitted to commercial and financial centers and often credit is much shaken. Then follows a slow and painful process of readjustment.
The low-tariff advocates in America undoubtedly have underestimated these immediate effects. They have been too abstractly doctrinaire, have argued too absolutely for the merits of free trade, to be applied instantly regardless of the existing distribution of investments and of occupations. They have opposed one extreme system by another, with no thought of the inexpediency and injustice of sweeping changes. There is a strong feeling among business men that any tariff, be it high or low, is better than a shifting policy. Despite the great preponderance of domestic production over foreign trade, it is perhaps too much to say that the tariff is unimportant in our present conditions. It can, however, be truly said that business can adjust itself in large measure to any settled conditions, and that radical changes, especially sudden and large reductions, are fraught with evils. Long before a new tariff law goes into effect, even months in advance of its passage, while it is merely in prospect, the course of trade is abnormally affected. If the rate is likely to be raised, large importations take place under the lower rate, and for a considerable time after the law goes into effect imports are small, while prices rise and domestic production gradually increases. But if the rate is likely to fall, importations are for months meager, stocks of goods are reduced to the lowest point, and when the lower rate goes into effect, large importations follow to the injury of domestic producers. In many cases a year or two of notice, time given to enterprisers to adjust their business, would probably do away with a large part both of the serious losses and of the lottery-like gains that otherwise occur.
The obvious measure of precaution and of justice would be to put any new rate into effect gradually.16 The difficulties are of a political nature and in the desire of the party in power to “make a showing” at once of the results of its campaign pledges, in the one case by starting and stimulating industries through a higher tariff and in the other by reducing prices to consumers through a lower tariff. Under the new permanent tariff board, constituted to suggest tariff changes and to administer the tariff laws, it would be possible to apply some such feature.
§ 15. Some lessons from our tariff history. From the checkered course of tariff history in America it is difficult to draw clear lessons of wisdom for the future; but at least certain negative conclusions may be safely drawn. It is a history of a vacillating public opinion toward the policy of protective duties. Always the policy has kept some hold on public sentiment, but it has varied in strength, now waxing, now waning. The time of revisions has been determined nearly always by varying needs of revenue. When more income has had to be raised, this has nearly always been made the occasion and pretext for increasing the degree of protection for many industries. This is not at all a necessary connection, for it would be possible to couple internal revenue taxes and customs duties in such a way that the rates would go up and down together and give the varying amounts of revenue required for the government without appreciably altering the relative profitableness of various private enterprises. Now that customs duties are no longer the chief source of revenues for the federal government, and are outweighed many times in fiscal importance by income taxes and internal revenues, the question of fostering favored industries should be more easily kept distinct from that of raising public revenues.
Our tariff history is too largely a record of special favors granted to classes of citizens, to citizens of certain localities, and to particular enterprises. This is apparent even in a general survey, but almost every more detailed examination of particular protective rates reveals evidence of suspicious and sometimes scandalous personal influences at work. The protective policy has always professedly been advocated for the general welfare, to raise wages or to make the country prosperous; but the initiative has always been taken, and the valiant work in contributing funds for campaign purposes and in lobbying bills through Congress has been done, by the interested manufacturers. Even if it were beyond question sound in principle to exclude goods that can be bought more cheaply by trade, it is very doubtful whether any net good could have resulted from this policy as it has been in fact applied and followed. The frequent and unpredictable changes have been a great evil, and have again and again brought unmerited losses to the many in business and still greater and unearned gains to a favored few. It is incredible that such a hit-or-miss, in large part selfishly determined, policy could have been an important cause of our national prosperity. The fundamental causes of the general high wages and popular welfare that we have enjoyed is to be found rather in our rich natural resources, our capacity for self-government with free institutions, and the industrial energies of our people.17
[1 ]See ch. 3, § 12 and § 13.
[2 ]In European countries, on the contrary, the rates that have been mainly effective have been those levied upon food products, and the agricultural landholders have been the “protected interests,” such as the England “landed aristocracy,” the German agrarian “Junkers,” and the French peasant landowners.
[3 ]See ch. 15, § 1.
[4 ]See ch. 3, § 7 and ch. 15, §§ 7-11.
[5 ]In ch. 15, § 8.
[6 ]See ch. 2, § 8.
[7 ]That there is a certain measure of truth in this opinion is recognized in our discussion of the standard of deferred payments, ch. 5, § 9. But the relation of a world-wide appreciation of the standard money commodity with the burden that this change puts upon debtors has nothing to do with the question now before us, viz.: Does a protective tariff enable a country to keep and increase its proportion of the world’s stock of gold; and if it could, would it be a general benefit?
[8 ]See Vol. I, especially p. 228, and chs. 34 and 36.
[9 ]See on wages in times of crises, ch. 10, § 6 and § 7; and on tariff changes, ch. 10, § 11 and § 13 below.
[10 ]See ch. 25.
[11 ]See Vol. I, pp. 361 and 443.
[12 ]See Vol. I, p. 436, for average wheat prices in England, practically in the world-market.
[13 ]See ch. 14, §12
[14 ]See ch. 15, § 5 and § 6.
[15 ]See § 8. On the next paragraph, see ch. 10, § 11.
[16 ]For example, the maximum alteration in any year might be limited to 3.65 per cent of the value of the goods and in any case not to exceed one tenth of the old duty, this change to be applied day by day. Thus, if, on a valuation of $1000, the duty collected under the old rate has been $400 and under the new law is to be $290.50, three years would be required for the full change to become effective, the reduction each day being $.10 per $1000 valuation. The administration of such a rule would be simple, and it has been favored by men of practical commercial experience.
[17 ]See Vol. I, e. g., pp. 228, 431, 445ff, 466, 490, 506ff.