The Online Library of Liberty

A project of Liberty Fund, Inc.

• One: Free Trade—a Timely Proposal
• Two: the Nature of Protectionism
• Three: the Positive Case For Free Trade
• Four: the Reasons For Protectionism
• Five: Progress Toward Free Trade
• About the Author

Two

The Nature of Protectionism

TYPES OF IMPORT BARRIERS

Tariffs—schedules of duties on imports—are the traditional tools of Protectionism. A duty, if high enough, can severely restrict or even completely cut off imports of a commodity. Nowadays, however, most countries have import controls that make tariffs seem weak in comparison. An import quota directly limits the quantity of a commodity that may be imported during a given time period. The consumer does not enjoy a lower price just because a quota rather than a tariff limits the supply of an imported commodity to a certain amount: the spread between the world price and the local price only goes to privileged importers as a “quota profit” rather than to the government as a tax. Allotment of scarce import privileges is but one of the special problems arising under a quota system.

In comparison with most other countries, the United States has only a few import quotas. Still, imports of peanuts, rice, rice products, and certain fats and oils have been under quota since World War II. The famous “cheese amendment” to the Defense Production Act of 1951 added cheese and other dairy products to the list of goods under quota. The government’s farm price support program has caused some of the situations seeming to call for import quotas: cheese and honey, for instance, have sometimes been imported at low prices from abroad while domestic output was sold to the government as surplus. Almond imports were put under quota in 1952 and filbert-nut imports in June 1953. On April 1, 1953, import quotas on dried milk, dried cream, dried buttermilk, and peanuts were set at zero; that is, these imports were completely forbidden. The “cheese amendment” to the Defense Production Act expired on June 30, 1953, but the quotas that it provided for have been extended under authority of other legislation. There is a lot of agitation these days for import quotas on petroleum products, and the chairman of the National Labor-Management Council on Foreign Trade Policy has suggested quota protection as a substitute for tariff protection on a great many products.

Unlike most countries, the United States does not use exchange control. Under exchange control, exporters must sell the foreign money they earn to a government agency at an official price; and people who need foreign money can get it only according to strict rules. This foreign-exchange rationing is very effective in controlling not only imports, but also foreign travel, foreign lending, and all other transactions involving payments abroad. The combination of exchange control, quotas, and tariffs that many countries enforce these days amounts to very rigid, and in many respects discriminatory, control over almost all dealings between their own people and foreigners.

CUSTOMS COMPLICATIONS1

The complications and arbitrary enforcement of United States customs laws harass importers. The Smoot-Hawley Tariff of 1930, still in effect, says that every article not specially listed should be taxed as the article it most closely resembles. Doubtful articles are classified in whatever way makes the duty the highest. Zealous customs officials, until overruled by the Customs Court, taxed radar equipment at 65 per cent of its value as clock-like measuring devices rather than at 15 per cent as electrical goods. Finding small lengths of elastic braid between the linings and outer material at the back of some British raincoats, officials taxed the coats not at 10 per cent as raincoats but at 45 per cent as “articles in part of braid.” Importers of men’s evening clothes must import the trouser braid separately and sew it on later to keep the clothes taxable at 25 per cent as suits rather than at 45 per cent as braided articles. The lace and fringe classifications of the tariff law are worded with what Fortune magazine calls “predatory inclusiveness.” Accordingly, fringed rugs pay a 45 per cent duty rather than the regular 30 per cent duty. An importer of cheesecloth for use in making cheese had to carry his case through the Court of Customs and Patent Appeals when customs officials considered the reinforcement at the edges of the cloth to be a “fringe,” presumably ornamental. Jewelry ordinarily pays a 55 per cent duty; but when customs men can classify it as “artificial flowers, fruits or leaves,” it pays from 60 to 90 per cent. Upholstered chairs must sometimes pay a duty as “wool.” “Animate” spring-wound toys pay a 25 per cent duty, while “inanimate” toys pay 50 per cent. In a recent Customs Court trial, the government, to collect the higher rate, claimed that a toy policeman on a motorcycle was “inanimate,” pointing out that the spring motor turned the motorcycle wheels and not the policeman himself. Since synthetic rubber contains both rayon and carbon black, the customs men get the highest possible duty in each case by classifying truck tires as rayon and passenger-car tires as carbon black. Customs officials, learning that pingpong balls can be fired from a toy pistol, have raised the duty from 10 to 95 per cent by reclassifying the balls as “ammunition.” Following a rule for classification by “material of chief value,” the customs men once taxed a recording of famous church bells imported by a radio network, not as a record, but as “church bells and gongs.”

Since the tariff law provides several different complicated systems of appraising imports dutiable according to value, the result is sometimes fictitiously high. When the University of Chicago Press imported 1,000 copies of A Reverse Index of Greek Nouns and Adjectives, the customs men assessed the book at a cost-of-production value of $50 per copy instead of at the $6 cost-of-production value claimed by the Press. When the Kelvinator people imported for their own files a technical film in Spanish made in Canada for Latin America, they valued it at the cost of reprinting. The customs appraiser valued the film at the cost of production and assessed a large penalty for undervaluation.

As just implied, the law forced an importer to declare a value on his goods. If he played safe and declared a value that turned out to be higher than the official appraisal, his own figure stood and he got no tax refund. But if his own value turned out lower, he had to pay, besides the regular duty, a stiff fine proportional to how much the official appraisal exceeded his own. If the importer guessed less than half the final value, his merchandise was subject to forfeiture as a presumtively fraudulent entry. As Fortune summed up this unfair arrangement, which prevailed until recently, the importer was presumed to be a liar unless proved a fool, in which case his estimate was preferred to that of the customs appraiser.

Delays in customs sometimes cost importers dearly. Customs men held up some specially-designed stadium boots being imported for the Christmas market while trying to decide whether their “component material of chief value” was the crepe-rubber sole, the leather upper, the wool lining, or the rayon sock lining. The decision finally came through in February! A shipment of women’s coats from Holland was delayed three weeks while officials wondered whether to charge duty according to the wool or the buttons. Some treacle tart (molasses pie) from England was held up because a customs inspector said there was no such thing as treacle. An important cause of delay on goods to be valued at their cost of production is that officials may have to make cumbersome investigations of production processes in the exporting country itself.

Even if an importer succeeds in getting his goods released from customs while the officials make up their minds, he risks being billed later for additional duties. An Oregon linoleum firm bought $325 worth of asphalt floor tile from a Canadian manufacturer, paid the estimated duty of $97.67, laid the floor, and collected from the customer. Meanwhile, chemists for the Customs Service found that the tile contained synthetic resins making it fall into a higher duty classification. The American firm got a bill for an additional duty of $949.05, wrote off the loss, and stopped importing asphalt tile. Changes such as this sometimes wipe out an importer’s profit on merchandise sold to consumers months or even years before. Hearings in 1952 on a proposed customs simplification bill turned up some cases in which the final duty assessment was not made until ten or more years after the original importation.

Such disputes and delays in customs classification and valuation are by no means rare. At the end of 1952, 723,000 import entries had not been finally decided upon. Delays of two to four years are common. By early 1953 about 146,000 classification and valuation cases were clogging the Customs Court.

The customs regulations harass importers in still other ways. Imports of Dutch bricks were discouraged by the requirement that each brick be stamped “made in Holland.” To enter the United States at a duty of “only” 40 per cent, even a surgical needle would until recently have had to bear the names of its maker or purchaser and of the country of origin die-sunk conspicuously and indelibly on the outside. Twenty thousand bags of cocoa from British possessions in Africa once had to be sent back to Liverpool because they were labeled in French. A customs man once kept a shipment of boxed candy from the Netherlands out of the United States because, although the net weight was clearly printed on each label, he considered the appearance of the package “misleading.”

A British delegate to the 1953 Congress of the International Chamber of Commerce in Vienna had a field day displaying the mountains of red tape that confront an exporter to the United States. Before World War II, a shipper had to fill out eight documents telling what he was shipping and its value. Now he must fill out 185 documents, weighing nearly 4 pounds.

Thirty-five bales of hops imported from Yugoslavia by a St. Louis brewery figure in an example of just plain unfairness on the part of the U. S. Government. These bales had accidentally got soaked with oil during the ocean voyage, turned out to be wholly worthless, and were finally burned under the eyes of the customs authorities. The importer appealed the duty assessment, claiming that the goods were a nonimportation (should be treated as if never imported). Yet even the Court of Customs and Patent Appeals ruled against him.

The many examples cited above bear out the observation of the Detroit Board of Commerce that “some customs officials continue to look upon importers as businessmen engaged in a type of semilegal skulduggery that is to be discouraged at all cost.” True, reform of some of the worst customs complications is proposed now and then. But these complications illustrate a Protectionist mentality that can hardly be circumvented but must be fought head-on.

UNSTABLE TRADE BARRIERS

Aside from the restrictiveness of American tariffs and customs regulations, their instability is a serious barrier to trade. “Escape clauses” in trade agreements and provisions of the Agricultural Adjustment Act and other laws permit tariff increases or quota cuts by administrative as well as Congressional action. Although our foreign-aid officials had been urging the Danes, French, Dutch, and Italians to increase cheese production and so earn more dollars, Congress tacked the “cheese amendment” onto the Defense Production Act. Other products getting tighter tariff or quota protection in recent years include dried figs, felt hats, almonds, and filberts. Recently, in order to raise the duty from 25 to 35 per cent, the customs officials have been trying to declassify dehydrated garlic powder, dehydrated kibbled onions, onion powder, and mustard seed as spices and reclassify them as prepared vegetables or vegetables reduced to flour. President Eisenhower has been faced with the task of deciding on recommendations by the Tariff Commission for higher duties on briar pipes and silk scarves. In recent years the Tariff Commission has also investigated proposed tariff increases on many other products, including motorcycles, bicycles, wood-wind musical instruments, garlic, chinaware, clothespins, glacé cherries, fish, rosaries, and even pregnant mares’ urine. Agitation has been going on in Congress for higher tariffs on lead, zinc, tin, mercury, and antimony. It is important to realize that trade is discouraged not only when tariffs or quotas are actually tightened but also when such action is expected or feared. Foreign exporters whose very success might provoke higher duties rightly wonder whether it is a worth-while gamble to spend money and sales effort making business contacts and developing new markets in the United States.

THE “BUY AMERICAN” IDEA

Another example of Protectionism is the so-called “Buy American Act,” a hodgepodge of legislation dating back to the depths of the depression in 1933. As interpreted by administrative regulation, this act requires Federal departments and agencies buying goods for government use to prefer American over foreign suppliers unless the American bid exceeds the foreign bid by 25 per cent plus the amount of import duty. Exceptions to this rule are seldom made. In one instance the Army split a contract for microscopes evenly between domestic and foreign suppliers, although the bid of an Italian company was 23 per cent below the two American bids. In the spring of 1953 the Defense Department rejected the low bid of an English company on six or seven million dollars’ worth of generators and transformers for the Chief Joseph Dam power project. Yet the English price would have saved nearly a million dollars, not counting an additional $681,000 that the government would have got in import duties on the equipment. (Newspaper accounts suggested that the government’s concern about differences between specifications of the English and American equipment was an after-thought; Army Engineer officials were quoted as saying that the “Buy American” policy was the only real issue. After rejecting the first set of bids, the government received another set and awarded the English company a fraction of the original contract.) Laws in the Buy-American spirit govern spending of Rural Electrification Administration loans, Federal Housing Administration funds, and merchant-marine subsidies. The Defense Department Appropriation Acts for the fiscal years 1952 and 1953 give preference to American-made food, clothing, cotton, and wool products. The Marshall Plan and Mutual Security Acts require half the goods bought with foreign-aid dollars to go in American ships despite lower freight rates on foreign ships.

All such laws harm the American public in at least two ways. First, they raise the cost of government purchases; if it were established government practice to buy from the cheapest source, many domestic bids would no doubt be lowered to meet foreign competition. Unnecessarily high costs require either higher taxes or bigger government budget deficits than otherwise. Second, such Protectionist laws hamper foreigners in earning dollars and so contribute to the need for foreign aid at the expense of the American taxpayer.

THE PROTECTIONIST MENTALITY

Protectionism reveals its nature very clearly in all the measures described above. Unwittingly, Secretary of Agriculture Benson gave another good example of Protectionist thinking in his testimony before a Senate committee in April 1953. Mr. Benson cited a cargo of farm products found to be nearing American shores. Existing laws were so unwieldy, complained Mr. Benson, that the ship successfully landed its goods before an embargo could be ordered!

Free Trade means letting people buy and sell as they see fit, abroad as well as at home. Protectionism means using the force of government to keep people from trading as they see fit or to fine them for it. Import barriers and naval blockades have the same objective—to block trade. Protectionism protects us not against foreigners but against ourselves—against our own desires to make advantageous purchases. The executive secretary of the California Art Potters Association expressed matters just backwards when he told the Senate Finance Committee on February 27, 1951 that tariff reduction

Contrary to what the witness says, tariff reduction—and this would hold true all the more for Free Trade—does not “force American women to look to some foreign country for style and utility in ceramic household items.” Free Trade does not force; it permits. It permits people to look abroad or at home or anywhere they wish for pottery. It is Protectionism that uses force: it penalizes buyers of imported pottery to make them buy California pottery instead. The pottery witness is wrong again in saying that his “domestic industry does not seek special favors or grants or subsidies” from the government. Special favor is just what he does seek! He wants the government to shunt customers his way by blocking them off from other producers who might serve them better. He evidently dislikes the pattern of economic activity that would prevail in the United States if workers and property owners were left free to use their abilities, capital, and resources in whatever ways best met the demands of uncoerced consumers. No; like a typical Protectionist, he sees the need for governmental economic planning—piecemeal planning through taxes on imports.

Protectionism resembles a kind of governmentally-planned partial destruction of transport facilities. Railways, planes, trucks, ships, and other improvements in transportation cheapen the cost of getting useful goods from faraway places. Using the example of imports from Belgium into France, Frederic Bastiat noted over 100 years ago that

As Bastiat implied, tariffs are “negative railways.” William Graham Sumner showed a similar insight in entitling one of his books Protectionism, the -Ism which Teaches that Waste Makes Wealth.

As Henry George wrote,

Such is the contrast between Free Trade and Protection. Perhaps a case can be made out in favor of Protection; we shall examine the Protectionist arguments later on. First, however, let us consider the positive case for Free Trade.

[1 ]Since this was written, early in the summer of 1953, Congress has passed a watered-down Customs Simplification Act that adopts some of the less controversial of the timid reform proposals referred to in the last paragraph of this section. For instance, undervaluation penalties are dropped, the use of the entered value when higher than the final appraised value is ended, and marking requirements are eased.

[2 ]Economic Sophisms (translated by Patrick James Stirling, New York: G. P. Putnam’s Sons, 1922), pp. 69-70.

[3 ]Protection or Free Trade (New York: Robert Schalkenbach Foundation, 1949), p. 54.