Front Page Titles (by Subject) Four: The Reasons for Protectionism - Free Trade: America's Opportunity
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Four: The Reasons for Protectionism - Leland B. Yeager, Free Trade: America’s Opportunity 
Free Trade: America’s Opportunity (New York: Robert Schalkenbach Foundation, 1954).
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The Reasons for Protectionism
Although the Free-Trade case looks strong, Protectionism has triumphed so far in the world of practical affairs. Doesn’t this fact suggest some grave flaw in the Free-Trade case after all? Free Traders should, if they can, show why their arguments have met such widespread scorn in practice. That is what the following sections try to do.
It is unfortunate, as a matter of practical politics, that the Free-Trade case involves some abstract reasoning: to understand it, one needs some ability to think clearly.
The case for free trade is primarily rational and unspectacular. To appreciate it calls for a broader and deeper understanding of economics than most people possess, or care to acquire. But to the mass of the people, it seems plausible that, if imports are kept out, there will be more work for the home population—at least for specific groups; that domestic wages will not be endangered by the “starvation” wages paid abroad; that money will be kept at home; that domestic producers will have a better market for their goods. The most fallacious of the protectionist arguments are the ones which carry the greatest popular appeal.11
The typical Protectionist fallacies and half-truths can be stated forcefully and in a few words, while the answers to them tax the patience of the man in the street. The Free Trader is at a disadvantage in being, generally, too well-informed to use arguments as simple, appealing, and false as those of the Protectionists.
The Protectionist can exploit what J. E. Cairnes called “the prejudices of mere experience.” He can point to “facts”: here is an industry that has thrived under tariff Protection; here is one that has suffered after a tariff cut. When a particular industry thrives behind a tariff wall, the Protectionist can coolly ignore the accompanying diffused but, in the aggregate, more-than-offsetting harm done to consumers, exporters, and others. When a particular industry suffers or appears to suffer from a tariff cut, he can ignore the more-than-offsetting benefits. Precisely because such offsetting harm or benefit is by its very nature diffused, the Free Trader cannot “prove” it with spectacular “facts.” The Free Trader can show the results of Protectionism by valid reasoning that can stand critical inspection, but his reasoning goes to waste on people too impatient or too dull to pay attention.
The Protectionist actually takes pride in his narrow viewpoint. He sticks to plain facts—clear examples of benefit from Protection or of damage from foreign competition. He does not concern himself with remote, intangible, theoretical consequences. Thank God, he is no impractical theorist who never met a payroll! If he happens to be a watch lobbyist, he must struggle for patience with the poor understanding of Congressmen who never had practical experience in retailing watches. If he is a fishing-tackle man, he pities the ignorance of trade-agreements negotiators who never had practical experience in manufacturing fishing tackle.12 He scorns the theorist’s “over-all” view of the economic system and sticks to the down-to-earth case-by-case approach. In so doing, he refuses even to consider the decisive heart of the tariff controversy.
The plain man—I do not think this is an overstatement—calls a “theory” anything he does not understand, especially if the conclusions it is used to support are distasteful to him. . . . It is only because he does not understand “theory” that the plain man is apt to compare it unfavourably with “practice,” by which he means what he can understand.
The practical man is apt to sneer at the theorist; but an examination of any of his most firmly-rooted prejudices would show at once that he himself is as much a theorist as the purest and most academic student; theory is a necessary instrument of thought in disentangling the amazingly complex relations of the external world. But while his theories are false because he never tests them properly, the theories of science are continually under constant test and only survive if they are true. It is the practical man and not the student of pure science who is guilty of relying on extravagant speculation, unchecked by comparison with solid fact.13
For all his vaunted realism, the Protectionist theorizes without knowing it. Furthermore, his haphazard theories are far less able to stand inspection than those of the trained theorists whom he scorns. The Protectionist sees the economic system as ever-threatened by unfair competition, cheap foreign labor, dumping, spreading pools of unemployment, and stagnation. Shaky as his theories are, they are the ones that carry weight among self-styled “practical” men. That is why it is necessary to study his theories—and more carefully than the Protectionist would like. The following discussion is unavoidably theoretical because the whole Protectionist case is theoretical—and sloppily so.
Space permits considering only the Protectionist arguments most commonly used today. Even these are numerous, but their mere number should not fool you into thinking that the Protectionist case must be strong. The very fact that the Protectionists, lacking even one or two really strong arguments, must pile weak argument upon weak argument itself casts doubt on their case. Furthermore, as we shall see, some of the Protectionist arguments contradict one another.
SAVING AN INDUSTRY
To judge from testimony at Congressional committee hearings, the most common Protectionist argument is that such-and-such an industry is suffering from “unfair” foreign competition and must be saved by a higher tariff or a tighter import quota. The typical witness points out how imports are underselling his product, how his sales are dropping off, and how his workers face unemployment. Very likely the witness will emote a little: his workers have rare skills acquired by a lifetime of specialized work in the widget industry; these widget workers are good, loyal American citizens, the backbone of the nation, who live along elm-lined streets in peaceful little towns, own their own homes, support the schools and churches, and have sons who fought in Korea. Congress must save their jobs. (Such stories are effective: the unfortunate widget workers are definite, specific people, while the vast majority who bear the diffused harm of Protectionism are nameless and forgotten.)
Congressmen are sometimes rightly skeptical about whether conditions really are as bad as the witness claims. But if evidence is produced, the typical Congressman regards the case for stronger import barriers as airtight. Secretary of Commerce Weeks exemplified the similar confusion of a great many people when he said, shortly before taking office, that “you cannot go on importing goods which hurt American business.” Even President Eisenhower, in his first state-of-the-union speech, said that customs reform “must not ignore legitimate safeguarding of domestic industries, agriculture and labor standards.” Senator Malone of Nevada, during a tirade against a Japanese microscope priced about 60 per cent below the equivalent American model, spoke as follows:
The point I make is this: We could buy the cheaper one and allow the Japanese and the Germans to manufacture all the precision instruments. It is a fine theory as long as you only have that one industry—it is not a large industry, not a large employer—but if you follow that through, you kill all the industries, and then the United States and all of our businesses are down to that same level.14
People who think like Secretary Weeks and Senator Malone are falling into the “fallacy of composition”—the fallacy of assuming that what is true of the part is necessarily true of the whole. For example, one person in a crowd can see a parade better by standing on a soap box; but it is wrong to conclude that everybody can see better if everybody stands on a box. Similarly, a particular industry may suffer from competitive imports, and the facts are plain to see: lost orders, idle factories, displaced workers. But if anyone concludes from this that the American economy as a whole is suffering and would benefit from Protection to the afflicted industry, he is committing the fallacy of composition. To protect one industry hurts consumers in the form of higher prices than otherwise and so may reduce their buying power as customers of other industries. It also hurts all industries into whose costs the Protected products directly or indirectly enter, whether as raw or semifinished materials, as tools, as means of transportation, or as items in the cost of living of their workers. Finally, by cutting the dollar earnings of foreigners and thus their ability to buy American goods, import barriers harm the businessmen and workers in American export industries. (In fearing that imports could kill off all American industries, Senator Malone evidently supposes that foreigners will give us all the goods we need free, taking no American goods in return. The idea is pleasant but absurd.)
The hearing before the House Ways and Means Committee on May 18, 1953 neatly displays a Protectionist venting his contempt for academic theory while he himself unwittingly indulges in save-an-industry theorizing built on the fallacy of composition. Congressman James B. Utt was questioning Mr. Peter G. Franck, an economist who specializes in international trade and who had just made a powerful case against Protectionism.
Mr. Franck, you have covered quite a range of subjects here. I would just like to ask whether you have ever been engaged in the production of petroleum?
I have not.
Have you ever been engaged in the production of lemons?
I have not.
Have you ever been engaged in the production of cotton?
I have not.
Have you ever been engaged in the production of lead and zinc?
I have not.
Well, we have had before us a solid stream of producers of these items, and they are all in trouble and they are all asking for help. It just seems that if we do not give them some type of protection, that we are going to destroy the American economy, and I think that your treatise on theory is beautiful, but I must say that I do not think it is practical.
Somebody should remind Congressman Utt that nothing can be correct in theory but wrong in practice (a theory that does not square with practice must have a flaw in it, in which case the objector need only point out the flaw) and that few things are so practical as a correct theory.
Arguments on behalf of industries damaged by foreign competition could apply no more illogically on behalf of industries damaged by technological progress. Henry George once asked: “Economically, what difference is there between restricting the importation of iron to benefit iron producers and restricting sanitary improvements to benefit undertakers?”15 Why shouldn’t the automobile industry have been suppressed to protect the buggy makers, whip makers, and horse breeders, not to mention the railroads? Why shouldn’t we have suppressed movies, radio, and television to protect the vaudeville actors? Why shouldn’t we have suppressed petroleum, natural gas, and hydroelectricity to protect coal miners and mine owners? Technological progress and international specialization through Free Trade are on a par: both are means to improve the standard of living that can be won from a country’s labor and resources.
In detailing the woes of particular industries, Protectionists tacitly claim that adjustment to change is undesirable, and that an industry, once established, has a right to thrive indefinitely, regardless of efficiency or changing conditions. Protectionists forget that business deaths, as well as business births, are essential in a progressive economy. Protectionists show by their complaints that they do not understand a free economy and that they are economic planners at heart. One of the worst things about having adopted Protectionism in the first place is that the government has a bear by the tail. Every move toward a freer market touches off the clamor of vested interests. We may be thankful indeed that adjustments to technological progress never became political issues to the same extent as adjustments to international trade.
Protectionists forget that industries are not ends in themselves, but rather means for partly overcoming obstacles that stand in the way of human well-being. The purpose of a food industry is not to provide work—not, that is, to call forth effort—but to overcome hunger. The purpose of a clothing industry is not to exercise the brain and muscle of managers and workers but to overcome nakedness and shabbiness. The purpose of a transportation industry is not to employ labor but to overcome distance. Protectionists seem to approve of obstacles because overcoming them gives employment. Otherwise, why would Protectionists oppose food and clothing imports unless they approved of anything that kept hunger and nakedness difficult to overcome? To judge from the tariff on soap, Congress positively cherishes the dirt that supports the American soap industry. To judge from the tariff on fire hose, Congress considers arsonists public benefactors. To judge from the tariffs on medicines and surgical and dental instruments, Congress would deplore any improvement in the bodily or dental health of the American people. A consistent Protectionist would find it logical to encourage both the medical profession and the medical-supplies industry by a law against the sanding of icy sidewalks.
William Graham Sumner correctly pointed out that an industry dependent on Protection is hardly an industry in the usual sense of the word. It thrives only because government interference with the freedom of buyers has turned capital and labor out of other channels where they would otherwise have been more productive. A tariff enables the Protected industry to live like a parasite on consumers and on other industries. A Protected clothing factory is not so much a means of providing clothes as a means of making clothes more expensive behind a tariff wall than they would be under Free Trade. An industry dependent on tariff Protection exists at the sacrifice of other industries that would otherwise have used the country’s labor and resources more efficiently in the ceaseless struggle against obstacles to human welfare. Sumner is right: a Protected industry is a nuisance. The bigger it is, the sadder it is.
Ironically, even though tariff Protection of a particular industry harms the general public, it need not permanently benefit the investors and workers in the industry. Competition at home gradually tends to bring abnormally high profit and wage rates in a particular industry down, at least relatively, to a more ordinary level. In the long run, Protection tends to expand a particular industry at the expense of others rather than to preserve abnormally high earnings for the people already in it. Only some kind of monopoly able to block new investment in the Protected industry would enable the people already in it to keep on benefiting indefinitely from their overcharging of consumers.
In summary, the argument that the alleged plight of particular industries justifies tariff Protection is just as weak as it is popular. If you understand the fallacies in this argument, you are less likely to sympathize with the people who use it than to deplore their efforts to enlist the power of government for their own short-run advantage at the expense of their fellow citizens.
Another common argument for Protection is that certain industries are vital to national defense. We must not rely unnecessarily on imports of strategic products—so the argument goes—because enemy action might cut off these imports during wartime. It is better to protect the home industry even in peacetime so we will have it when we need it.
Unlike most Protectionist arguments, this one does not rest on wholly false reasoning. Still, it is far from conclusive. Against any supposed gain in strategic self-sufficiency must be balanced the loss in productivity and in real national income that barriers to specialization and trade impose. Such a loss means that fewer goods and services are available for consumption, investment, and defense. The greater the degree of national self-sufficiency that tariff policy aims at, the greater is this weakening in the country’s economic and therefore military strength. Considering that a wartime interruption in strategic imports is merely possible—not certain—the case for accepting the certain economic weakening inflicted by Protection is even less conclusive. Incidentally, development of naval power great enough to safeguard shipping lanes in wartime might well cost less than the loss in economic power caused by a drive for self-sufficiency.
Since almost all industries have some use in wartime, all kinds of lobbyists can make some sort of superficially plausible plea for Protection of their own “strategic” industries. Gloves, pens, peanuts, pottery, and umbrella frames are just a few ridiculous examples of industries that in recent years have sought continued Protection on grounds of strategic importance. Even the lacemakers once called for more Protection than they were already getting on the excuse that they could convert their machinery in wartime to make mosquito netting. Clearly, the defense argument is often just a straw that special interests grasp at insincerely to bolster their pleas for privileged shelter against competition. Almost everybody thinks or pretends to think that his case is exceptional. Grant a single exception, and you loose a torrent of special-interest pressures.
The assumption is false that a government can know in advance just which weapons and industries will be most important in some possible future war. Constant technological change is a leading feature both of modern war and modern industry. Furthermore, modern industry has proved itself remarkably able to convert and reconvert between peacetime and wartime production. Incidentally, among the industries that, so far, have been most easily convertible are those in which the United States has a Comparative Advantage, such as automobiles, electronics, elaborate office equipment, and industrial machinery. These strategic industries typically do not need tariff Protection, and Free Trade would enlarge their peacetime markets. (By contrast, the industries that typically clamor for continued or increased Protection—handbags, pottery, fish, nuts, cheese, hats, wine, toys, and so on—can turn much less readily to war production.) The moral is that the United States should not partially freeze its industry by Protectionist policies into a pattern that might well prove, if war finally came, to be out of date—and all at the cost of a sure loss in real national income. Even from considerations of national defense, it would probably be wiser to adopt Free Trade and other policies contributing to general economic strength and to rely, if war cut off foreign supplies, on the conversion of peacetime industry to wartime purposes that would in any case be necessary.
Still, for the sake of argument, let us suppose that the government does know exactly what products it will need most in a future war, knows for sure that foreign supplies will be cut off, and knows that no domestic industry could switch quickly enough to making these things. Even if the government knew all that—which is impossible—even then Protective tariffs would not be the best answer. As one alternative, the government might stockpile enough strategic goods to last through a war. Not having to make the stockpiled goods, domestic industry could concentrate on lines of production in which it was relatively more efficient. Another alternative, even if the government felt it had to encourage strategic industries artificially, would be subsidies rather than tariff Protection. A tariff keeps a product price higher than it would otherwise be. The subsidy approach does not interfere with the comparatively low price set by import competition but enables the home industry to compete by making up for its relatively higher production costs with direct money grants. Since low prices ensure a wider market for the product than do high prices, the subsidy approach is clearly better if the government’s aim really is to expand the industy’s production and capacity. Besides that, subsidies are a more precise and flexible way to encourage an industry than the tariff. Subsidies can be withheld from types of production and even from single companies whose encouragement is unnecessary. Furthermore, there is good reason to believe that the public, in its double role as consumer and taxpayer, pays less for encouragement to particular industries through subsidies than through tariffs. Finally, the subsidy approach is a fairer way than the tariff approach to distribute the burden of supporting strategic industries. If such support helps defend everybody, why should special groups of consumers have to bear the whole burden in tariff-raised prices?
Even aside from all these reasons, the defense argument for import barriers applies especially little to present world conditions. On the contrary, freedom of trade from the barriers hampering it today would promote efficiency in using productive resources and so would greatly help strengthen the free world. In an open letter to the NATO Council made public in April 1953, 155 leading citizens of the United States, Great Britain, Canada, and France recommended
immediate steps to lower tariffs, eliminate quotas and other trade restrictions, simplify customs proceedings and free currencies to the end that the Atlantic nations may eventually become one financial and trading community.
The writers of the letter, feeling that these steps among others would be taken, in the event of war, urged “that they be taken now in order to prevent war.” As the letter explained,
Better defense at lower costs depends as much, if not more, on the integration of our economic policies as it does on the integration of our defense policies. By wise economic co-ordination, we could so increase the combined national incomes of the fourteen NATO members that their combined defense costs would be a much smaller percentage of their incomes than it has been hitherto.
The more freely the United States and its allies can trade among themselves, the less they will feel the need to trade with the Russian bloc. Many stories have appeared in the newspapers lately about how the Communists are wooing our allies with offers on just those goods that bear the highest United States tariffs. Japan in particular must be allowed greater trade opportunities in the free world if she is not to be forced into close economic ties with Communist China.15a
Aside from such tangible considerations, the good will that Free Trade would win for the United States would help bring about spiritual solidarity among the peoples of the free world. As Mr. Harold F. Linder of the State Department told the Senate Finance Committee on April 22, 1952,
The relationship between a country’s trade and its political orientation was a factor very much in the minds of the Soviet officials who planned the Moscow Economic Conference. They were very much aware of the fact that one of the most effective gestures of good will which one country can extend to another is an offer to take its goods on a reasonable basis. They were aware of the converse proposition as well—that there are few things in international relations which generate political hostility quite as rapidly as an unwillingness to give another country a reasonable opportunity to trade. They already realize what we are only beginning to learn—that every national policy affecting foreign countries is a potential weapon in the cold war between the East and the West.
Finally, the defense argument for tariffs would be completely irrelevant in the peaceful world that we are aiming at. Free Trade, while not the decisive means to reach that ultimate goal, would help greatly.
EMPLOYMENT AND THE HOME MARKET
Import competition does, it is true, cut down job opportunities in some relatively inefficient American industries. Pointing to actual examples and ignoring the more-than-offsetting growth of relatively efficient American industries that gain by freer world trade, Protectionists often suggest that imports threaten the United States with general unemployment. We need high tariffs, they say, to avoid this mass misery. Often coupled with this argument is the slogan that we must keep the American market for American producers. For instance, Senator Wiley told the Senate on January 16, 1952 that “The American market is the greatest in the world, and necessarily it should be reserved basically for American producers. . . .” This “home-market argument,” which in one form or another has long appeared in Republican Party platforms, was used at first to enlist the farmers in support of industrial tariffs. The idea was that tariffs make people in manufacturing prosperous and so improve the home market for farm products also. Gradually the argument grew to suggest that Protection which benefits any economic group, by improving its purchasing power, indirectly benefits all other groups.16 From there it is but a short step to the idea of tariff Protection for anybody claiming to need it.
In fact, of course, Protection for particular industries does more harm than good to people in others. Consumers lose through higher prices on imported goods. Exporters lose because import curbs deprive foreigners of opportunities to earn dollars. Still other industries lose because the tariff makes their materials and tools more costly or because tariff-raised prices in effect make their workers and customers poorer. The more all-embracing a tariff system becomes, the more do these repercussions tend to outweigh even the direct benefit that an industry gets from the tariff on its own products. A particular industry benefits most from a tariff only when it is the sole Protected industry. The idea of all-around Protection—of reserving the home market for all home producers—is full of contradictions.
As Henry George shrewdly noted, many people find the home-market argument akin to the idea that “We should keep our own pasture for our own cows.” In truth, though, it is like saying that “We should keep our own appetites for our own cookery” or “We should keep our own transportation for our own legs.”
Hence the proposition that we should keep our home market for home producers is simply the proposition that we should keep our own wants for our own powers of satisfying them. In short, to reduce it to the individual, it is that we ought not to eat a meal cooked by another, since that would deprive us of the pleasure of cooking a meal for ourselves, or make any use of horses or railways because that would deprive our legs of employment.17
The naïve employment and home-market arguments for Protection are prime examples of the “fallacy of composition,” which we have already explained. While abandonment of Protectionism may trouble people in particular industries for a while, it does not follow that people in all industries will suffer. Protectionist victims of the fallacy of composition should try to explain just how unchecked imports can cause general unemployment and general damage to American markets. Are foreigners going to overwhelm us with their goods of all kinds, all for free, never asking anything in return? Or will they ask only dollars that they never mean to spend—dollars that our government and banks could easily create out of thin air? Far from being a disaster, that situation would be paradise. After all, we don’t want employment and markets for their own sakes, but only as means of earning useful goods and services. It would be fine to get everything without effort: we could use the time saved from drudgery for science, art, literature, and other “higher things.” In sober fact, of course, foreigners will never be kind or foolish enough to spare us the need for working. Foreigners won’t send goods to our markets unless we send goods to theirs.
Imports (understood to include “invisible imports”—purchases of services) and exports (including “invisible,” or service, exports) pay for each other. Thus, anything that cuts imports ultimately cuts exports. Despite the home-market theories, Protectionism does not gain any more markets for American producers than it loses. In fact, Protectionism causes a net loss of markets at home and abroad. The extent of a market is not merely a matter of land area or population but also of the wealth of the customers. There is no more an ultimate limit to the extent of markets than there is to human wants. The wastes of Protectionism cut down markets in the sense that really counts: they cut down real incomes and buying power. Free Trade, on the other hand, allows more efficient use of resources and raises productivity. Barring gross mismanagement of the money system, greater efficiency and productivity raise real incomes and let people buy from and sell to each other more actively. So Free Trade provides a net gain, not a net loss, in markets. Protectionism can gain markets for home producers only so far as we Americans keep giving our goods or the dollars to buy them with to foreigners (and even then the necessary taxes take buying power away from American customers). If getting rid of our produce and making work is all we care about—if we abhor getting paid back—we might as well simply dump goods into the ocean. Some Protectionist quacks do seem to think that a nation prospers by giving away or destroying its wealth.
In respect to unemployment as in many other respects, Free Trade is on a par with technological progress. Inventions shrank employment in the buggy industry but expanded it in the automobile industry. In the long run, technological progress raises productivity and real incomes and does not cause general unemployment. Free Trade works the same way.
In one sense, though, tariffs do create work. They create work just as anything that makes getting useful goods more difficult creates work. They create work just as would destroying machinery. They create work just as destroying trucks, planes, and railroads would create work in carrying freight on human backs. Frederic Bastiat’s description of tariffs—“negative railways”—is apt. If work—hard, sweaty work—is all we want, there are countless ways of making it; the tariff is only one. As Bastiat suggested, Protectionists must be confused by some such false unspoken syllogism as the following:
The more men work, the richer they become;
The more difficulties there are to be overcome, the more work;
Ergo, the more difficulties there are to be overcome, the richer they become.18
In truth, of course, people want not work but the products of work. Progress consists not in using more and more work to get a given amount of products but in getting more and more products for a given amount of work. Free Trade is just like technological progress in making work more effective.
Despite all we have said so far, one rather sophisticated version of the tariffs-against-unemployment argument does have certain limited validity. An increase in tariff rates could cut down the imports of a country suffering from depression, thereby giving the country a surplus of exports over imports. For certain theoretical purposes, imports, like saving, can be thought of as a leakage from the country’s stream of money income; exports, like investment spending, can be thought of as an injection into the income stream. So an export surplus achieved by higher tariffs would be a net injection into the country’s income stream. The export surplus might even have a “multiplier” effect, raising yearly national income by more than its own amount. Another way of putting the whole theory is to say that an export surplus might bring more money into the country or into existence or else make the country’s existing money supply get spent faster, or both. The extra spending would help bring recovery from depression and so reduce unemployment.
Several reservations must be made about this theory. First, the export surplus can last only a short time. In the long run, exports and imports pay for each other. We can have an export surplus only until foreigners use up their reserves of dollars or gold or only as long as we keep giving or lending foreigners the money with which to buy our exports. Second, tariffs cannot usefully be raised again and again. A tariff increase works only if the previous tariff level was comparatively low. Once tariffs have cut down imports severely, there is little room to make an export surplus by putting tariffs still higher. Third, import barriers to promote home employment are a trick that foreign countries can easily copy if they are stupid enough. If we try to “export our unemployment,” other countries can retaliate. All countries can’t have export surpluses at once. As the nineteen-thirties clearly showed, the main result is likely to be a wasteful over-all shrinkage in world trade.
More important, the very idea of import barriers as an unemployment cure shows ignorance of the nature and cure of depressions. Imagine—trying to become prosperous by getting rid of goods worth more than those you get! As J. M. Keynes once suggested, there is nothing that a tariff can do against unemployment which an earthquake could not do better. Depressions and the accompanying unemployment are essentially a matter of a shrunken money supply or of too-slow spending of money. The cure is to be found partly in correct monetary management—something that, unlike a tariff, does not interfere with business and with beneficial international specialization. Discussion of the relationship between depression, unemployment, and money would be out of place here. We should understand, though, that tariff tinkering to cure unemployment is way off the track.
People sometimes argue that a country should protect itself against “excessive” specialization and “excessive” dependence on foreign countries. The country needs import controls to “insulate” itself against foreign disturbances. Well, how much specialization is “excessive” is a matter of opinion. Interference with international specialization has a cost in a less efficient use of labor and resources and so in lower real incomes. Incidentally, well-developed international trade benefits a country by relieving dependence on just home supplies and home markets and by broadening markets, so giving more scope for temporary gluts and shortages of particular commodities in local markets to cancel each other out.
When the argument against “excessive” specialization, as applied to the United States, is not just the defense argument already discussed, it is akin to the employment argument. It is only a minor oversight of this argument that the danger to foreigners from our depressions is far worse than the danger of our catching theirs. The main objection is that depressions and their contagion are chiefly matters of the flow of money. The United States could quite well manage its own money supply so as to avoid depression at home, no matter what happens abroad (which is not to say that the United States need feel no ill effects when foreign depressions shrink trade opportunities). A powerful argument can be made that nations should have their own separate, independent monetary systems, with the various currencies not linked together at fixed exchange rates. As a safeguard against international contagion of inflations and depressions, this kind of “insulation” makes sense. But reliance on trade barriers shows complete misunderstanding of the problem.
CHEAP FOREIGN LABOR
One of the falsest but hardiest tariff arguments insists on Protection against the “unfair competition”—effective competition is always called “unfair”—of imports made by “cheap foreign labor.” Fortune’s issue of March 1953 quotes a Houston oil and cotton magnate as follows:
The only thing that made our country great is the protective tariff to protect us from the cheap labor abroad. Those people haven’t developed in two thousand years. They’ve been letting the flies eat their children’s eyes out all that time. If they take our tariff off, it’s just a matter of time before the American people will be living like them.
Senator Malone warned the House Ways and Means Committee on January 26, 1951 that tariff cuts
will explode in our face. In other words, these imports from these low-cost-labor countries will just swoosh in, and the investments in our businesses will be gone.
The vice-president of the Onondaga Pottery Co., testifying right after Senator Malone, told the Committee that his industry faces what
is, in essence, purely a wages problem. The American employer cannot afford to pay American wages and sell in competition with the distressingly low wages paid in so many foreign countries. Currently the wages paid to American pottery workers in the vitrefied-china industry are about 4 to 4½ times wages paid English pottery workers, 6 times the rate paid German pottery workers, and 12 times the rate paid Japanese pottery workers.
Business Week for December 13, 1952 summarized the sentiment of the typical Protected American businessman as follows:
Tariffs are generally undesirable in that they antagonize our friends in foreign lands. Furthermore, if tariff cuts will reduce our foreign aid bill, I’m for them. But my own product needs tariff protection against cheap foreign labor.
David L. Cohn has justly mocked the cheap-labor argument in the December 1951 issue of the Atlantic:
We alone live decently or want to live decently. The British, as we know, have long subsisted on roast acorns and mist air of the fens. The French learned to cure Roquefort cheese in caves because they live in caves; no doubt they were animated by the malicious desire to flood us with cheap goods. Scandinavians, like circus seals, are content if you throw them a fish. Italians, of course, rank with Orientals. They exist on leftovers from yesterday’s fried seaweed.
If the cheap-labor argument were true, American producers would need Protection most against the countries with the lowest wages—China, India, Haiti, and so on; and this is clearly not so. Low wages are a sign of low productivity. The relatively most efficient American producers, using advanced technology, can pay high wages and still produce at lower cost than foreign competitors. In fact, European producers have sometimes asked Protection against the competition of low-cost machine-made American goods.
But this answer does not meet the cheap-labor argument head-on. In its strongest version, this argument concedes that it is fine to import goods produced more efficiently abroad than at home, but counters that if the competitive advantage of imports rests on cheap labor rather than on superior efficiency, then international trade positively distorts the use of the world’s labor and resources away from the theoretically-ideal pattern. The president of the American Watch Workers Union gave the argument this twist in his testimony before the House Ways and Means Committee on January 25, 1951:
. . . every economist teaches . . . that it is best to produce goods where it is most efficient and that inefficient industries have no right to survive. No one can disagree with this premise as it relates to efficiency, except that we can seriously disagree that an industry is efficient [inefficient?] simply because it has to pay the high-wage level of the United States and the competitor in a foreign country pays his people according to the low-wage standards of his country. Here is the crux of the problem.
Chairman Daniel A. Reed was not trying to be funny when in May 1953 he described his House Ways and Means Committee as “the forum where American citizens come to be heard about the impact foreign goods that come in here, made by cheap labor abroad, has on our domestic economy.” His fellow committeeman, Representative Noah M. Mason, made this observation during the hearing on April 27, 1953:
We have just listened to the American Knit Handwear Association and the American Seafood Association and the Harley-Davidson Motorcycle Co. representative, and all three state that they represent an industry that is the most efficient in the world, as compared to the industries abroad. But they all three stated that they are being injured because of imports from abroad, not because they are more efficient to produce abroad but because of the difference in the cost of production. It is a question of low wages there, high wages here.
If our people are to compete against the people of other countries then we have got to cut our wages in half. And no one wants to do that.
In their Monthly Digests for May and June 1953, Stevenson, Jordan & Harrison, Inc., management engineers, say “that American business managers do not fear or want to restrict fair competition” but add
that competition is not fair when the cost of labor required to produce a commodity represents a major cost factor and the wages paid to the workers who produce that commodity in foreign countries are very much less than the wages paid in the U.S. to produce a similar commodity.
Inability to compete with imported goods is not necessarily an indication of inefficiency in domestic industry. Any test of efficiency on the basis of dollar costs here and abroad is an unfair and unsound test.
The error in such thinking is fundamental. For international trade to benefit all trading countries, a commodity need not be supplied only by the countries making it most “efficiently” (most “efficiently” meaning at lowest cost in terms of the amounts of labor and resources used, quite regardless of money costs, wages, and prices). On the contrary, as we have already learned from the Principle of Comparative Advantage, each country gains by specializing on the things in which it is relatively most efficient. A country that is inefficient in making everything gains by specializing on the products that it makes least inefficiently and importing the products that it would make most inefficiently. A country that is efficient in making everything gains by specializing on the products that it makes most efficiently and importing the products that it would make least efficiently (even though perhaps more efficiently, in an absolute sense, than the country where the imports come from). Suppose we Americans get watches by importing them and paying with goods we make still more efficiently. Since we get watches this way at less cost in effort and resources than if we made them ourselves, we gain by trade. Whether or not the United States is absolutely more efficient than Switzerland in making watches is beside the point.
No Free Trader doubts that in many foreign countries the levels of wages and other incomes are, as translated through the exchange rates into dollars, wretchedly low by American standards. The Free Trader merely sees through the unspoken Protectionist theory about what facts are relevant. Actually, wage statistics no more make a case for tariffs than would, say, statistics on egg prices in Iceland or rainfall in Patagonia. Low wages in foreign countries reflect low productivity. (Low productivity of labor in turn typically results from a great abundance of labor in relation to comparatively scarce factors of production such as land, capital, and business ability.) Low wages enable the unfortunate foreigners, despite their low productivity, to charge low enough prices so that the goods they make least inefficiently can sell in the American market. Wages reflecting their low productivity enable the foreigners to export some goods and so earn the dollars with which to buy imports. If the foreigners could not do this, their poverty would be even worse.
That cheap-labor imports undersell some American products is far from a national calamity. On the contrary, the United States gains by trade even with poor countries. Nobody who understands the Principle of Comparative Advantage, which is fundamental, could miss this point. A rich country no more loses by trading with a poor one than a rich tycoon loses by dealing with a poor newsboy.
Of course some American industries—the relatively least efficient ones—have a hard time competing with imports while paying their workers at our high American wage levels. But see what these high wage levels mean: other industries, which can use labor still more productively, are setting the pace in wages by their competition in hiring labor. The very fact that the high cost of labor burdens a particular American industry shows that its workers have good alternative job opportunities.
Cheap labor could never let foreigners undersell us on all goods. Allowance made for loans, gifts, and the like, a country’s imports and exports of goods and services must be about equal. Except when wrecked by government interference, an “automatic” trade-balancing mechanism exists. Different wage levels among countries, as compared through the exchange rates, are an important part of this balancing mechanism. It is pleasant but unrealistic to think that foreigners would flood us with their goods and ask for little or none of ours in return.
If foreigners do sell us some things very cheap, we Americans positively gain. We can use the labor and resources that we thereby save to make other products in which we have a Comparative Advantage. Even from our own selfish viewpoint, it is fine that foreigners will work cheaply for us, trading us many of their goods for few of our own. Free Trade would raise, not lower, American standards of living.
To be perfectly honest, I must not overlook a theory that, while not flagrantly false, might still be considered remotely akin to the cheap-foreign-labor argument. Certain theorists have imagined a highly simplified and unreal case in which Free Trade, as compared with Protection, might, while of course increasing total real national income, change the shares of different groups in this total in a way that might be considered unfavorable. For example, if “labor” were “scarce” and “capital” were “abundant” in a certain country, Free Trade would promote the importation of goods with a high labor content in trade for exports with a high capital content. In comparison with the Protectionist situation, this trade would tend in effect to lessen both the scarcity of labor and the abundance of capital and so tend not only to increase total real national income but also conceivably to give labor a smaller share and capital a larger share. This recondite income-distribution theory is quite distinct from and gives no support to the usual cheap-foreign-labor argument already discussed. The reasoning and the hypothetical conditions composing this theory are so special that nobody who swallows the usual cheap-foreign-labor argument could understand this one. The very theorists who have worked out this intellectual curiosity have pointed out its irrelevance to the real world.
If anyone did try to use the income-distribution theory as an argument for Protection in the real world, the following points, among others, could be developed in reply: (1) The real world differs in countless relevant ways from the imaginary simplified conditions in which the theory works. For example, one must distinguish among a great many factors of production, not just between “labor” and “capital.” (2) It is just as possible to imagine conditions in which Free Trade increases the share of labor in a larger total real income as to imagine conditions in which labor’s share shrinks. According to a recent statistical study by Professor Leontief of Harvard, actual American conditions do more closely approach the former situation (in which Free Trade would especially benefit labor) than the latter.19 (3) The anti-monopoly effects of Free Trade tend to change the income distribution in favor of labor. (4) If Free Trade lets a country cut its foreign-aid spending, the tax savings benefit labor as well as capital. (5) If increased income of capital feeds greater capital accumulation, the share of labor in future income grows. (6) A domestic tax program could in principle correct any unfavorable influence on income distribution so as to leave both labor and capital better off than under Protection. (7) Protectionism in accordance with the income-distribution argument and frequent adjustment of tariffs to continually-changing conditions would require the officials in charge to have an absolutely impossible amount of theoretical acumen, detailed factual knowledge, and freedom from political pressures. (8) Finally, the same income-distribution argument might be made against labor-saving inventions as against labor-saving trade; and the very reasons for not granting Protection against inventions also hold true for not granting Protection against trade.
Now let us return to the Protectionist arguments that really carry weight in practical politics. Regarding the cheap-labor argument, we may well ask: If cheap imports really do harm American labor, how does it matter why they are cheap—because of cheap labor, because of better natural conditions, or because of more efficient production in foreign countries? To go further, if a flood of cheap goods on the American market is harmful, what difference can it make whether foreigners or machinery provide this flood? Henry George has put the point very neatly:
We maintain a tariff for the avowed purpose of keeping out the products of cheap foreign labor; yet machines are daily invented that produce goods cheaper than the cheapest foreign labor. Clearly the only consistent protectionism . . . would not only prohibit foreign commerce, but forbid the introduction of labor-saving machinery.20
On the question of cheapness, some Protectionists are unexpectedly consistent: they seem to agree that low-cost foreign products hurt America, no matter why they are low in cost. The National Wool Growers Association, in a plea for greater Protection, cited a Tariff Commission finding that Australian sheep raisers have the advantage of cheap land. In a hearing on April 28, 1953, the Chairman of the House Ways and Means Committee sympathized with American growers of hothouse tomatoes and cucumbers because their Mexican and Cuban competitors are free from the expense of heavy investments in hothouses. A bicycle witness complained that his foreign competitors enjoy the low costs made possible by mass production to meet a large demand. The coal industry is currently agitating against imports of heavy fuel oil: since this residual oil is a by-product and so has no well-defined average unit cost of production, its competition with coal is “unfair.”
The existing United States tariff law pays homage to the theory that low foreign production costs, whatever their cause, harm us Americans. The little-used section 336 lays down procedures for changing tariff rates within certain limits so as to “equalize” (offset) differences between the production costs of American goods and competing imports. The Tariff Commission has the task of investigating production costs both at home and abroad and of recommending suitable new tariff rates to the President.
Now the very idea of cost investigations is foolish. Even aside from the many possible meanings of “cost,” the differences among costs even of producers within a single country, and the practical difficulties of such investigations, the whole business is absurd. Steady importation of some commodity itself proves that the foreign production cost is lower. Senator Malone has apparently realized how unnecessary cost investigations are. Why not set each duty at whatever level just brings the price of the imported article up to the price of the corresponding American article? The Senator has worked this idea into a pet bill of his.
Malone’s proposal certainly seems fair, doesn’t it? Don’t set tariff rates too high—just high enough to offset the foreigner’s lower costs. Put foreign and domestic producers on an even footing and, as the Protectionist O. R. Strackbein suggests, “Let the goods come in and compete on a fair competitive basis in this country. Let the best goods win.”
All such foggy notions of “fair competition” rest on a false premise. Trade is not like a horse race or a friendly golf game; “fair competition” is not an end in itself. The end of trade is to get goods on advantageous terms. To interfere with trade because of foreign cost advantages is to attack the very principle of specialization and trade. The idea that imports must not undersell domestic goods would, if consistently applied, almost wholly stop all imports and therefore all exports also. Consistently applied, the idea would enthrone national self-sufficiency and guarantee any American industry airtight Protection, no matter how badly it wasted American labor and resources.
Senator Malone, like so many other Protectionists, understands none of this. Testifying before the Senate Finance Committee on March 8, 1951, he offered this gem of absurd theorizing:
When we fix rigid tariffs, as we do under the Trade Agreements Act, or as we did in the 1930 Tariff Act except for the relatively little used flexible provision, all foreign nations have to do then, as England did, is to lower the value of their currency in relation to the dollar in order to reduce the effect of our tariff rates. This increases the cost of their imports, and keeps their standards of living down. In addition, of course, the foreign countries keep their wage rates low. Thus the rigidity of our tariffs encourages devaluation, and the maintenance of low wages.
Now, suppose you had a flexible method, as proposed in my bill, S. 981, and immediately any devaluation could be taken into consideration by the Foreign Trade Authority or the Tariff Commission in setting new tariff rates. All those factors are considered. It would be to no advantage to foreign nations to keep their costs down if they face a higher tariff in this country. The incentive to keep their standards of living down to capture the American market would be gone.
Even the representatives of these foreign countries would say after a trial “We might as well pay higher wages to our labor and pay social security and industrial insurance,” as we do in this country, rather than have us pay the difference into the United States Treasury.
In effect, Senator Malone says this: Low standards of living are just a trick that foreigners use to capture the American market. If we outwit them with a flexible-tariff system, the foreigners will abandon their trickery and let their standards of living rise. The Senator’s scheme will benefit not only Americans but the foreigners too!
Incidentally, whether imports have low dollar prices because of foreign currency devaluation matters no more to us Americans than low prices because of cheap labor, cheap land, efficient machinery, or any other reason. Exchange-rate adjustments are simply part of the mechanism that, when not wrecked by government interference, keeps each country’s imports and exports in balance. Proper exchange rates enable even poor countries to export the products they make at least disadvantage and so to share in the benefits of international trade.
Frederic Bastiat, writing early in the nineteenth century, has keenly satirized the Protectionist horror of bargain imports in his famous “Petition from the Manufacturers of Candles, Waxlights, Lamps, Chandeliers, Reflectors, Snuffers, Extinguishers; and from the Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Used for Lights.” Here is a condensation of this imaginary petition to the French Chamber of Deputies. Note in particular how the candlemakers use the “purchasing-power” argument: the prosperity that they will get from Protection will presently radiate onto all other industries.
Gentlemen, you are right: you reject abstract theories. As practical men, you are anxious only to free the producer from foreign competition. You wish to secure the national market to national labor.
We now offer you an admirable opportunity to apply your practice. We are subjected to the intolerable competition of a foreign rival whose superior facilities for producing light enable him to flood the French market at so low a price that, the moment he appears, he takes away all our customers; and thus an important branch of French industry is suddenly reduced to stagnation. This rival is no other than the sun.
Our petition is that you pass a law to shut up all windows, dormers, skylights, openings, holes, chinks, and fissures through which sunlight penetrates. Our industry provides such valuable manufactures that our country cannot, without ingratitude, leave us now to struggle unprotected through so unequal a contest.
Do not repulse our petition as a satire without hearing our reasons in its favor. Your protection of artificial lighting will benefit every industry in France. If you give us the monopoly of furnishing light, we will buy large supplies of tallow, coal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal. Greater tallow consumption will stimulate cattle and sheep raising; meat, wool, leather, and above all manure, that basis of agricultural riches, will become more abundant. Greater oil consumption will stimulate cultivation of the luxuriant olive tree. Resinous trees will cover our heaths. Swarms of bees will gather upon our mountains the perfumed treasures that are now cast useless upon the winds. In short, the granting of our petition will greatly develop every branch of agriculture. Navigation will equally profit. Thousands of vessels will soon be employed in the whale fisheries, and thence will arise a navy capable of upholding the honor of France. Paris will become magnificent with the glittering splendor of gildings, bronzes, crystal chandeliers, lamps, reflectors, and candelabras. We and our many contractors having become rich, our great consumption will contribute to the comfort and competency of the workers in every branch of national labor. No one, not even the poor resin manufacturer amidst his pine forest nor the miserable miner in his dark dwelling, will fail to enjoy an increase of salary and of comforts. There is perhaps not one Frenchman, from the rich stockholder to the poorest match-seller, who is not interested in the success of our petition.
We foresee your objections, gentlemen; but there is not one which you will not have to take from the free traders and which is not opposed to your own practice. Do you object that the consumer must pay the price of protection to us? You have yourselves already answered the objection. When told that the consumer is interested in free importation of iron, coal, corn, wheat, cloth, etc., you have answered that the producer is interested in their exclusion. You have always acted to encourage labor, to increase the demand for labor.
Will you say that sunlight is a free gift, and that to repulse free gifts is to repulse riches under pretense of encouraging the means of obtaining them? Take care—you deal a death-blow to your own policy. Remember: hitherto you have always repulsed foreign produce because it was an approach to a free gift, and the closer this approach, the more you have repulsed the goods. You have, in obeying the wishes of other monopolists, acted only from a half-motive; to grant our petition there is a much fuller inducement. To turn us down just because our case is much stronger than any previous one would be to accumulate absurdity upon absurdity.
When we buy a Portuguese orange at half the price of a French orange, we in effect get it half as a gift. If you protect national labor against the competition of a half-gift, what principle justifies allowing the importation of something just because it is entirely a gift? You are no logicians if, refusing the half-gift as hurtful to human labor, you do not with double zeal reject the full gift.
The difference in price between an imported article and the corresponding French article is a free gift to us; and the bigger the difference, the bigger the gift. It is as complete as possible when the producer gives us, as the sun does with light, the whole in free gift. The question is whether you wish for France the benefit of free consumption or the supposed advantages of laborious production. Choose, but be consistent. And is it not the height of inconsistency to check as you do the importation of foreign goods merely because and even in proportion as their price approaches zero, while at the same time you freely admit the light of the sun, whose price is during the whole day at zero?
Protectionists want tariffs to combat “dumping.” Dumping means that foreigners are selling their goods on the American market, perhaps with the aid of subsidies from their government, at less than the price they charge at home. Even if dumping does occur often enough to be important, however, it is not clear how it harms us Americans. If the dumping is steady, we should rejoice in a steady flow of bargains. As we have already seen, why the foreign goods are cheap makes no difference.
Intermittent dumping is conceivably a different story. If the foreigners sometimes offer bargains and sometimes charge high prices, the uncertainty might disorganize American markets and American industry. However, plenty of American commodities—wheat, for instance—rise and fall unpredictably in price without alarming our Protectionists. In particular, if the intermittently-dumped imports were storable, like wheat, then speculators could make a profit by buying up the goods when they were dumped and reselling them when the dumping stopped. So doing, the speculators would even out conditions in the American market and still save for us the advantage of the bargains sometimes obtainable. If conditions were not clear enough for speculators to see profit opportunities, then it is hard to understand how conditions could still be clear enough for the government to take proper action. Intermittent dumping of non-storable goods is probably of little or no importance.
Ordinary fixed-rate tariffs are no guarantee against future intermittent dumping. Whatever little might be said in favor of special “emergency” antidumping duties, the administrative difficulties and the danger of Protectionist misuse inherent in them make them unwise. For one thing, “emergency” tariffs breed vested interests and have a political tendency to become permanent.
In ordinary talk, the word “dumping” has no clear meaning except as a kind of swear word suggesting that some businessman finds some import price too low to suit him. Pleas for antidumping duties are typically just the standard Protectionist fallacies in disguise.
INFANT INDUSTRIES AND ECONOMIC DEVELOPMENT
The infant-industry argument supposes that while a country might have a prospective Comparative Advantage in a certain industry, that industry might never get the necessary good start in life merely because of the head start enjoyed by foreign competitors. A temporary Protective tariff would let the infant industry find a wide enough market to support economical production methods. The industry could stand on its own feet in a few years, and then the tariff would be removed.
The infant-industry argument has such admittedly slight relevance to present-day American conditions that we may properly pass over it more quickly than if we were considering how it applies to other countries. (1) The prospect that an infant industry could in time survive without Protection is not conclusive grounds for a temporary tariff. The loss in total real national income through curbs on international specialization and trade in the meanwhile might well burden other industries for which the country would have been even more highly suited. If prospective long-run profits from an infant industry do not impress private investors as likely more than to pay for losses during the industry’s first few years, then why should the government presume to know better and force consumers to pay for the gamble through tariff-raised prices? (2) History casts some doubt on the theory of infant-industry protection. Manufacture of iron, hats, and other goods got a foothold in Colonial America even despite British attempts at suppression. Manufacture of textiles, shoes, iron and steel, machine tools, and countless other goods has flourished in the American South and West despite competition under internal Free Trade with the well-established industries of the Northeast. (3) A legislature, whose members’ chief interest may be in the next election, is hardly a fit body to make and apply an impartial analysis of economic conditions and technological prospects. Political pressures also explain why infant industries practically never get weaned from Protection. Some Protected American industries are big babies with long beards. Once the principle of infant-industry Protection is accepted, the door is open to promiscuous Protection on all sorts of pretexts. (4) As popularly used, the infant-industry argument is akin to the save-an-industry fallacy, which we have already discussed. Not industries, but the products of industries, are what people really want. If certain products can be got more cheaply from abroad than at home, that is fine. (5) Even if, despite all the good reasons to the contrary, a government should want to encourage some infant industry specially for a while, then a subsidy is a better method than a tariff. The relative superiority of the subsidy approach has already been explained in connection with the defense argument.
The infant-industry argument is nowadays extended into an argument for Protection to foster a country’s general economic development. Since this argument is quite irrelevant for the United States, we may hasten over it. (1) Some users of the economic-development argument apparently have jumped to the unwarranted conclusion that since industrial countries are wealthier than agricultural countries, a tariff to encourage manufacturing will promote wealth. Actually, one might just as well encourage theaters and beauty shops on the grounds that wealthy countries have many of them. (2) Shelter from the competition of foreign manufactures ranks very low if at all on the list of things that a “backward” country needs to promote economic development. More necessary are venturesome business enterprisers, a social and ideological climate not hostile to business enterprise, capital for productive investment, a tax system that encourages enterprise and productive use of resources, and—perhaps—governmental development of education and health programs and certain public utilities. Home-produced manufactures sell poorly not so much because of import competition as because the country’s poverty-stricken people cannot afford much manufactures, foreign or domestic. So far as curbs on international specialization and trade hold down real income, Protectionism not only impedes essential saving and investment but also holds down the people’s power to buy industrial goods. (3) When conditions are ripe, a country’s industrial structure tends to develop “naturally” in a balanced way that need not be described here. Hothouse forcing of merely spectacular industries does not make for balanced economic development. (4) In short, the notion that Protection against international trade promotes economic development seems to be a non sequitur, probably based on the idea so common nowadays that governments possess superhuman benevolence and wisdom.
As Lord Beveridge truly wrote, the industrial development of a Free Trade country is guided by businessmen sticking to their business and always seeking to wrest the maximum useful result from available resources. Industries compete in economic efficiency alone. In a Protectionist country, industrial development is guided by politicians, by businessmen become politicians, by legislators with business allegiances, and by lobbyists. Industries compete less in productive efficiency and more in political influence and wire-pulling. Tariff-making brings businessmen out of their factories and offices into politics, which is a misuse of both business ability and political machinery.21
TARIFFS FOR REVENUE
What shall we say to the argument that tariffs are desirable as a source of government revenue? Well, the higher an import duty gets beyond a certain point and the more goods it keeps out, the less revenue it brings in. If a duty provides both Protection and revenue, it necessarily performs each function imperfectly.
More fundamentally, though, tariffs are a poor type of tax. The middlemen between the foreign producer and the home consumer must pay the government the duty on an imported product before they pass the duty along to the consumer; and in order to pay themselves for this tying-up of their capital, they must figure their markups not on the price of the article alone but on the price plus the duty. As a result the duty raises the price to the final consumer by more than its own amount. Also, tariffs on mass-consumed articles are, like sales taxes, more of a burden on poor than on rich people.
Customs duties provided the bulk of United States government revenue before World War I, but nowadays they are relatively quite unimportant. Currently the tariff brings in a little under one per cent of total Federal government revenue, so it is hardly indispensable. Furthermore, even that miserable fraction of one per cent is at least partly offset by the burden that the tariff system puts on the government and public: the costs of running the customs “service,” the extra paper work and legal expenses imposed on private business, the expenses to business of keeping informed on tariff issues and of lobbying, the costs of Congressional and Tariff Commission debates, hearings, and investigations, the costs of the Customs Courts, the costs of international trade negotiations, the losses caused by delays in the availability of imported goods, the value of the time lost by travelers waiting to be searched, and so on, not to mention the lost benefits of the trade that is stopped. Even Malone of Nevada, the most vocal Protectionist in the United States Senate, agrees that “The actual revenue that we collect on imports is not particularly important.”
It is quite possible that abandonment of import duties would actually increase rather than reduce total government revenue. By permitting the advantages of greater international specialization, Free Trade might so increase national income that greater yields of already-existing income-tax rates would more than make up for any loss in tariff revenue.
There are still other advantages of clear-cut Free Trade unmarred even by a revenue tariff. A revenue tariff on an article also produced at home gives at least incidental Protection. It leaves a foot in the door for real Protectionism. Also, as a goodwill gesture and as an example to foreign countries, complete Free Trade is far better than even a moderate revenue tariff. People would be justly skeptical about Free Trade “with minor exceptions.” How much more convincing and dramatic it would be to tell the world that the United States of America has adopted Free Trade—complete Free Trade with no exceptions and no strings!
THE TERMS OF TRADE
The idea that a tariff is a way of collecting taxes from foreigners instead of from a country’s own citizens is naïve. The home consumer pays, of course, in the form of prices boosted by the tariff. Any chance of shifting part of the burden on to foreigners leads us into the highly academic argument that a tariff can improve a country’s terms of trade.
An improvement in the terms of trade means that the prices at which the country buys its imports go down relative to the prices at which it sells its exports. In other words, it means that the country gets a greater quantity of imports relative to the quantity of exports that it must send out in payment.
How does this work? The idea is that tariffs enable our country to act as a unit on the world market: tariffs in effect control buying competition among our private importers and let our country instead act as a monopoly buyer. If the foreigner suppliers are not very sensitive to the prices we pay—if they depend on our market and would keep selling us nearly the same old quantities of goods even at lower prices—and if we are sensitive to the price of imports—if we are not very dependent on foreign supplies—then we have a chance to make the foreigners pay some of our import duty. Rather than let our import duty much increase the retail price and so lose them many customers, the foreigners, being dependent on our purchases, will themselves absorb part of the duty. The foreigners net themselves lower prices than before, which means that our country has succeeded in beating down import prices with its tariff.
Before getting enthusiastic about this possibility, we should ask just what people benefit from the improved terms of trade. Certainly not the consumers as such: the tariff doesn’t lower retail prices of imports but rather tends to raise them a bit. No, it is the government that benefits: it collects import taxes that have in effect been partly shifted onto the foreign suppliers. Presumably this revenue lets the government either spend more money in the public interest than otherwise or else set home taxes lower than otherwise. Thus, the way that our people benefit is rather indirect and uncertain.
Furthermore, while foreign suppliers may depend on our purchases and have to absorb some of our import duty in the short run, that is much less true in the long run. The more time allowed for adjustment, the more price-sensitive does the supply of something, especially to one particular market, become. Professor Frank Graham has fully developed the point that because of long-run supply conditions in world trade, tariffs can much improve a country’s terms of trade only for a while.
Even this temporary improvement applies only to a volume of trade that the tariff itself has shrunk. Our country gets better terms per unit of trade but on less trade. Our consumers also pay higher prices than otherwise on the home-produced goods that replace some imports.
Since tariffs increase the gain per unit of trade but shrink the volume of trade, there is in principle some ideal tariff that would give our country the greatest possible total gain (temporarily). To set this ideal tariff is impossible in practice. Considering many sorts of impossibly detailed information about everchanging supply and demand schedules, the government would have to set a separate ideal duty on each of the thousands of different items. The tariff experts would need inhuman brilliance and impossible freedom from political influence. In practice, politicians set tariffs far above any theoretically-ideal level.
The academic terms-of-trade argument clashes with some of the more popular Protectionist arguments. At least it is right in seeing that cheap imports are beneficial and not harmful. Second, it clashes with the idea of Protecting home producers: full Protection would wipe out trade rather than increase the gain from it. Third, the terms-of-trade argument justifies export as well as import duties. (You yourself may work out the argument and find the flaws in it as a practical idea.) Yet Protectionists typically approve of exports.
The terms-of-trade argument is a strictly nationalistic one. It tells how one country can reap a temporary gain at the expense of foreigners. Now, if we make the absurd assumption that our country has the detailed facts and the nonpolitical tariff system needed to apply the theory to its own advantage, we should suppose that foreigners also know how to play the game. The outcome of retaliation and counter-retaliation would be an all-around shrinkage in trade and loss to all countries. Everybody can’t exploit everybody else. Incidentally, it would be inconsistent for the United States even to try on the one hand to exploit foreigners through the terms of trade while on the other hand spending billions of dollars a year to help them.
The space spent here on the terms-of-trade argument is all out of proportion to its practical importance. It does have some theoretical importance because academic economists are delighted and intrigued with such a curiosity as a tariff argument that is not quite false.
RETALIATION AND TARIFF BARGAINING
If foreign countries have tariffs and other import barriers, shouldn’t we retaliate in kind? It is true that foreigners hurt us as well as themselves with their trade barriers, but we can’t remedy some obstacles to trade by setting up others. As Lord Beveridge has said, that other countries have bad harbors is no reason for a country to sink rocks around its own coasts.
Akin to the retaliation argument is the argument that tariffs are useful for bargaining power. High American tariffs punish foreigners for their tariffs and let us offer cuts in ours in return for cuts in theirs. Anyone who sincerely uses this argument is tacitly admitting that general Free Trade is desirable. He is arguing that tariffs may be a tactical weapon to cut down tariffs. However, if one country uses its own high tariffs to make other countries lower theirs, the other countries can do the same. With many countries maintaining or raising tariffs to get other countries’ tariffs down, the end result is likely to be an over-all rise in trade barriers. This is especially true because tariffs once erected, no matter why, cannot fail to give at least incidental Protection to home producers and so to breed vested interests which demand their continuance. Furthermore, to experiment with tariffs for bargaining power suggests to the man in the street, who doesn’t understand such matters very well, that tariffs really must benefit his country. If we want foreigners to believe that tariffs are harmful, we ought to set an example by getting rid of our own. Tariffs for bargaining power boomerang.
Discussion of a final argument for tariffs—that adjustment to their removal involves painful difficulties—is left until the chapter on “Progress toward Free Trade.”
MONEY AND EXCHANGE RATES
While not now besetting the United States, balance-of-payments troubles, otherwise known as the famous “dollar shortage,” account in large part for the strict import barriers maintained by many other countries ever since World War II. The foreign countries with these troubles have a seemingly intractable tendency to import goods and services worth more than what they export. These countries would always be in danger of using up their reserves of gold and foreign exchange (especially American dollars) unless high tariffs, strict import quotas, and comprehensive exchange controls squelched their tendency to overimport. What causes this tendency to overimport and the resulting need for controls? It is hardly an oversimplification to blame wrong currency exchange rates. Many a government has been fixing the price of its own currency against the American dollar at a higher level than would prevail in a free market. As a result, people of the exchange-control country find goods imported from the United States and other “hard-currency” countries a great bargain in their own local currency, while their exports are too expensive for people in hard-currency markets. Hence the tendency for such a country to import more than it exports, and hence the apparent need for trade and exchange controls to curtail spending of scarce gold and foreign-exchange reserves.
You may object to this interpretation of postwar trade and exchange controls by pointing out that before 1914, the chief countries in world trade kept their exchange rates fixed under an international gold standard and yet did not need special controls against overimporting. Well, many people who yearn for the days before World War I have an exaggerated idea of how long the international gold standard was in effect, of how smoothly it worked, and of how free from interference trade under it was. Furthermore, before World War I, the governments of gold-standard countries were generally content to let inflation and deflation at home keep in step with world-wide monetary conditions. Nowadays most governments pursue so-called “full-employment” policies and would resist any deflation of the home money supply, prices, production, and employment transmitted through foreign trade.
Theory and experience have shown again and again that three things are not permanently compatible: (1) fixed exchange rates among the currencies of various countries, (2) independent national monetary policies (that is, monetary management affecting domestic levels of prices, production, income, and employment), and (3) international trade free from special controls to force a balance between imports and exports. Before World War I the leading countries, by and large, sacrificed independent monetary policies in order both to have stable exchange rates and to do without special controls to balance imports and exports. Nowadays, by contrast, most countries will not give up their monetary independence.
While a full discussion of the matter lies outside the scope of this pamphlet, many economists do judge that the so-called business cycle of boom and depression is mainly a matter of monetary inflation and deflation, and that the key to stable prosperity lies in managing the country’s money supply so as to stabilize the general price level. Proposals for deliberate money management are hardly radical or socialistic: establishment and control of a money system is inevitably a function of government, anyway; and government taxing, spending, and debt management cannot help but profoundly influence a country’s money supply, total spending flow, price level, and business conditions. The proposal for monetary stabilization is not that governments should have more power to influence spending, prices, and business conditions than they have already, but that this power should be subjected to a definite well-chosen rule rather than be used in a haphazard and sometimes disastrous manner.
A stable-money policy would be important not only as a way to avoid the well-known wastes and frustrations of inflation and depression but also as a safeguard against Protectionist sentiment. When labor, factories, and machinery are going to waste through idleness in a depression, people are not likely to understand or care about the lesser wastes caused by trade barriers. In a depression, people are likely to swallow arguments that tariff Protection safeguards home industry against foreign competition, saves jobs, and so on. The world-wide plague of trade barriers during the Great Depression of the 1930’s illustrates how depression breeds Protectionism. Free Traders dare not ignore the need for monetary stabilization in order to maintain prosperity and full employment.
Rather than give up either independent money-stabilization policies or freedom of trade, why shouldn’t countries give up rigid exchange rates? Price fluctuations in free markets play a vital role in guiding economic activity in a free-enterprise system; it seems strange to clamp government controls on such vital prices as the rates of exchange between currencies. Under a system of freely-fluctuating exchange rates, a government would not have to maintain or worry about reserves of gold and foreign money. It would not have to worry about a balance between imports and exports. The free market would assure such a balance “automatically”: any tendency toward overimporting, for example, would make the home currency depreciate in terms of foreign currencies, thereby checking imports and stimulating exports. The familiar objections to free exchange rates—the alleged insensitivity of trade to prices, the alleged dangers of speculation, and the alleged risks imposed on international trade and investment—do not, in my considered judgment, survive careful inspection. Free exchange rates would make independent policies to stabilize the purchasing-powers of national currencies and so to stabilize prosperity logically compatible with complete Free Trade.
Aside from these economic considerations, considerations of political tactics from the Free-Trade viewpoint make free exchanges preferable to fixed exchanges. Fixed exchanges promote Protectionist sentiment by hiding the damage done by import barriers to industries other than those directly favored. The mechanisms that tend to balance imports and exports under a system of fixed exchange rates are complicated and are understandable only to special students. Fixed exchange rates lend superficial plausibility to Protectionist arguments about “preserving home markets” and so forth. Under free exchange rates, by contrast, it is easy to understand how a tightening of import duties or quotas would tend to make the home currency appreciate in terms of foreign currencies. It is clear that while a higher tariff on one import would benefit the competing home industry, the effect of the tariff on the exchange rate would stimulate other imports and would discourage exports. Under free exchanges, businessmen could see clearly how tariff privileges given to some inflict damage on others. Thus free exchanges would enable businesses damaged by Protectionism to make definite, understandable, timely complaints.
While a system of freely-fluctuating exchange rates is not the only workable international monetary arrangement conceivable, it is hardly strange that freedom of trade from controls and freedom of foreign-exchange markets from controls make a logical pair of policies.
POLITICAL REASONS FOR PROTECTIONISM
American political history helps explain why Protectionism has lasted so long despite the overwhelming case against it. Congressmen seeking reelection are not likely to ignore the pressures of special economic interests among their constituents. A Congressman from a shoe-producing district can no more win votes by favoring duty-free shoe imports than a senator from a sheep-raising state can win votes by favoring duty-free wool imports. Even if—contrary to fact—every single senator and representative favored Free Trade “as a general principle,” he would find it politically expedient to make an exception for the “special circumstances” of the industries in his state or district. Here “logrolling” comes into the picture. A Massachusetts senator might say to a Louisiana senator, for instance, “You vote for my shoe tariff, and I’ll vote for your sugar tariff.” And so it goes, some vote-trades conceivably bringing in other matters than the tariff: “You vote for my pottery tariff, and I’ll vote for your wool tariff.” “You vote to dredge my creek, and I’ll vote for your glove tariff.” “You vote for my watch duty, and I’ll support your appropriation for a new post office.” “You go along with me on a motorcycle duty and I’ll go along with you on silver subsidies.” Such logrolling must play a big part in any explanation of the high Smoot-Hawley Tariff of 1930, which, while since then greatly modified by trade agreements, is still the basic tariff law of the United States.
The general interest gets lost amid the special-interest pressures and the logrolling. Each special producer interest knows what it wants and how to get it through political pressure. The consumer interest is unorganized and without effective lobbies. The old principle holds true that “Everybody’s concern is nobody’s concern.”
The general ignorance of tariff issues except by the Protection-seeking special interests provides an opportunity to wrap up Protectionism in the American flag. To the uninitiated, slogans about “saving the home market” and “protecting American industry” have an undoubted appeal. Phony patriotism is an effective trick of Protectionist sloganeering.
Political parties in a democracy tend not to draw up election issues in a clear-cut way. An anti-Protectionist party would hesitate to demand complete Free Trade for fear of losing some Protectionist voters who would support it on other issues. The anti-Protectionists would expect to get the votes even of complete Free Traders merely by being somewhat less Protectionist than the avowed Protectionist party. Thus political compromise, plus the unavoidable intermingling of unrelated issues in every election, means that the issue of Protection versus Free Trade always gets watered down into an uninspiring issue of a little more versus a little less Protection. If the tariff could somehow be got rid of as a political issue, the disentanglement of issues would improve the wisdom of political decision making on other matters.
Underlying people’s willingness to compromise on the tariff and other issues seems to be the very widespread fallacy, rarely spoken in so many words, that positive virtue lies in a “middle-of-the-road” position between two “extremes.” Nobody wants to be an “extremist.” We might name this attitude the “golden-mean fallacy.” Actually, either so-called “extreme” policy, especially in economic matters, may have a logical coherence and self-consistency completely lacking in a “compromise.” A further defect in “golden-mean” thinking is that almost any position can be described as a compromise between two extremes. Protectionism could be described as a happy medium between complete national self-sufficiency on the one hand and Free Trade on the other; Free Trade, as a happy medium between Protectionism on the one hand and a policy of export duties plus import subsidies on the other. People who habitually pride themselves on their “middle-of-the-road” positions are just showing their own intellectual bankruptcy. The illogic of compromisers is something that Free Traders always have to combat.
The conclusion to be drawn from this chapter is not that Free Trade is a hopeless cause, but that the popularity and persistence of Protectionism are no evidence whatsoever in its favor. Faulty theories and the realities of practical politics combine to fasten Protectionism upon us. But if a sizable number of influential people can be made to see the fallacies in Protectionist theorizing, Free Trade will become an issue that even practical politicians can no longer afford to ignore.
[11 ]Lawrence W. Towle, International Trade and Commercial Policy (New York: Harper & Brothers, 1948), p. 328.
[12 ]See Hearings before the Committee on Ways and Means, House of Representatives, Eighty-Second Congress, First Session, on H.R. 1612 (January 1951), pp. 225-228, 601-602.
[13 ]Norman Campbell, What Is Science? (New York: Dover Publications, Inc., 1952, $1.25), first quotation from p. 181; second from p. 174.
[14 ]Hearings . . . on H.R. 1612, p. 372.
[15 ]Protection or Free Trade, p. 105.
[15a ]The general case for complete Free Trade does not, in my personal opinion, argue for unrestricted trade between the free world and its enemies while the cold war lasts. The objection to such trade is not that our enemies would send us their products. Receipt of many useful things, after all, could in itself only be of benefit to us. The objection, rather, is that our enemies would probably reap even greater benefit from the things we would send them in return.
[16 ]Frederic Bastiat has effectively mocked this “purchasing-power argument” in his “Petition of the Candlemakers,” condensed below in the section on “Cheap Imports.”
[17 ]Protection or Free Trade, p. 103.
[18 ]Economic Sophisms, p. 216.
[19 ]Business Week, April 25, 1953, pp. 162-163.
[20 ]Protection or Free Trade, p. 36.
[21 ]Sir William Beveridge and a Committee of Economists, Tariffs: The Case Examined (London: Longmans, Green and Co., 1931), p. 233.