Econlib

The Library

Other Sites

 Front Page arrow Titles (by Subject) arrow ESSAY No. CXXX. - The Principles of Free Trade

Return to Title Page for The Principles of Free Trade

Search this Title:

Also in the Library:

Subject Area: Economics
Topic: Free Trade

ESSAY No. CXXX. - Condy Raguet, The Principles of Free Trade [1835]

Edition used:

The Principles of Free Trade illustrated in a series of short and familiar Essays originally published in the Banner of the Constitution, 2nd ed. (Philadelphia, 1840).

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


ESSAY No. CXXX.

october 10, 1832.

The effects of domestic competition on the prices of foreign manufactures at the places of their production.

ONE of the most plausible arguments advanced by the advocates of the Restrictive System in favour of their policy is, that the competition created in the United States by the tariff has had an influence in reducing the prices of cotton and woollen manufactures, not only in this country, but also in Great Britain. This argument, we confess, has, at first sight, a semblance of truth: and we shall therefore be obliged, in order to expose its fallacy, to examine it somewhat in detail.

The effect of competition is, doubtless, to diminish prices. But what is competition? It is that struggle between the producers of particular commodities, of similar or nearly similar description, and of equal or nearly equal quality, by which each endeavours to make it the interest of a purchaser to give him a preference, which is usually accomplished by a reduction of price. It is this struggle to which the world is indebted for the many improvements which now exist in labour-saving machinery, for the great increase in skill and dexterity, and of economy in the application of industry, and for the constant efforts which philosophy and science are daily bestowing upon the advancement of the powers of production. But competition, in order to be efficient, must be carried on between persons who are upon a par, or nearly upon a par—that is, who can afford to sell their fabrics at the same, or nearly the same, prices. If A, who is a hatter, for example, proposes to enter into competition with B, who is also a hatter, he can only do so by offering his hats, of equal quality, at the same price at which the latter offers his. If, from any cause, A is not able to make them as cheap as B, there can be no competition, on the part of A, which will have a tendency to induce B to lower his price. The tendency of the competition is, indeed, to make A reduce his price; but, as he cannot do this without loss, he must, sooner or later, quit the field.

The case is precisely similar in regard to the position in which the United States stand towards Great Britain. The latter nation having advantages over the former in cheapness of capital and wages, and being quite upon a par as to improved machinery, and very nearly so as to some raw materials, and upon a better footing as regards others, is able to produce manufactures of cotton, wool, and iron, at a cheaper rate than they can be produced in the United States. Indeed the difference in the cost of production of some fabrics, between the two countries, is so great, that, were it not for high duties, no competition whatever could be sustained; and, therefore, the rival-ship of the United States, under a system of Free Trade, could have no influence whatever in reducing their prices. Let us now see whether the case be altered by the artificial competition brought about by high duties. An article of cotton manufacture, we will suppose to cost, in England, with charges of impost added, ten cents per yard, whilst the cost of making a similar fabric, at home, would be fifteen cents per yard. The question then is, whether a protecting duty of fifty per centum would have the effect of reducing the price, in Great Britian, below ten cents.

In the first place, the immediate effect of such a law would be to diminish the importation, into the United States, of cotton fabrics, on account of the rise in price: for, nothing is more clear, than that as price rises, consumption diminishes. This diminution of demand would occasion a temporary fall in the price of cotton fabrics in Great Britian, partly arising from the excess of stocks on hand, for which the regular market would have been thus cut off, partly from a fail in the wages of labour, which would result from the dismissing of the surplus hands, and partly from the fall which would take place in the price of the raw material. This fall, however, would not have been the result of competition, but of a diminished demand, and would only be of temporary duration. The production of cotton manufactures would be suspended until the supply should be adapted to the new extent of the demand—wages would recover their former level, by the idle hands gradually finding employment in other pursuits—and the production of cotton would be diminished until the supply should be only equal to the new demand. The price would then again rise to ten cents, and thus far it will be seen that the operation of duties would have been productive of no permanent reduction of price. Much evil, however, would have resulted, pending this process, to the American manufacturers. They would, for a considerable time, have had to encounter the foreign competition of foreign fabrics, sold in the market at less than the cost of importation, and, besides this, the domestic competition, which, operating together, would have brought down prices below the American cost of production. Time, however, would cure the evil, and, ultimately, no more fabrics would be produced than could be sold at prices which would give the ordinary profits of capital; and thus the prices of cotton fabrics would settle at ten cents per yard in Great Britain, and fifteen cents in the United States. It remains now, to be seen, whether the competition hereafter to be carried on in the two countries would diminish the price, in Great Britain, below ten cents. To ascertain this, it would be requisite to know whether the number of competitors would be greater or less after the imposition of the high duties, for, according to the number of competitors must be the probabilities of diminished prices. A moment’s consideration would solve this difficulty. The establishment of manufactures in the U. States would increase competition in this country; but the cessation of the American demand would diminish it in Great Britain; and, as the number of persons who could find employment in manufactures, which could only be sold at fifteen cents per yard, would not be as great as the number which would be employed in manufactures which could be sold at ten cents per yard, in the two countries united, the competition would not be as strong as if the high duties had never been imposed—and, consequently, prices would not be as likely to fall.

It is therefore an error, to suppose that our Tariff has had the effect of occasioning any permanent reduction in the prices of manufactures in Great Britain. Besides, if it be true that a manufacturer can afford to reduce his price in proportion to the quantities he sells, which we believe, is admitted by all, it follows, that our tariff, by diminishing the quantities of certain fabrics required from Great Britain, has had the tendency of keeping up, instead of diminishing, prices in that country; and, low as the prices already are there, they would have been still lower had not our Restrictive System diminished the demand for them. But, say our restrictionists, the high duties have created a domestic competition which has brought down prices in the United States. This is true, but no domestic competition can ever bring down prices below the cost of production; and as the cost of production in the United States, where capital is worth from five to ten per centum per annum, wages fifty cents to a dollar and a half per day, and first rate land, in the Western country, at one dollar and a quarter per acre, can never be so low as it is in Great Britain, where capital can be had at three per centum per annum, labour at half our rates, and where land is wholly beyond the reach of the labouring poor—it is altogether impossible, so long as those inequalities exist, that we can manufacture as cheap as the British can. This important fact seems to be entirely overlooked by the manufacturers, and they are perpetually urging the idea that all they want is a protection for a few years, until they can get fairly under way. This they said in 1816, this they said in 1824 and 1828, and this they will say fifty years hence, unless they should, as is quite likely, long before, be broken down by smugglers. The fact is, no temporary protection can avail against such permanent inequalities as those we have described. The prices of the raw materials, wool and iron, are cheaper in Great Britain than they are in this country, whilst cotton does not cost one cent per pound more to transport it to Liverpool, than it does to transport it from the cotton-growing to the manufacturing states. In manufacturing skill and invention, too, there are no improvements, in this country, which would not be accessible to the British; and, if we have cheap water power, they have cheap steam power, and, besides this, iron and mechanical labour, to make their machinery, at half the price which we must pay. All idea, therefore, of any ultimate reduction of prices, by domestic competition in this country, down to the British prices, is, in our opinion, altogether delusive.