Front Page Titles (by Subject) Part I: INTRODUCTORY—SOME PRINCIPLES - Some Aspects of the Tariff Question
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Part I: INTRODUCTORY—SOME PRINCIPLES - Frank William Taussig, Some Aspects of the Tariff Question 
Some Aspects of the Tariff Question (Cambridge: Harvard University Press, 1915).
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Part I, Chapter I
Duties, Imports, Prices
In this introductory chapter I shall consider, even at the risk of repeating elementary matter, the way in which duties work, the significance of the continuation of imports after duties have been imposed, and the possibility of measuring the charge which they lay on the community.
A common notion is that any duty operates automatically as a price-raising cause, bringing at once and permanently a tax up to its full rate. Not a little speechifying of a very effective kind has consisted in an enumeration of extreme rates, with the implication that they bring burdens no less extreme.1 Even more remarkable is the eagerness with which protected producers have themselves schemed and labored for high duties as if it were certain that they would get the full benefit, in a corresponding rise in the price of their wares. The burden which our protective system imposed on the community has been much exaggerated by its opponents; but the protected producers and their spokesmen have countenanced the exaggeration by virtually endorsing the indictment against themselves. They ask for advances in duties and protest against reductions as if a corresponding effect on domestic prices were certain to appear.
The truth is that the levy of a duty may have no influence at all on domestic price; or it may raise the price of the dutiable commodity by its full amount; or it may have an effect intermediate between these extremes.2
(1) The first case is the simplest. A duty on a commodity which is produced within the country as cheaply as without, and sold as cheaply, ordinarily has no effect whatever. Of such levies there has been a plenty in our tariff history. Those on the staple agricultural products are the most familiar and conspicuous. In the log-rolling which is an almost universal concomitant of protective tariffs, the notion that a duty will surely be of benefit to domestic producers has caused our farming sections to insist on "their share" of the going favors, and to accept, nay demand, duties on wheat, corn, meat and meat products, which yet have been quite without industrial effect. There has been no more striking illustration of the average farmer's naïve state of mind on this subject than the bitter opposition aroused by the reciprocity treaty with Canada which the Taft administration proposed in 1910-11. The free admission of wheat contemplated by that treaty was supposed to portend disaster to the wheat growers of the northwest; though it was known to all the world that wheat was exported both from the United States and from Canada, and that it was the same in price (allowing for cost of transportation) in these two countries and in England. The range of commodities subjected to duties yet not at all affected by them, has been very wide, including not only agricultural staples, but many manufactured articles.
(2) The second case—that in which the price of the commodity rises by the full amount of the duty—is found when imports continue after its imposition. Nevertheless it is not so easy as may seem at first sight, to determine just how conclusive is the evidence from the fact of importation. It will appear, as we proceed in the discussion, that qualifications of various sorts need to be borne in mind.
Under the ordinary conditions of trade,—those of competitive dealings,—the continuation of imports after a duty has been levied shows that the price of the commodity is higher within the country than without by the full amount of the duty. This is not the same as to say that the price is raised to the purchaser or consumer by that full amount; a consequence which no doubt commonly ensues, but by no means ensues under all conditions. It is conceivable that the divergence between foreign and domestic price will come about through a fall in the foreign price, not through a rise in the domestic; or through a partial fall in the one, a partial rise in the other. Of this possibility, more will be said presently. The only thing which is shown by the inflow of imports over a tariff barrier is that the level of price is higher on one side than on the other by the height of the barrier. The reason is obvious: no trader will import goods, and pay the duty on them, unless he can sell them at an advance over the foreign price which will recoup him for the duty paid.
This holds, to repeat, under the ordinary conditions of trade. But it does not hold necessarily in case of goods produced in the foreign country under monopoly conditions. Under monopoly, there is a possibility of difference in charge to different purchasers, and hence a possibility that a duty will not affect price as it would under the conditions of a free market.
That the incidence of a tax on monopoly products is different from that of a tax on competitive products is a commonplace in economics. Whether the tax be in the form of an excise or a tariff duty, the monopolist may find it expedient to bear part of the charge, in an extreme case even to bear the whole of it. He may be confronted by such inelasticity of demand as to make it most profitable to sell at an advance in price less than the tax, perhaps very much less than the tax. Now, the peculiarity of a customs duty is that it makes divided markets. It is imposed not on the whole of the monopolist's output, but only on that part which is exported to the country levying the duty. In the duty-levying country, the monopolist may not raise his price by the full amount of the duty,—i.e., may lower his net price, what is left to him after the tax is paid by himself or others,—and yet maintain the full previous charge in his home market. Then the divergence between the two markets after the duty has been imposed will be less than the amount of the duty. The foreign producer then will "pay" some part of the tax; not in the sense that he lowers his price all around, but that he lowers it on the quota exported to the duty-levying country.
An analogous case is that of "dumping" in its typical form,—that is, the steady sale of a commodity to a foreigner at a lower price than to domestic consumers. The divergence of prices is here also explicable, as a rule, on the ground of monopoly. Of dumping in its various forms, more is said elsewhere;3 it is enough at this stage to note that it presents theoretical problems very similar to those of the imports of a monopolized article continuing after the imposition of a duty.
Complete monopoly is rare at best; and this particular consequence of full monopoly seems to be even more rare. I know of no case, either in American or in foreign experience, where one having a complete monopoly has in fact continued steadily to send to a foreign country a product on which a duty has been levied, and then has sold the product at an advance in price less than the duty.
But imperfect monopolies,—those where the product is sold for a considerable time at a price above the strictly competitive rate,—are by no means rare. Competition works out its effects slowly and irregularly. For long periods there are quasi-monopolies due to established reputation, trademark, or brand. No doubt these require for their maintenance, as well as for their first establishment, a considerable degree of business ability; but they are susceptible of being held in a position of advantage for a surprisingly long time. As in the case of complete monopoly, though to a less extent, the returns are so high as to make it possible to make some reduction in price and yet retain enough to make sales worth while. The imposition of a duty may lead to such a concession. Thus, a particular kind of steel tape used by engineers, made in England and widely exported, has a long-established name and a quasi-monopoly position. "Specialties" of various kinds are brought from Europe to the United States under similar conditions, and indeed account for the continued importation of many classes of goods subject to high duties. On such articles the reduction in price which may follow the imposition of a duty is not likely to be great; the divergence between foreign and domestic price will after all not be far from the amount of the duty. But the cases are frequent enough, and divergence sufficiently noticeable, to cause the man of affairs who encounters them to be skeptical about the general proposition that price rises by the full extent of the duty even when imports continue; and they lead the protectionist to jeer once more at the "theoretical" free trader who says that the foreign producer bears no part of the tariff burden.
The case is different with commodities produced under strictly competitive conditions. Here there is a free market, and a market price the same for all purchasers. Here it would seem that there is no possibility of divergence between prices to different purchasers, such as appears in case of monopoly. It would seem, therefore, that the continuance of imports proves at the least that price in the duty-laying country is higher than in the exporting country by the full amount of the duty. Here, too, it would seem clear that in the long run this full amount constitutes a charge on the domestic consumer, not on the foreign producer. These consequences do in fact appear; yet with temporary divergences which again puzzle the ardent free trader and are made much of by the ardent protectionist.
A manufacturer or set of manufacturers whose operations have been developed and adjusted for a large export trade may be "caught" by the sudden levy of a duty. In order to hold their own in a market on which they have relied for disposing of a large output, they may sell in the duty-laying country at a less price than elsewhere. One would suppose that, under competitive conditions, the concession in price would not be confined to the exported quota. Each of the producers,—so the economist would reason,—is desirous of avoiding the fall in price; each will prefer to sell in the home market at full price rather than in the foreign market (now subjected to duty) at a reduced price. Competition between them will cause the decline to be distributed over all the output. But in fact things often work out, at least for some time, differently from what the close-reasoning economist expects. The producers, it is true, are desirous of staving off the fall in price; but this desire often leads them, without any express agreement or combination among themselves, to maintain their price on ordinary sales, yet cut it perforce on the sales to the protecting country. They do not wish to "spoil" the general market4 or upset the going price which has come to be regarded as "fair." Thus for a time the consequence may be similar to that of monopoly; there may be a reduction from the going price, for the purchasers in the duty-laying country. But all this is for a time only. Such special sales at reduced prices are unwelcome; they will be dropped as soon as possible. Each producer will prefer to sell all he can in the general market where concessions in price have been avoided. In this general market, too, he will be tempted to push his sales; very probably by concessions other than overt reduction of price,—such as longer credit, ready allowance for alleged damage or shortage, assumption of freight charges. The mercantile world has plenty of devices by which rates are cut in fact, even though nominally maintained. The differences between the prices in sales to the duty-laying country and to other markets will gradually disappear; and then, if imports into the former go on, the normal inference from continued imports can be drawn: price is higher within such a country than without by the full amount of the duty.
Further, that difference will ultimately appear as a charge on the domestic consumers, not on the foreign producers. Only for a time will the latter sell in the duty-laying country at a less (net) price than they have been previously getting,—assuming that this previous price was the strict competitive price. Sooner or later they will withdraw from the business thus made unprofitable or less profitable. If this cannot be done without an appreciable reduction in total output, the process will require time; most of all, if it cannot be done without allowing large plant to wear out.5 But in the end special sales to foreign countries and general reductions in price due to the cutting off of the foreign markets, will cease. Exports which may be sent thereafter to the duty-laying country will go under normal conditions, and the normal consequences of duties will appear. Prices of the dutiable commodities will be higher by the full amount of the duty; not only higher within the protecting country than without, but higher by that full amount when measured from the previous level. In the long run, the continuance of imports of staple goods, after a duty has been imposed, proves that the domestic consumer pays an enhanced price, or tax, to the full extent of the duty.
In the present volume, it happens, the discussion of imports, duties, prices will have to do chiefly with staple goods made under competitive conditions; moreover, goods not mainly dependent on the American market, so that even a temporary divergence from normal conditions will rarely need to be considered.6 As regards the tariff schedules to be considered in the following pages, the general proposition holds, with little need of allowance for the qualifications and exceptions: if imports continue, we may be sure that the domestic purchaser pays a tax of the full amount of the duty.
If now imported goods, steadily sent in over a tariff barrier, are raised in price by the amount of the duty, it follows that any similar goods that may be produced within the country are also raised in price by the same amount. Not only the imported supply, but the total supply, sells at a price higher by so much within the country than without. This is the first article, and an essential one, in the free traders' indictment of protective duties: they tax the consumer without bringing a corresponding revenue to the government. They thus cause prima facie a net loss to the community. The higher price paid for the imported portion is not open to this charge; what the consumer so pays in taxes is offset by the revenue yielded to the public treasury. It is the higher price of the domestic product which has no offset. All this is a commonplace in economics, and there is no occasion for repeating here what has been so often set forth.
(3) Next we have to consider the third case, intermediate between the two just discussed,—that in which a duty causes a rise in price, but one not up to its full amount. Here the duty is prohibitory, yet has its effects. It is so high as to cause the cessation of imports which would otherwise come in. The case is one in which there is "need" of protection; the commodity could be got more cheaply from abroad; but the duty is greater than is needed to offset the difference between domestic and foreign cost. There is then no overt evidence on the quantitative effect of the duty. The tax on the domestic consumer may be nearly equal to the full amount of the duty; it may be considerably less. So far as the evidence from imports goes, there is nothing to prove there is any tax at all,—the case might be that mentioned first in our analysis.
The intermediate case is the most frequent of all as regards manufactured goods. It is not often that a duty is imposed on these precisely so high as to cause a division of the market between foreign and domestic producers. Such a result was aimed at in our tariff act of 1913, in which the rates were supposed to be adjusted on a "competitive" basis.7 In fact, a rate that is really "competitive" is difficult to fix, and was arrived at in very few of the duties of 1913. A duty on a manufactured product commonly is either so high as to keep out all imports, or so low as to admit all and thus to be in effect merely a revenue duty. True, imports often appear to continue, and a division of the supply between domestic and foreign quotas often appears to be brought about. But the appearance is deceptive; the two sets of goods on examination prove to differ in quality, or to be for other reasons not in reality competitive. Of the need of discrimination in interpreting the evidence from continued imports of manufactured goods, more will be said in the ensuing paragraphs, and still more in the later chapters of the volume.
A duty on the so-called raw materials is more likely to be really competitive; the probability is greater that some part of the supply of such goods will be brought in over the barrier of a duty. The reason for this difference between manufactured goods and extractive products is not far to seek. The latter are likely to be produced not at uniform cost, but higher cost for some parts of the domestic output than for others. When a duty has brought about a rise in domestic price, there will be some increase of domestic production, but not an indefinite increase. Diminishing returns, i.e., increasing cost, will set in, and will bring a limit to the extension of the domestic quota. Imports will continue, even though on a less scale than they would without a duty. Of this situation there have been some striking illustrations in modern tariff history. One was in the continuing imports of wool into the United States during the period from the close of the civil war until wool was admitted free in 1913; a case which will be followed in detail in this volume.8 Another was in our imports of raw sugar, of which also a full consideration will follow. Still another, the occasion of a vehement political and economic controversy in Germany, is in the sustained imports of wheat into that country after the imposition of the wheat duty in 1879 and its gradual increase in the years thereafter.9 In all these cases the fact that imports came in steadily after the imposition of the duty proved beyond question that the price of the whole supply, domestic as well as foreign, was raised by the full amount of the levy.
But, to repeat, in the case of manufactured goods, of which an increased supply can be produced in the long run without rising cost per unit, the division of the market between foreign and domestic producers is not so likely to take place. It may be fairly described as a lucky hit when a duty is adjusted at the exact point which brings about this result. In the tariff experience of the United States at large, and particularly as regards the schedules whose effects will be examined in this volume, the rates have usually been much above the point of prohibition. Imports have ceased. To ascertain then what effect the duties have had, above all to measure their quantitative effects, proves extremely difficult. Statistics of the prices of the goods are not easy to get, and are even less easy to compare with due allowance for differences in quality. In some instances, as with ordinary grades of cotton cloths, it is tolerably certain that domestic prices have been no higher than foreign; the case is in reality our first. With the ordinary grades of woolens, on the other hand, it is clear that domestic prices have been higher than foreign, yet by an amount much less than the duty; the case is the intermediate one. And for another great class of textiles, silk fabrics, the evidence is conflicting and the outcome difficult to state with any precision; there is a conglomerate made up of the two extreme cases, and of various degrees of the intermediate case.
Returning now to a topic touched in passing a moment ago, we have to note some further cautions and qualifications to be observed when drawing inferences from the fact of continued imports. There are not a few cases where imports seem to prove the full rise in price, but in fact do not prove anything of the kind.
In the first place, it must be ascertained whether the goods imported are in reality comparable to those made within the country. Textiles of all sorts have been steadily imported into the United States during the period covered in the present volume,—cottons, woolens, silks. But the imports have been almost exclusively of the finer and more expensive qualities. The less expensive goods, those which are most largely used, have been made exclusively within the country. The consumers have been served by two streams of heterogeneous supplies, not by one of homogeneous supply. Though the custom house statistics register considerable imports of silks and woolens, these have been of grades and qualities different from the domestic goods.
A striking case is that of pig-iron. Of this article also the customs returns show imports in considerable quantities for each year during the last half-century. But for the greater part of the period they were of special qualities only; classed as "pig-iron" in the tariff schedules and in the Treasury statistics, yet in fact without significance in the general iron market. Almost all of the imports were of spiegel-eisen and ferro-manganese, used in comparatively small amounts for mixing with other iron in the Bessemer process. This continued importation proved something about the relation between foreign and domestic price for that particular grade, but nothing about the prices of the enormously greater quantity of pig-iron proper.10
Again, exceptional transportation conditions may cause an imported commodity to find its way into some part of the domestic market over a duty which yet is prohibitory as regards the general market. Steel rails may be carried from Great Britain to Galveston, by steamers which are glad to get a return freight for cotton, at very low transportation charges; and it may then be to the purchaser's advantage to import them and pay the duty (i.e., a price raised by the amount of the duty) rather than meet the comparatively high land freights from the American mills,—at Pittsburgh or Birmingham (Ala.). Yet steel rails may be as cheap in Pittsburgh as in Great Britain, and American prices for them in general not higher than British. So economical is water transportation that steel rails have been transported from Europe around Cape Horn to Puget Sound, and have paid a considerable duty, even though rails were in most parts of the United States no dearer than in Europe. Similarly, pig-iron might come from Glasgow to New England and other places on the Atlantic coast, though charged with a duty and though no higher in price at Pittsburgh than at Glasgow. Transportation conditions of this kind explain some continuing imports which have puzzled those who make inferences from the bare statistics of foreign trade.
Lastly, we have to consider another qualification and distinction. It is one thing to say that the continuance of imports proves domestic price to be higher than foreign price by the full amount of the duty; it is another thing to say that the domestic consumer pays a tax to that full amount. The latter proposition, usually stated without qualification by the free traders, is often denied by protectionists of the extreme type. These are likely to maintain that duties operate as taxes on the foreign producer, not on the domestic consumer. To say that duties always tax the foreign producer is absurd. Yet there are conditions,—quite apart from monopoly, or temporary conditions of readjustment,—under which the unqualified free trade statement is not completely true, and the extreme protectionist statement not completely false; conditions under which imports continue, price is higher by the full extent of the duty, yet the domestic consumer is not taxed to that full extent. And conversely there are conditions under which a remission of duty will not lower price by the full amount.
These are the conditions, familiar in economic theory, where production is carried on under varying cost or diminishing returns. The ordinary free trade reasoning, like most of the reasoning of those British economists by whom the theory of international trade was worked out, assumed constant returns,—one uniform cost of production, irrespective of the volume of output. This at least was assumed as regards the foreign supply. The influence of varying cost or diminishing returns on domestic supply, and the consequent special effects of import duties on domestic cost and on the rent of land, were conspicuous in the reasoning of those who attacked the British corn laws. But these same conditions may exist for the imported supply. Suppose that the imports are of agricultural products or raw materials, and that they come from a country whose natural resources are not superabundant. An increase in the output of a commodity so produced will cause its normal price to go up, if the additional increments of supply can be got only at higher cost. A decrease in output, conversely, will cause normal price to go down, if the sources of supply which are abandoned are comparatively poor, and if those which continue to be utilized are comparatively good. The margin of cultivation will rise in the former case, will fall in the latter; and normal price will shape itself correspondingly. The particular case which is to be considered in the present discussion is where an import duty causes part of the foreign supply to be supplanted by domestic supply, and where the abandoned foreign quota had been produced at high cost. The recession of the margin of cultivation will then cause normal price to fall in the foreign country; and though imports continue, and though domestic price be higher by the amount of the duty, it will not be raised by that full amount above the level which prevailed before the duty was imposed. It cannot be said that in this case the foreigner bears any part of the tax; but, also, it cannot be said that the domestic consumer pays a tax of the full amount of the duty. The converse case arises where a duty which had long been imposed and had shut out a foreign supply, is repealed, letting in the foreign article. If the consequent pressure on foreign sources of supply causes resort to poorer grades of land or other natural agents,—if the margin of cultivation goes up,—the normal foreign prices will rise. Then, in the country where the duty has been remitted, price will go down by less than the amount of the duty. Some part of the possible gain to consumers will be offset by the higher cost of the additional foreign supplies.
This sort of general reasoning, however, is in fact less likely to be applicable to imported supply than to domestic supply. The British economists who made much of it in condemning the corn laws, but neglected to consider its applicability to the countries from which corn might be imported, were substantially in the right, even though their theoretic reasoning was not carried far enough. It is much more probable that the conditions of diminishing returns will be found for a domestic supply than for a foreign supply. The reason is obvious. The available area in any one country is more likely to be limited, and, therefore, more likely to exhibit considerable variations in cost. A foreign supply is likely to come, actually or potentially, from several countries. Within wide limits, it will probably be produced under conditions not of varying cost but of constant cost. Any considerable increase in the supply of wheat grown in Germany or in England, for example, will probably cause resort to inferior soils, or disadvantageous pressure on all the available soils. But the same increase of supply from foreign countries,—distributed over Canada, Argentina, the United States, India, Russia, Roumania,—will cause no pressure at all. If indeed a single country or area were the sole source of supply for the article subjected to duty, there would be some probability of increasing cost and rising price after the removal of the duty. But this must be a rare case; at all events I know of none in the tariff experience of the United States. More nearly within the bounds of possibility is the case where, though several countries contribute to the imports, all of them have pushed production to the point where additional output is not certainly to be had on the same terms. This possibility exists, for example, in the case of wool; and it has been alleged to exist, though with less plausibility, in that of sugar. As will appear later, it deserves at least to be considered whether a greater demand for foreign wool, due to the abolition of the United States duty, will cause some permanent rise in foreign cost and price, and so fail to bring for the domestic consumer the full expected gain from the remission. Even in this case the answer seems to be in the negative: the conditions of foreign supply are sufficiently flexible to prevent an outcome so disappointing to the free traders.11
So much for the details, qualifications, exceptions, which must be borne in mind when interpreting statistics of imports or reasoning about the effect of duties on domestic price. Under the ordinary conditions of trade, if imports continue, the effect of a duty on prices is plain. The nature of the effect is equally plain, though its extent is not so easy to measure with exactness, if imports are stopped by the duty; yet would come in were the duty removed. Quite a different question is whether these consequences from the imposition of a duty are permanent; whether the price of the dutiable article, raised at first by the tariff, may not be lowered eventually in consequence of changes in the conditions of domestic production. This is the question raised by the doctrine of protection to young industries, to which we turn in the next chapter.12
Part I, Chapter II
Protection to Young Industries
The argument for protection to young industries cannot be stated better than in the terms used long ago by a staunch adherent to the principle of tree trade, John Stuart Mill.
"The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production often arises only from having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the production than those which were earlier in the field; and besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production, than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burden of carrying it on, until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reasonable time, will sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should the domestic producers ever be allowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing."13
Simple as the general course of the argument is, something more is to be said concerning the form in which it has been most often urged in recent times and the tests by which to judge of success in attaining the desired result.
The form in which the argument most commonly appears in connection with our recent industrial development is the statement that protection ultimately lowers prices. It is admitted (grudgingly perhaps,—and sometimes questioned or even denied) that the first effect of the imposition of a duty is to raise the price of the dutiable article. But domestic competition ensues, it is said, and eventually price goes down. And when it is asked why the domestic producer, if he can bring his commodity to market after all at the lowered price, really needs a protecting duty, the answer is that he needs it at first,—during the early stages. He needs to learn; he needs time to develop the full possibilities. All this, it is obvious, is simply the young industries argument. But during the last generation our American protectionists have been chary of using that phrase. The United States is no longer a young country. Its industries are on a great scale, often on a gigantic scale. To call them "infant" invites ridicule. Hence falling prices, alleged to be due to domestic competition, and eventual benefit to consumers, are the pleas dangled before the public. Yet this is the same reasoning, merely put in other words; the question is simply whether there has been successful application of protection to nascent industries.
One familiar misapplication of the argument deserves attention. In the hearings before congressional committees on tariff bills during the last thirty years, there are countless statements, often fortified by more or less accurate statistics, to the effect that the price of one article or another within the country fell after the imposition of a duty on it. All such evidence is beside the point. The question is not whether domestic price falls, but whether it falls relatively to foreign price; whether eventually it comes to be as low as the latter. If both fall together, the domestic price always remaining higher than the foreign, nothing is shown in support of the young industries argument; or rather, it is shown that the facts adduced fail to support the argument. The circumstance that both sets of prices go down indicates that some other causes,—such as improvements and inventions or new resources,—have been at work to bring a reduction in price the world over. Persistence of the gap between the domestic and foreign price indicates that no special cheapening influence has been at work in the protecting country. Only if the domestic price falls to the foreign level, does the question present itself whether protection to a young industry has been successfully applied. This is so obvious to one trained in the elements of economic reasoning that an apology is almost needed for explaining it. The repeated triumphant parading of a bare fall in prices as evidence of success in the working of protection is perhaps only a part of the general shallowness of the stock presentation of the protectionist case. Yet this sort of presentation is often made by earnest and intelligent men, convinced of the goodness of their case; one more instance, among many that are sadly familiar, to show that the most elementary economic propositions are little understood, and the simplest economic reasoning needs to be stated and illustrated again and again.
A different question, and one not so simple, is whether there is any prospect of gain from protecting young industries in a country as fully developed as the United States has been since 1860; whether, for so robust and full grown a social body as this has become, ridicule is not a sufficient answer, whatever the terms in which the argument is stated. In that earlier formulation of the argument which won a respectful hearing from the fair-minded, stress was laid on the general conditions of the country imposing protective duties. It was a young country that was spoken of by Mill, rather than one having young industries. List's well-known plea rested on his doctrine of stages in economic evolution,—on the inevitableness of the transition from the agricultural and extractive stage to the manufacturing stage, and on the advantages of protective duties for furthering and easing this transition. He found the United States in this stage of development when he was sojourning here during the period of our early protective movement. On his return to Germany, he found his own country in a similar stage, and agitated for nurturing protection there also. The possibility of good results from protective duties under such conditions is now denied by few. But does the same possibility exist when this particular period of transition is past, when the manufacturing stage has been fairly entered, when the question no longer is whether manufacturing industries shall be established at all, but whether some particular kinds of manufactures shall be added to others already flourishing?
Notwithstanding early prepossessions to the contrary, I am disposed to admit that there is scope for protection to young industries even in such a later stage of development. Any period of transition and of great industrial change may present the opportunity. No doubt the obstacles to new ventures were greater during the first half of the nineteenth century than they have come to be in the modern period. The general diffusion of technical knowledge and technical training, the lessening of secrecy in trade processes which is the inevitable result of large-scale operations, the cessation of regulations like the early British prohibition of the export of machinery, the greater plenty of expert mechanics and machinists,—all these factors tend to facilitate the establishment of industries whose difficulties are no more than temporary and transitional. None the less the early stage of any new industry remains difficult. In every direction economists have come to recognize the immense force of custom and routine, even in the countries where mobility and enterprise are at the highest. Departure from the habitual paths of industry brings unexpected problems and difficulties, false starts and initial losses, often a fruitless imitation of familiar processes before new and better ones are devised. All this is made more trying when a young competitor is striving to enter the market against a producer who is established and well equipped. The obstacles in the way of promising industries, though doubtless not so great as they were a century ago, remain great. The experiences of the United States during the last fifty years, some of which will be described in the following pages, indicate that there remains in modern times at least the possibility of acquiring a self-sustaining industry by aid during the early stages.
The most striking cases in which success of this sort may be fairly alleged to have been secured are those of industries quite new,—not existing at all at the time when the protective duty was imposed. Where an industry is already started, or where there exist others closely related, further extension may be expected to take place, if the conditions are really favorable, without any legislative stimulus. If a silk manufacture already is established, the development of new branches of silk making is not likely to meet with the special obstacles to young industries. And if, none the less, protection has been applied, and if thereafter a self-sustaining additional branch of the manufacture has grown up, the question at once presents itself, would not the same growth have ensued in any case? and was the protection needed? Such skepticism, however, would be hardly justified if there had been no silk manufacture of any sort before the protection was applied. Precisely this outcome,—the establishment of an industry entirely new,—has appeared under our duties on silks during the last half-century. Without the duties, it is doubtful whether there would have been any silk manufacture at all. And if in course of time that manufacture proved capable of supplying the country with its products more cheaply than those imported, or at least as cheaply, the presumption would be strong that a young industry has been successfully nurtured. It remains to be examined, in the following pages, whether this latter condition has been met; but the other condition,—that an industry completely new was brought into being,—certainly is found in the case of the silk manufacture. In the case of worsteds also, there was virtually no industry at all before the civil war; it has grown up under the barrier of protection. The same thing has happened with plate glass, and with many another commodity. In such cases,—if eventual independence has been achieved,—it may be fairly said that protection was applied to an industry really young.
Further: the length of time to be allowed for the experiment should not be too brief. Ten years are not enough; twenty years may be reasonably extended; thirty years are not necessarily unreasonable. When writing of the earlier stages of United States tariff history, I intimated that the first sharp break, in 1810-20, from the established ways of industry, and the very first ventures in new paths, were sufficient to give the needed impetus, and that thereafter protection might have been withdrawn.14 An opinion of this sort I should not now support. What has already been said of the tenacity of old habits and the difficulties of new enterprises justifies the contention that a generation, more or less, may elapse before it is clear whether success has been really attained.
Nevertheless, in the end the final test must be applied,—can the industry, after a period not unreasonably long, maintain itself unaided? The gist of the young industries argument is that the community bears an initial charge for the sake of an eventual gain. That gain is secured only if the community is finally supplied with its goods as cheaply as the displaced foreigner could supply it. The young industry must mature so fully as to sustain itself. The final test would seem to be indifference to the continuance of the duty and willingness to meet foreign competition on even terms. If the industry continues to need protection indefinitely, and never succeeds in offering its products as cheaply as they could be got by importation, then its protection cannot be defended on this plea. There may be good pleas on political or social or military grounds; or the stock arguments about home labor and home markets and the "acquisition" of valuable industries may be repeated; but there can be no pretense that a young industry has been nurtured with success.
It happens, however, that there is always the most violent opposition to the application of this, the sole decisive test. In the same breath we are told that prices have been brought down and a flourishing industry has been brought to maturity,—and also that the duties must by no means be touched. It might seem reasonable to infer from this invariable unwillingness to submit to the real test that real success was never attained,—that the talk about domestic progress and lowered prices was empty froth. And yet, with all the obvious inconsistency on the part of the protectionists, it can be fairly argued that their case is not necessarily vitiated. The persistent clinging to the accustomed props, even though these were never designed to be permanent, is often due to mere ignorance or nervousness. Most business men know singularly little beyond the range of their daily routine. When customs duties have kept foreign competitors out of the market for twenty or thirty years; when a trade has habituated itself to domestic supply only; when there is a great din about pauper labor, designing foreigners, ruinous flooding of the market and what not,—there will be opposition to the removal of duties, even though in fact the removal would make no difference. All business men, and all workmen likewise, are uneasy about intruders. They prefer to be on the safe side, and to avoid the slightest chance of having to face competition from new quarters. It will often happen, too, that some special phase of an industry will in fact be damaged by foreign competition, even though the industries as a whole be independent of it. Then there will be as much overt opposition to a reduction or removal of duties as if the whole were at stake.15
Under these circumstances it will not be easy for the searcher after truth to interpret the situation rightly and to reach a just conclusion. The facts which he will be able to make sure of, after examining an episode in our tariff history, will often be something like the following. Duties have been imposed that proved prohibitory, and imports have ceased; the simplest test of the working of the duties,—continuance of imports,—is thus not applicable. A domestic industry has grown up and has assumed a character of its own, very probably turning out commodities of grades and qualities different from the foreign. The domestic goods have been cheapened; but so have the foreign. Direct competition has long ceased; the two sets of competitors have gone their diverging ways, each indifferent to the other. The American producers allege that they have achieved all sorts of wonderful things, and the evidence may be strong that in fact improvements have been made by them. Their contentions rest, though without their saying it or even being aware of it, on the young industries argument. But they protest vociferously against the slightest reduction of duties, asserting in the same breath that they have distanced the foreigner and that they are in mortal fear of him. Much of their talk is obviously exaggerated. Experts who are competent to compare domestic wares and prices with foreign are not easy to find, and when found are not always unbiased. How has the experiment of protection to young industries really worked? The test of abolishing the duties has not been applied; under the political conditions, very probably it is out of the question that it should be applied. To reach a clear and certain conclusion is impossible. The best that can be done, after interpreting the evidence in the most judicial spirit, is to arrive at some qualified or provisional verdict.
Not infrequently those protectionists who put forward, more or less consciously, the young industries argument, contend that even after the stage of independence is reached a duty should be retained in order to prevent occasional disastrous importation.16 It is said that even though the domestic industry can supply the market as cheaply as it could be supplied by importation and need not fear competition in ordinary times, protection is still called for because in times of depression abroad the foreigner pours in goods regardless of cost, and subjects the domestic industry to an unfair competition. This is not the demand for support against dumping in the strict sense,—that is, the systematic and continuous disposal of goods at less than cost or less than the normal price; it rests on a fear of spasmodic importations resulting from "overproduction" and the slaughtering of prices. Yet it would seem that precisely this same sort of disastrous competition must be faced at home also. Trade cycles and recurring periods of depression are peculiar to no one country. Overproduction may take place within the country; every industry must face this possibility, and be prepared to take the lean as well as the fat. The special fear of the price-cutting foreigner doubtless reflects a protectionist feeling which goes far beyond the limits of the young industries argument,—a feeling of suspicion and dislike against foreign supply at any time and under any conditions. The truth would seem to be that the consequences of overproduction,—that is, of miscalculations, mistakes, unforeseen changes in demand,—are less likely to be severe in proportion as the sources of supply are larger and the markets which they reach are wider. An international market is less exposed to fluctuations than a narrower domestic one. What is obviously true of such commodities as wheat, wool, sugar,—that their price fluctuations are less the larger the area over which the general market extends,—presumably holds of manufactured goods also. Considerations of this sort cannot be expected to appeal to the root-and-branch protectionist, for whom the young industries is only one among many arguments, and perhaps not a vital one. Those who have no general terrors about foreign supplies, and are unwilling that the young industries argument in favor of home supply should be pushed beyond its strict limits, will consider the talk about foreign overproduction as mere subterfuge, as a retirement to an entirely different and weaker line of defense after the first and strong line has been given up.
There remains at the very end a most troublesome question. That question remains even if it be proved, either by the conclusive test of abolished duties or by other evidence, that the protected industry has finally succeeded in offering the commodity as cheaply as it could be supplied by the foreigner. Would not this same result have come in any event, protection or no protection? Do not other causes, perhaps changes in the general industrial conditions of the country, explain the growth of the particular industry? To answer this question, a careful examination of the history of all the circumstances is necessary, and a reasonable interpretation of the course of events. And here again the best that can be done is often to reach a qualified and hesitating conclusion. But the presumption, at this stage of the debate, may be said to be against the staunch free trader. If indeed the industry has failed to meet its obligations, so to speak; if it clings to protection indefinitely and refuses ever to meet the foreigner on even terms,—then the presumption is the other way; it is against the advocate of protection to the young industry. But if the industry does accept the challenge, or is clearly able to do so without danger of defeat, then the free trader who maintains that all the protection was unnecessary, and that the same development would have taken place in any case, is fairly called on to show just how and why it would have taken place. He can no longer rest his case on general reasoning. He must consider and explain the actual course of events.
Enough has been said to show that this phase of economic inquiry demands in especial degree investigation of the concrete facts. Most of the economists' reasoning about international trade is deductive. The advantages of the geographical division of labor; the relation of imports to exports, and the flow of specie from country to country; the equilibrium of international payments; the doctrine of comparative costs (presently to be considered in some detail); the nature of the gain from international trade; the fallaciousness of the vulgar arguments for protection, all this rests mainly on reasoning from general principles. There may be illustration and verification from the facts, and indeed such can be found in abundance; but the core of the reasoning is not statistical or historical or realistic. This holds good also of the very first stage in the reasoning about protection to young industries. When it is laid down that protection in its first stage involves a burden to consumers, and a loss to the community because of a diversion of labor and capital into channels less advantageous, the proposition rests on no specific evidence. The ordinary protectionist would deny it at once; he would not admit that there is any initial loss at all; he would talk about the intrinsic and immediate benefits from acquiring a new industry, about increased demand for labor, about the home market, and so on. The only way to deal with him is to go back to first principles, and alas! to repeat the most elementary analysis. But after passing the elementary stage, and securing (if we can) an admission that the question in this case is whether an initial loss is balanced by an ultimate gain, we can no longer reason in the same general way. Is it probable, or is it not, that eventually the gain will come? Is domestic progress likely to be quickened? Are the conditions in the protecting country really favorable? These are not questions to be answered through deductive reasoning in terms of yes or no; they are to be answered, if at all, through laborious research and in terms of probabilities.
It has often been contended by free traders that the effect of protection is to retard progress, not to promote it. Foreign competition we have been told, quickens the domestic producer. In its absence he is likely to stagnate. Only by opening the field to every rival, whether within the country or without, can we secure the most rapid spread of improvements. On the other hand, the young industries advocates say that the planting of an industry in a new country, under novel conditions, pulls it out of its routine and stimulates improvement. General reasoning might perhaps incline us to the former view. A priori the most effective way of promoting progress would seem to be to make the way free and open for the best producer, wherever he may be. But then we are reminded of the difficulties of new ventures, and so on; and our attention is called to the analogy of the patent system. The analogy is not perfect, since the protection of a patent is not granted until the applicant has proved in advance that he really has evolved something new. To make the case of protection to young industries strictly analogous, one would have to require from the applicant proof in advance, not after the event, that he really had planned distinct improvements. None the less, the analogy suggests that an initial privilege to a producer, and a consequent initial burden on the consumer, may be balanced by ultimate gain. The question becomes one of probabilities, not of reasoning straight from premise to conclusion.
Illustrations of either consequence,—of the retardation of improvement as well as of its acceleration,—have been adduced from industrial history. The protective system of France before 1860, which was carried for many articles to the point of complete prohibition of imports, is said to have caused some staple manufactures in France to lag behind the English.17 The protective system in Germany is said, on the other hand, to have caused one of the staple manufactures—that of iron—to progress.18 It is certain that since the adoption of the protective system by the German Empire in 1879 there has been an extraordinary advance in all the technique and organization of manufacturing industry. In the United States it has been declared that protection of the woolen manufacture after the civil war caused old plants and antiquated machinery to be retained.19 Yet in general it is as certain in the case of the United States as in that of Germany that the march of technical improvement has been extraordinarily rapid during the period of the maintenance of a high protective system. What may be the cause of this progress,—what part protection has played,—is doubtless a problem extremely difficult of solution; but at least it calls for careful inquiry into the particular cases. All the general indications from the economic history of the United States are that protective duties in the great majority of cases have not served to bolster up antiquated establishments or to retard improvements; though it may not be so clear that they have so often actually stimulated improvement in the way and to the extent contemplated by the young industries argument. At all events one of the chief objects of the following pages is to consider with care the history of some important protected industries, and reach such conclusion as can be derived by the only method applicable to this sort of economic inquiry,—by direct investigation of the particular cases.
Part I, Chapter III
The Principle of Comparative Advantage
The doctrine of comparative advantage,—or, in the phrase more commonly used by the older school, of comparative cost,—has underlain almost the entire discussion of international trade at the hands of the British school. It has received singularly little attention from the economists of the Continent, and sometimes has been discussed by them as one of those subtleties that have little bearing on the facts of industry. I believe that it has not only theoretical consistency, but direct application to the facts; and that in particular it is indispensable for explaining the international trade of the United States and the working of our tariff policy. Neither the familiar arguments heard in our controversy nor the course of our industrial history can be understood unless the principle of comparative advantage is clearly understood and kept steadily in view.
Briefly stated, the doctrine is that a country tends under conditions of freedom to devote its labor and capital to those industries in which they work to greatest effect. It will be found unprofitable to turn to industries in which, though labor and capital may be employed with effect, they are applied with less effect than in the more advantageous industries. The principle is simple enough, nor is it applicable solely to international trade. The conversant reader does not need to be told that it bears on the division of labor between individuals as well as on that between nations. The lawyer finds it advantageous to turn over to his clerk that work which he could do as well as the clerk, or even better, confining himself to the tasks in the profession for which he has by training or inborn gift still greater capacity. The able business leader delegates to foremen and superintendents routine work of administration that he could doubtless do better than they; he reserves himself for the larger problems of business management for which he has special aptitude. The skilled mechanic often has a helper to whom he delegates the simpler parts of his trade, giving his own attention to those more difficult parts in which he has marked superiority.
In international trade, however, the principle, if not most important, needs most attention; because it is obscured by the extraordinary persistence of prejudice and of shallow reasoning in this part of economics. Simple as it is in its statement and in its more obvious applications, it extends to some complex and difficult problems, and more particularly to those concerning the varying ranges of prices and wages in different countries. There is perhaps no topic in economics on which there is more of popular confusion than on this; nor can it be said that there is always careful and consistent thinking on it among economists who contemn the popular superficialities. Though fallacies of much the same sort are prevalent in all countries, the United States is above all that for which the principle is most important and for which there is most need of explaining the connection between prices, wages, and the currents of international trade.
Whatever the differences of opinion among economists on the theory of wages,—and those differences are less in reality than in appearance,—there is agreement that a high general rate of wages rests upon general high product, on high effectiveness of industry. It is not necessary here to enter on the question whether, in speaking of the effectiveness of industry, we should consider precisely in what way it can be said to be based on the several factors in production, or caused by them. Some economists regard capital and natural resources (land) as distinct factors, contributing each its specific share to the total product of industry. Others regard them simply as means or conditions for enabling labor to work with effect and so to turn out a large product. The latter seems to me the better way of stating the case,—that labor is the fundamental agent in production; but for the present purpose it is not material which form of statement is preferred. It is agreed among the careful thinkers on economics that high general wages and a high degree of material prosperity can result only from the productive application of labor; good tools or good natural resources, or both, being indispensable to high productivity. And when "labor" is spoken of, it must be remembered that not only manual labor is meant, but the equally important labor of organizing and directing the rank and file. In the United States more particularly, the general effectiveness of labor depends in great degree on the work of the industrial leaders.
Now when there prevails a general high range of wages, due to generally productive application of labor, this high rate comes to be considered a difficulty,—an obstacle. The business point of view is commonly taken in these matters not only by the business men themselves, but by the rest of the community. To have to pay high wages is a discouraging thing in business; does it not obviously make expenses high, and competition difficult? People do not reflect that wages are not high as a matter of course. If they are in general high, there must be some general cause. Once established, they are taken in a country like the United States as part of the inevitable order of things. The ordinary man does not stop to consider why they should exist at all. He regards them as something he must face, and too often as something that constitutes a drawback in industry.
When speaking of wages as high, we may have in mind either money wages or commodity wages ("real" wages, in the older phrase). It is familiar to all that money wages are higher in the United States than in Europe; and it is almost as familiar that the greater money wages are by no means completely offset by higher prices, and that there remains a large advantage in real or commodity wages. Let us center attention for the moment on this latter and more substantial advantage,—the higher commodity wages.
It is obvious that higher commodity wages cannot be handed over to workmen by employers unless the workmen (as guided by the employers and aided by tools and machines) turn out a large product,—unless there is greater effectiveness of industry. I say effectiveness, not efficiency, because the latter word has come to be used so often to denote one particular factor that bears on the quantity of product,—the immediate efficiency of the manual workers; by no means the sole or even the commanding factor. In current discussions on the tariff and wages, it has often been alleged that in one industry or another the efficiency or skill of the workmen is no greater in the United States than in England or Germany; that the tools and machines are no better, the raw materials no cheaper. How then, it is asked, can the Americans get higher wages unless protected against the competition of the Europeans? But, it may be asked in turn: suppose all the Americans were not a whit more skilful and productive than the Europeans,—perhaps quite as skilful, but not more so; suppose the plane of effectiveness to be precisely the same throughout the realm of industry in the countries compared; how could wages be higher in the United States? The source of all the income of a community obviously is in the output of its industry. If its industry is no more effective, if its labor produces no more, than in another community, how can its material prosperity be greater and how can wages be higher? A high general rate of real wages could not possibly be maintained unless there were in its industries at large a high general productiveness.
But when once these two concomitant phenomena have come to exist,—a high effectiveness of industry and a high general rate of wages,—it follows that any industry in which labor is not effective, in which the plane of effectiveness is below that in most industries, finds itself from the business point of view at a disadvantage. It must meet the general scale of wages in order to attract workmen; yet the workmen do not produce enough to enable that general scale to be met and a profit still secured. Such an industry, in the terms of the principle now under discussion, is ipso facto working at a comparative disadvantage. In other industries, product is high; that is, labor cost per unit is low. In this industry, product is low; labor cost is high. The industry does not measure up to the country's standard, and finds in that standard an obstacle to its prosecution.
Consider the same problem,—the relation between wages, costs, prices,—from the point of view of money wages. Here again we are beset by everyday fallacies and superficialities. High money wages, it is commonly alleged, cannot be paid unless there be high prices for the goods made. A dear man is supposed to mean a dear coat, and a cheap man a cheap coat. Yet it is beyond dispute that in the United States, while money wages are higher than in European countries, the prices of things bought are on the whole not higher. Though some things cost more, and higher money wages therefore do not mean commodity wages higher in the same degree, real wages remain higher by a substantial amount. The dear man may perhaps mean a dear coat,—of this we shall learn more when we come to consider the domestic conditions of production for clothing; but the dear man certainly does not mean dear food, and probably does not mean a dear house. The explanation is simple: though wages in money are high, the effectiveness of the dear man's labor on the whole is also high, and therefore goods on the whole are not dear. Where a man who is paid high wages turns out a larger number of pieces, each piece can be sold at a low price, and the employer still can afford to pay the high wages. With reference to individuals, the business world is constantly accepting this principle. A good man, we are told, is cheap, even at high wages. To use the same phrase, a good industry is cheap even though high wages are paid in it. Where labor is effective, high wages and low prices go together.
None the less, an established high rate of wages always presents itself to the individual employer as a difficulty that has to be overcome. And to the employee it presents itself as a thing in danger,—something that must always be jealously guarded. Yet it is a real difficulty for the employer only where the effectiveness of labor is not great; and for the employees also it needs no protection, so far as the competition of foreign products is concerned, where this same essential condition is found. If, indeed, such effectiveness does not exist, then the American employer cannot pay the prevailing high rate of wages, and hold his own in free competition with producers in countries of lower wages. In other words, he cannot hold his own unless there is the comparative advantage in his particular industry. The prevalence of a general high rate of wages is due to the fact that in the dominating parts of the country's industrial activity the comparative advantage exists. These dominating industries set the pace; in them we find the basis of the high scale of remuneration; it is they which establish a standard which others must meet, and which to the others presents itself as an obstacle.
Some further explanation of these general statements is necessary before they can be made to fit all the facts. What has just been said of dominating industries holds only as regards those industries and those commodities which play a part in international trade.
For sundry reasons, many articles do not come within the range of international dealings. It is out of the question that they should be exported or imported. Such are bulky articles, not readily transportable for any distance, like bricks; these are necessarily produced near the spot where they are used. Such again are articles greatly affected by national habit, like furniture or household utensils; and,—to mention a highly important class,—such are houses and house-room, which must be provided once for all by domestic labor. Things of this sort may or may not be higher in price than they are in foreign countries. They are made by labor which is paid the current high rates of money wages. If that labor is more effective than in foreign countries, the commodities will yet be lower in price than abroad. But if that labor is not effective as compared with similar labor in foreign countries, the commodities will be higher in price. Domestic commodities, therefore,—meaning by that phrase the commodities which are necessarily produced within the country, may be higher in price than they are in foreign countries, or the same in price, or even lower in price, according to the effectiveness of the labor engaged in producing them. If by some change in the underlying conditions,—say, an extraordinary cheapening of transportation,—their importation were to become feasible, the employer would find it impossible to compete with foreigners unless there was the same effectiveness of industry in producing them as there was in the dominant industries.20
As regards commodities potentially within the range of international trade,—and with these alone the tariff controversy is concerned,—the principle of comparative advantage applies more fully and unequivocally to the United States than to any country whose conditions are known to me. The difference in money wages between the United States and European countries is marked; the difference in commodity wages, though not so great, none the less is also marked. Notwithstanding these high wages, constituting an apparent obstacle or handicap for the domestic producer, the United States steadily exports all sorts of commodities; not only agricultural products, but manufactures of various kinds. Evidently they could not be exported unless they were sold abroad as cheaply as foreign goods of the same sort are there sold. That these products of highly paid labor are exported and are sold cheap, is proof that American industry has in them a comparative advantage. There are other goods which, though not exported, are also not imported; goods where the balance of advantage is even, so to speak. They are not such as are ruled out of the sphere of international trade once for all, because of great bulk or necessity of production in situ; they might conceivably be imported; yet in fact they are not imported. These are the products of industries in which American labor is effective, yet not effective to the highest pitch; effective in proportion to the higher range of money wages in the country, but barely in that proportion. And finally there are the goods whose importation continues, even though there is no obvious obstacle to their domestic production from soil or climate. These are things which, it would seem, could be produced to as good advantage at home as abroad. They could be produced to as good advantage; but they lack the comparative advantage. They do not measure up to the standard set by the dominant industries. The obstacle to their successful prosecution within the country is not physical but economic. It is they which find in high wages an insuperable difficulty. In this class belong the industries which are protected, and which would not hold their own without protection. They are in a position analogous to that of the strictly domestic industries in which labor is not effective, but which, being carried on of necessity within the country, have high prices made necessary by high money wages. The obvious difference between the two cases is that the force which causes the strictly domestic industries to be carried on is an unalterable one, such as the difficulty or impossibility of transportation; while that which causes the protected industry to become domesticated is the artificial one of a legislative barrier.
What, now, are the causes of industrial effectiveness and comparative advantage? To put the question in other words, what are the industries in which a comparative advantage is likely to appear? and, more particularly, in what directions is the labor of the people of the United States likely to be applied with special effectiveness?
The more common answer has been, in agriculture. A new country, with abundance of fertile land, finds its labor most effective in the extractive industries. Hence the United States long were steady exporters of wheat, meat products, cotton. Hence Canada is now a heavy exporter of wheat. Wheat is specially adapted to extensive culture, and is easily transportable; it is the commodity for which nature gives to a new country in the temperate zone a clear comparative advantage. The international trade of the United States was long determined chiefly by the country's special advantages for the production of wheat and similar agricultural staples.
It should be noted, however, that not only the natural resources told, but the manner in which they were used. From the first, inventiveness and ingenuity were shown. The United States early became the great country of agricultural machinery. Especially during the second half of the nineteenth century, the skill of the makers of agricultural implements and the intelligence of the farmers who used the implements were factors not less important than the great stretches of new land. Still another factor of importance was the cheapening of transportation. From the very beginning, the Americans have been energetic and successful in overcoming the vast distances of their country. Our railroads have cheapened long hauls as nowhere else. The most striking improvements of this sort were made in the last third of the nineteenth century; then new lands were opened, and agricultural products exported, on a scale not before thought possible. When the effectiveness of labor is spoken of, the effectiveness of all the labor needed to bring an article to market is meant; not merely that of the labor immediately and obviously applied (like that of the farmer), but that of the inventor and maker of threshing-machines and gangplows, and that of the manager and worker on the railways and ships. In other industries even more markedly than in agriculture, the labor of the directing heads, of the planners and designers, tells in high degree for the final effectiveness of the labor which is applied through all the successive stages.
That the situation began to change with the opening of the twentieth century does not need to be explained at length. The period of limitless free land was then passed, and with it the possibility of increasing agricultural production under the specially advantageous conditions of new countries. For one great agricultural article—cotton—the comparative advantage of the country indeed maintained itself, and its exports continued to play a great part in international trade. The exports of other agricultural products,—wheat, corn, barley, meat products,—have by no means ceased, nor will they cease for some time. But they tend to decline, absolutely and even more relatively. Other articles grow in importance, such as copper, petroleum, iron and steel products, various manufactures. For some of these,—copper, for example,—the richness of our natural resources is doubtless of controlling importance. But the manner in which those natural resources are turned to account is in all cases important; and in many cases the comparative advantage of which the exports are proof rests not on the favor of nature at all, but solely on the better application of labor under conditions inherently no more promising than those of other countries. What are the causes of advantage under these less simple conditions?
The same question may be asked regarding a closely-allied phenomenon, referred to a moment ago. A considerable range of manufactured articles, though not exported, are yet not imported. The domestic manufacturer holds the domestic market with ease, while paying higher wages than his foreign competitor. The range of such industries is wider than is commonly supposed. It is obscured by the fact that our tariff system imposes needless and inoperative duties on a quantity of things which would not be imported even in the absence of duties. On the other hand there is a considerable range of articles on which the duties do have substantial effect,—articles which would be imported but for the tariff. Some of these continue to be imported notwithstanding high duties; they pour in over the tariff wall. Why the difference between the two sets of cases: those in which the domestic manufacturer holds his own irrespective of duties, and those in which he needs the duties or even is beaten notwithstanding the tariff support?
The answer commonly given is that American producers can hold their own more easily when much machinery is used. Then, it is said, the wages bill forms a smaller proportion of the expenses of production, and the higher wages of the United States are a less serious obstacle. But it requires no great economic insight to see that this only pushes the question back a step. Why is not the machinery itself more expensive? The machinery was made by labor. It is a commonplace that a commodity made with much use of machinery is the combined product of two sets of laborers,—those who make the instruments and those who operate them. If all those whose labor is combined for producing the final result are paid higher wages than in foreign countries, why cannot the foreigners undersell where much machinery is used as well as where little is used?
The real reason why Americans are more likely to hold their own where machinery is much used, and where hand labor plays a comparatively small part in the expenses of production, is that Americans make and use machinery better. They turn to labor-saving devices more quickly, and they use devices that save more labor. Where Americans can apply machinery, they do so; and not only do so, but do so better, on the whole, than their foreign competitors. The question remains one of comparative effectiveness. Their machinery is not necessarily cheaper; absolutely often it is dearer; but it is cheap relatively to its effectiveness. It is better machinery, and the labor that operates it turns out in the end a product that costs not more, but less, than the same product costs in countries using no such devices, or using devices not so good.
In general, it may be laid down that this sort of comparative advantage is most likely to appear in the United States in two classes of industries,—those that turn out large quantities of staple homogeneous commodities and those that themselves make tools and machinery. Only where many identical things are turned out, does it pay to construct an elaborate and expensive plant. A machine-using people directs its energies to best advantage where thousands of goods of the same pattern are to be produced. Hence the repeated experience that, notwithstanding high duties, there is a tendency to import specialties and goods salable in small quantities only. Goods used by the masses in large quantities, as distinguished from luxuries bought by the comparatively few who are rich, are likely to be produced at home, without danger of being pushed by competing imports. If specialties, such as goods made to order, must be supplied by domestic producers, they are likely to be what the customer thinks inordinately dear; because they are made preponderantly, or at least in greater degree, by hand labor which is paid high wages and which by the very conditions of the case cannot use labor-saving machinery. Again, implements themselves, big and little, are likely to be well made in a country where people are constantly turning to machinery; from kitchen utensils and household hardware to machine tools, electric apparatus, and huge printing presses. These are things in which the success of American industry is familiar; which are exported, not imported; in which it is proverbial that the Yankee has a peculiar knack,—another way of saying that he has a comparative advantage.
The relation between high wages and the use of machinery calls for a word more of explanation. It is usually said that high wages are a cause of the adoption of machinery, and that we find here the explanation of the greater use of machinery in the United States. I believe that the relation is the reverse; high wages are the effect, not the cause. To the individual manufacturer it may seem a cause; he schemes to save in the wages bill by adopting a labor-saving device. But the reason why he is induced to scheme is that labor-saving devices are in common use and that the effectiveness of industry at large is therefore great,—hence high wages. No doubt the general situation has its reflex influence on the individual. Every one is put to his trumps; every one feels the need of playing the industrial game at its best. The abundant resources which so long contributed greatly, and indeed still contribute, to making labor productive and wages high, thereby stimulated the introduction of labor-saving methods in industries not so directly affected by the favor of nature. But the fundamental cause of the prevalent use of machinery was in the intelligence and inventiveness of the people; these being promoted again by the breath of freedom and competition in all their affairs. What are the ultimate causes of industrial progress and industrial effectiveness is not easily stated; complex historical, political, perhaps ethnographic forces must be reckoned with. But these causes work out their results in modern times largely by prompting men to improve their implements and to use unhesitatingly new and better implements. Thence flows a high rate of return for their labor; it is not the high rate of return that leads them to use the better tools.
In creating and maintaining the comparative advantage which comes from the better application of the machine processes, the business man—the industrial leader—has become in recent times a more and more important factor. The efficiency of the individual workman has been much dwelt on in discussion of the rivalries of different countries: aptitude, skill, intelligence, alertness, perhaps inherited traits. No doubt qualities of this sort have counted in the international trade of the United States, and still count. The American mechanic is a handy fellow,—it is from his ranks that the inventors and business leaders have been largely recruited,—and he can run a machine so as to make it work at its best. But there is a steady tendency to make machinery automatic, and largely independent of the skill of the operative who runs it. The mechanics who construct the machines and keep them in repair must indeed be highly skilled. Once, however, the elaborate machine is constructed and kept in perfect running order, the operative simply needs to be assiduous. Under such circumstances the essential basis of a comparative advantage in the machine-using industries is found in management,—in invention, rapid adoption of the best devices, organization.
The business leader has been throughout a person of greater consequence in the United States than elsewhere. He has loomed up large in social consequence because he has been of the first economic consequence. He has constructed the railway, and opened up the country; he has contributed immensely to the utilization of the great agricultural resources; he has led and guided the inventor and mechanic. I am far from being disposed to sing his praises; there are sins enough to be laid to his account. But he has played an enormously effective part in giving American industry its special characteristics. His part is no less decisive now than it was in former times,—nay, more so. The labor conditions brought about by the enormous immigration of recent decades have put at his disposal a vast supply of docile, assiduous, untrained workmen. He has adapted his methods of production to the new situation. His own energy, and the ingenuity and attention of his engineers and inventors and mechanics, have been directed to devising machinery that will almost run itself. Here the newly-arrived immigrant can be used. So far as the American can do this sort of machinery making to peculiar advantage, so far can he pay wages to the immigrants on the higher American scale and yet hold his own against the European competitor who pays lower wages to the immigrant's stay-at-home fellow. But it is on this condition only that he can afford to pay the green hand wages on the American scale, or on some approach to it: he must make the total labor more effective. The main cause of greater effectiveness in the dominating industries is to be found, under the economic conditions of recent times, not so much in the industrial quality of the rank and file as in that of the technical and business leaders.
Similar reasoning is applicable to another cause of effectiveness in industry which has been much discussed of late,—"scientific management." Some persons believe that here is a panacea of universal application; any and every industry can be made more effective by systematic observation and experiment on each of its steps and management based thereon. With reference to the protective system it was maintained, for example, after the reduction of duties in the tariff act of 1913, that scientific management, if generally adopted, would enable all American industries to meet the new and sharp competition of foreigners. The truth is that here also the question is one of comparative advantage. Scientific management is likely to tell more in some industries than in others. Apparently it tells most in industries of the standardized type,—precisely those in which industrial leadership already has proved of cardinal importance and in which Americans have already shown the greatest aptitude for leadership. It implies large-scale operation; since the heavy expense of preliminary investigation and the enlarged supervisory staff are worth while only if the expense is spread over a large output. It is adapted not to industries which produce specialties or small lots of numerous and varied articles, but to those in which the steady repetition of the same operations makes it profitable to work out an elaborate system. The indications are that it will not radically change the character of American manufacturing industry or modify the division between domestic and foreign sources of supply. Rather is it likely to accentuate existing relations; to strengthen American industry where it is already strong. Not all industries equally will feel its influence, but those in which this special form of industrial leadership tells with special effectiveness.
Returning now to the invention and operation of machinery, we have to consider a further possibility,—one which has played a considerable part in recent tariff discussions. The more machinery becomes automatic, the more readily can it be transplanted. Is there not a likelihood that apparatus which is almost self-acting will be carried off to countries of low wages, and there used for producing articles at lower price than is possible in the country of high wages where the apparatus has originated? In hearings before our congressional committees a fear is often expressed that American inventors and toolmakers will find themselves in such a plight. An American firm, it is said, will devise a new machine, and an export of the machine itself or of its products will set in. Then some German will buy a specimen and reproduce the machine in his own country (the Germans have been usually complained of as the arch plagiarists; very recently, the Japanese also are held up in terrorem). Soon not only will the exports cease, but the machine itself will be operated in Germany by low-paid labor, and the articles made by its aid will be sent back to the United States. Shoe machinery and knitting machinery have been cited in illustration. The identical apparatus which has been brought in the United States to extraordinary perfection is sent to Europe (perhaps even made in Europe by the American manufacturer), and is there worked by cheaper labor. The automatic looms, again, which have so strikingly influenced the textile industry of the United States, and so much increased its effectiveness,21 are making their way to Europe,—here again being pushed into use by the American loom makers themselves. Is it not to be expected that they will be operated by cheaper English and German and French labor, and that their products will be shipped back to the United States, to the destruction of the very American industry which they had first made strong and independent?
This possibility is subject to exaggeration. It is not so easy as might be supposed to transplant an improved system of production and all that hangs thereby. However automatic a machine may be, intelligence and knack in operating it are always called for; though less, perhaps, among the ordinary hands than among the machine tenders and foremen. It is a common experience that the same machinery will produce in the country of its invention and manufacture better results than when transplanted. Those very automatic looms, just referred to, are making their way very slowly into Europe. They do not fit into the traditional industrial practices, and do not accomplish what they accomplish in the United States. The difficulties which impede the transfer of machinery and methods, however perfected and however available for every applicant, are most strikingly illustrated in the rivalry of the Orient. We hear frequently of the menace of the cheap labor of China, India, Japan. Will not these countries deluge us with the products of cheap factory labor, when once they have equipped themselves with the latest machinery? The truth is that they will in all probability never thus equip themselves. To do so, would require more than the mere shipment of the machinery and the directions for working it. A completely different industrial environment would need to be transplanted. The yellow peril has been as much exaggerated in its economic possibilities as in its military.
None the less, some possibility of this sort does exist, especially in the rivalry between those countries of advanced civilization which are more nearly on the same industrial level. It is by no means out of the question that shoe machinery or automatic looms shall be worked as well in Germany as in the United States. Supposing this to be done, cannot the German employer who gets his operatives at low wages undersell the American employer who must pay high wages? Is not the comparative advantage which the United States possesses in its ingenious machinery necessarily an elusive one, sure to slip away in time? An advantage may indeed be retained indefinitely where skill or intelligence on the part of the individual workmen are necessary. Even here there is a doubt whether it will persist, in view of the spread of education and technical training the world over. At all events, in the widening range of industries where the workman merely tends semi-automatic machinery, the manufacturing industries of the country having high wages would seem to be in a perilous situation.
The only answer which can be given to questioning of this sort is that the leading country must retain its lead. As fast as other countries adopt the known and tried improvements, it must introduce new improvements. Unrelaxed progress is essential to sustained superiority; he who stands still inevitably loses first place. Such was in the main the relation between England and the other western countries during the first three-quarters of the nineteenth century. English machinery was exported and English methods were copied throughout the world, but the lead of the British was none the less maintained. As fast as the other countries adopted the devices which originated in England, that country advanced with new inventions or with goods of new grades. A similar relation seems to exist at the present time between Germany and the other countries which follow her lead in some of the chemical industries.22 It appears also in the position of the United States in those manufacturing industries which contribute to our exports. As fast as the American devices are copied elsewhere, still other improvements must be introduced.
This will seem to the American manufacturer a harsh sentence, and a heartless or unpatriotic one to the ordinary protectionist. What? To be deprived of the fruits of our own enterprise and ingenuity, without protection from a paternal government against the interlopers? Yet I see no other answer consistent with the general reasoning of economics on international trade and the geographical division of labor. The gain which a country secures from its labor is largest when that labor is applied in the most effective way; and labor is applied with the greatest effectiveness only when it proves this effectiveness by sustained ability to hold the field constantly against all rivals.
This train of reasoning, however, can be carried further. It is conceivable that improvements and inventions will be so completely adopted by all the advanced countries as to bring about an equalization in their industrial conditions; which of necessity would lessen the volume and the importance of trade between them. Where an invention is introduced in a single country, it gives that country at the outset a comparative advantage, leads to exports, and swells the volume of international trade. When the invention comes into international use, however, the industry which it serves may drift toward the countries of low wages; and these then may export the products. May export them, be it observed; for this tendency is greatly checked by those obstacles to imitation and transplanting which have just been referred to. But suppose the tendency not to be checked: suppose that each and every new device comes to be adopted in all countries, and used in all with equal effectiveness. Then the ultimate consequences will be different from those that nowadays follow the introduction of improvements. No one country will then possess advantages in manufactures over others; no one will be able to export to another; trade between them in manufactured goods,—if the assumed conditions hold absolutely,—will cease. All countries will secure in the same degree the benefit of the universalized inventions.
Such would be the inevitable outcome of complete equalization of the effectiveness of labor. The total income of a community is the product of its industry,—in the last analysis, of its labor. If labor is equally productive everywhere, differences in prosperity will cease. Then there will be no room for comparative advantages based on invention, peculiar effectiveness, better machinery, more skilful organization. The only trade between countries will be that based on unalterable climatic or physical advantages; such trade, for instance, as arises between tropical and temperate regions and between temperate regions having markedly different natural resources.
This consummation will not be reached for an indefinite period; nay, probably it will never be reached. Certainly it is beyond the range of possibility in any future which we can now foresee. But some approach to it is likely to come in the relations between the more advanced countries. There is a tendency toward equalization in their use of machinery, and so in their general industrial conditions. For the United States especially, the twentieth century will be different from the nineteenth. The period of free land has been virtually passed. That great basis of high material prosperity and of high general wages no longer exists as broadly and strongly as it did during the first century of our national life. The continued maintenance of a prosperity greater than that of England and Germany and France must rest on other causes. Now that fresh land can no longer be resorted to by the expanding population, a higher effectiveness of labor must depend almost exclusively on better implements and higher skill,—on labor better led and better applied. It may be reasonably hoped that the United States will long remain the land of promise, in the van of material progress; but the degree of difference may be less than it was. This lessening difference will come about, probably, not because the United States will fall back but because other countries will gain on her. Such has been the nature of the changed relation between England and the countries of the Continent during the last generation; and such,—to go back earlier,—was the change in the relative positions of Holland and England in the course of the seventeenth and eighteenth centuries. England no longer retains the unmistakable leadership which she had over the Continent during the greater part of the nineteenth century. But she has not retrograded; the countries of the Continent have progressed. Such is likely to be the nature of the coming race between the United States and other advanced countries. And the outcome is one which every friend of humanity must welcome. It means diffused prosperity, economic and social progress.
For an indefinite time, however, differences in general industrial effectiveness will remain. They will obviously remain, so far as they rest upon natural causes,—differences in soil, in mineral wealth, in climate. They will remain also in many manufacturing industries in which physical causes are not decisive. Some countries,—the United States among them, we may hope and expect,—will use machinery better, will apply labor-saving appliances more freely. The people of the United States will direct their labor with greatest advantage to those industries in which their abilities tell to the utmost. The development of the different industries will unquestionably continue to be affected by the accidents of invention and of progress, by dominant personalities in this country and in that, by the historical development of aptitudes and tastes, by some causes of variations in industrial leadership that seem inscrutable. But a general trend is likely to persist; in the United States labor-saving devices will be adopted more quickly and more widely. It will be shown in the following pages how this tendency has appeared in the great development that has taken place since the civil war, and how the effects of tariff legislation have been themselves influenced by the general tendency. In the industries where machinery can be used to most effect, this country will continue to have a comparative advantage.
[1.]One of the familiar methods of enumeration is to describe the taxes which follow the consumer from the cradle to the grave; a modern use of this tactical device is in the speech of Mr. Underwood, when introducing the tariff bill of 1912-13 in the House of Representatives, August 13, 1912.
[2.]In this analysis I follow the method of Albert Gallatin, in his Free Trade Memorial of 1831; reprinted in the collection which I have edited, State Papers and Speeches on the Tariff, pp. 122-123.
[3.]See chapter xiii, pp. 202-212.
[4.]Cf. the remarks on a similar situation in Marshall's Principles of Economics, Book V, chapter v, § 6 (6th ed.).
[5.]A case of a different kind, yet analogous to those considered above in that it rests on abnormal conditions, is adduced by Professor Brentano. The Russian state, being under obligation to make heavy remittances to foreign countries on interest account, reduced its railway rates on rye when Germany raised duties on that grain; thus virtually shouldering the duty. The stolidity, lack of resource, and general immobility of the Russian peasantry are also said by Brentano to have contributed, for a considerable time, to the same result. L. Brentano, Die deutschen Getreidezölle, p. 22.
[6.]An exception to this statement appears in the case of tin plate. There the foreign (British) production had been largely for the American market, and the duty of 1890 did serve for some to depress the British price. See below, chapter xii, p. 176.
[7.]See my Tariff History of the United States, p. 418 (edition of 1914).
[8.]See chapter xix.
[9.]On this episode full figures are given in Brentano, Die deutschen Getreidezölle.
[10.]Cf. what is said below, chapter x, pp. 144 seq.
[11.]See below, chapter xix, p. 318.
[12.]The reader will note that I speak in this chapter merely of the difference between price with the duty and price without the duty, not committing myself on the question whether this difference constitutes or measures a national loss. The presumption is that a national loss occurs, and is measured by the enhanced price which the consumer pays on the goods produced at home (not on those imported, since here the consumer's burden is offset by the government's revenue). Those conversant with the theory of international trade need not be told that there is the further possibility that duties will disturb the equilibrium of international demand and supply, and lead to a readjustment by which the duty-levying country will gain. See the classic passage in Mill, Political Economy, Book V, chapter iv, § 6. Cf. Marshall's Memorandum (of 1908) on the Fiscal Police of International Trade, §§ 7-9; Taussig, Principles of Economics, chapter xxxvii, § 1. The possibility has been questioned, but not in my opinion on solid grounds, in a note by H. H. O'Farrell in Quarterly Journal of Economics, August, 1912. Some further theoretical aspects of the problem seem to me to deserve attention; but this is not the place for examining them.
[13.]J. S. Mill, Principles of Political Economy, Book V, chapter x, § 1.
[14.]See my Tariff History, pp. 34, 45.
[15.]Thus, in 1912, there was opposition to a proposed reduction in duty on sewing machines, even though they had long been exported in great quantities; because some special kinds might still be imported from Germany. The same opposition, under similar conditions, was made to proposed reductions on saws, machine tools, electrical machinery,—all of them articles of which there could be at most sporadic importations. See Hearings before the Senate Finance Committee, 1912, on Metal Duties, pp. 172, 342, 1143, 1151.
[16.]See for example the passage from Samuel Batchelder's writings quoted in my Tariff History, p. 143 note. Cf. a similar utterance by Posadowsky, a conspicuous figure among German protectionists, quoted by Goldstein, Der deutsche Eisenzoll (Volksw. Zeitfragen, no. 268), p. 33.
[17.]See Amé, Les Tarifs de douanes, vol. i, pp. 318, 338, 399.
[18.]Compare what is said below, pp. 153 seq.
[19.]Compare what is said below, chapter xxi, p. 353.
[20.]So far as money wages are concerned, the dominating industries are those which export. I have considered this problem fully in a paper in the Quarterly Journal of Economics (vol. xx), from which I quote the following paragraphs (pp. 510-511):—
[21.]See below, pp. 273 seq.
[22.]See a passage quoted in my Tariff History, p. 393, note.