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The Policy of a Protective Tariff

( Originally Published Early 1900's )

ALL nations levy taxes to a greater or less extent upon goods imported from foreign countries. Such taxes are commonly called customs duties, or simply duties. A scale or system of duties is called a tariff. A tariff has two distinct economic objects :

Firstly. The raising of revenue.

Secondly. A real or supposed advantage to the country in " protecting" its producers against outside competition.

The policy of levying no tax on imported goods, except for revenue, is called free trade. That of levying taxes to "pro-mote home industry" is called protection, or the protective policy.

One of the great economic questions of the day is whether a protective tariff is, under any circumstances, of real advantage to a country, and hence whether the policy of levying it should or should not be upheld. This question may be considered from two points of view, namely :

I. That of the let-alone principle in general.

II. That of the special question of public policy.

From the point of view of a partisan of the let-alone policy as a general principle of action, there is no occasion for prolonged discussion. All taxes levied for the purpose of protection interfere with the freedom of the individual to secure his goods on the terms most advantageous to himself, and hence are violations of the let-alone principle. If, therefore, all men admitted this principle, there would be no occasion for discussing the policy of protection. Since they do not all admit it, we shall not consider it at all, but shall consider the policy of protection solely as a practical one touching the public good.

Moreover, since it is difficult for one country to frame a policy having in view the special benefit of other countries, we shall take account only of the interests of the country which levies the tariff. The question will then be whether we can really promote our own interests by discouraging the importation of foreign goods through the instrumentality of a tariff, and not whether humanity at large is benefited. This is the question on which free-traders and protectionists join issue.

We have already condemned all universal theories of government the supporters of which would apply them without regard to circumstances. Now, if by a protectionist we understand one who contends for the highest possible duties on all importations, without regard to the requirements or necessities of the situation, we must admit that the protectionist takes untenable ground. As a matter of fact, all protectionists do not take such sweeping ground as this. The general position taken by them, and the only one worth considering, is that as a general rule we can promote our interests by a protective tariff judiciously adapted to our situation. The corresponding position of the free-trader is that, as a general rule, our interests are promoted by free trade.

Viewing the subject from this standpoint, we see that if we break away from the let-alone principle, we restrict our discussion too much in confining it to the consideration of high tariffs to protect ourselves against foreign competition. If government is going to use its authority over foreign trade for the purpose of promoting the interests of its citizens, it ought to have full liberty of doing so in the best way, whether by a high tariff or a low one. Thus, placing on the free list an article from which we might collect a duty, because we think we are thus benefiting manufacturers who use that article in their industry, would be a violation of the let-alone principle. For we must then levy a higher duty on other articles, and give that which is free a special advantage. .Again, export as well as import duties might promote the public good, and we might even go so far as to specially encourage the importation of certain kinds of goods by bounties, in order to discourage home manufactures, if by so doing our interests would be promoted.

Looking at the subject from this broad point of view, and throwing off all our prejudices for or against active efforts on the part of government to promote our general welfare, it must be admitted that many cases may arise in which it would seem possible to promote the interests of ourselves and our posterity by modifying the natural course of trade. The following are examples :

If it is found that the supply of iron, coal, and copper in our mines is getting exhausted at a rate that, if continued, would result in our posterity being entirely without these materials, it would be sound policy to levy a tax upon the extraction of those materials and to admit the foreign product free. Al-though this would be an algebraically negative tariff, it would in the proper sense of the term be protective, if we apply this term to any tariff designed to promote our good.

If any manufacture is injurious to the public health, selfishness would dictate our adopting such a course as would discourage its prosecution by our own people.

If the promotion of some form of industry or labor by a protective tariff is proved to be a valuable means of education to the people, that fact would afford a sound reason in favor of it.

The policy of permitting the free importation of any product the home supply of which is monopolized by one or more parties capable of combining to keep up the price is too obvious to need enforcement.

But it must never be forgotten that none of these cases can be proved by merely vague and general argument, but that each must rest on its own grounds. Such general statements as, " Home industry may be improved by a protective tariff," " The ultimate cost of a product may be diminished by encouraging home competition," are entirely inconclusive and valueless except as set-offs against the corresponding general arguments in favor of free trade. For example, to show that some particular commodity, such as silk, should be protected, it would have to be shown not only that things in general might be got in a cheaper way by encouraging the home product, but that the special product silk would be thus cheapened.

The general argument for free trade is so simple as not to require much elaboration. It is in fact nothing more than an application to the case of foreign trade of the reasons already adduced in favor of the let-alone principle. It is supposed that, in ordinary cases and as a general rule, industrial activity takes the most advantageous form when each individuals left free to promote his own interests in his own way, subject to the requirement that he shall not encroach upon the corresponding freedom of his fellow-man. The money paid for goods by the purchaser is a measure of the labor expended by the purchaser in earning the money, and hence in commanding the goods. If they cost less when imported from abroad than when bought from his neighbor, that very fact shows that, so far as he is concerned, he gets them with less labor to himself than if they were made at home. The difference between home manufacture and importation is simply this : that in the one case we make the goods we want ourselves, and in the other case we make other things to give foreigners in ex-change for the goods we want. If it is easier and cheaper to us to make the things which we give in exchange than to make the goods, then it is to our economic advantage to import them rather than to make them.

We have in the beginning mentioned, what is indeed an obvious fact, that men, when left to themselves, try to supply their wants with the least possible amount of labor. The free-trader assumes that, in doing this, men are actuated by sound commonsense. But the protectionist takes the ground that there are other and more intricate questions to be considered than the merely economic one of labor. If, in conformity to this view of the protectionist, we reject the free-trade argument, then we have to consider what reasons can be assigned in favor of a protective tariff. The reasons which one meets are so numerous that they cannot all be considered in detail; indeed, the course most advantageous to the student will be to examine them for himself and reach his own conclusions. We shall therefore do little more than state and analyze the principal reasons in such a way as to guide his thought on the subject.

FIRST ARGUMENT FOR PROTECTION : The Home-industry Argument. The following is the form of the argument as usually stated :

It is important that our commercial and manufacturing interests should be protected and industry promoted. By levying a tariff upon the importation of all products that can be made at home we encourage their manufacture at home; by a tariff on iron we cause furnaces for the production of iron to be built, and men to be employed in working them; levying duties on cotton goods causes cotton-mills to be built, and men to be employed in making cotton; a tar on glass gives rise to glass-works, and encourages glass-making; and so on indefinitely. On the other hand, were free trade permitted, there would be an influx of cheap goods from abroad which would result in a great diminution in the number of our mills, furnaces, and factories, and would be productive of a great diminution in the amount of industry devoted to the manufacture and sale of iron, clothing, and other products of industry which could be imported from abroad.

As in all questions of policy, two logical steps come into play in this argument—the one of cause and effect, the other of policy. It concludes, first, that, as a matter of mere cause and effect, the cutting off of the foreign supply of goods pro-motes home industry. Secondly, it assumes that industry is a good thing and therefore ought to be promoted. It is very important that the student should make up his mind on these two conclusions separately and not confound them together. The first can be treated by strictly scientific methods in such a way that no doubt can exist in the minds of reasonable men. The second is one of those questions of policy which every person must decide for himself by the aid of his own common-sense.

Beginning with the first conclusion, it is too obvious to need proof that levying duties on goods which, were trade free, would be imported must tend not only to increase the home manufacture of those particular goods, but the home production of everything necessary to make the goods. This is, in-deed, nothing more than saying that when we throw difficulties in the way of a man doing something which he wants done, he will exert himself to overcome the difficulties, or to reach his end by some other means. Cutting off his legs will encourage him to make wooden legs ; depriving him of machinery will lead him to make more and better use of his hands; and so on indefinitely. The tariff does not make it any easier to our own goods. It only makes it more necessary by compelling us either to manufacture them or to go without them.

But it would be a mistake to suppose that this increase in any particular production necessarily indicates an equal in-crease in the sum total of industry. Whatever capital and labor are thus devoted to one form of industry will, to a greater or less extent, be withdrawn from other employments. In the present case we can see exactly how this withdrawal is effected, and how the compensation is established. No foreigners are going to bring us their goods, or allow us to buy them, unless we give them an equivalent of our productions in exchange. Vice versa, we are not going to make goods for them unless we can get theirs in return. No matter how free trade may be between us and the Esquimaux, we will not ship them any goods. We cannot under any circumstances import foreign goods without exporting an equivalent of our own products. Hence whenever we diminish importations by a protective tariff, we. must at the same time diminish the production of those goods which, were trade free, we should give in exchange for the goods imported. Thus the compensation is effected by withdrawing labor and capital from the manufacture of goods for export, and devoting it to the production of goods for home use.

It would, however, be a mistake in the other direction to say that all the industry set in operation by the tariff is withdrawn from other employments, and that there is no increase what-ever. The very fact that, under free trade, goods are imported instead of being made at home shows that we find it easier to make the goods which we send abroad than to make those which we receive in exchange for them. Hence when we are forced to make them ourselves, there must be an in-crease in the sum total of our industry. Thus the first conclusion of the protectionist is shown to be true to a limited extent.

We have now to consider the second principle, which is that increase of industry is, in itself, a good thing. This principle is really at the basis of the argument, because if industry is not a good thing in itself, why should we take so much trouble to promote it ?

Few social subjects are of more interest to the philosophical student than the views and practices of men on this point. No opinion is deeper-seated in the ordinary mind than that other people should be encouraged to labor, and that when they are hard at work the interests of society are promoted. This opinion gathers tenfold strength when the work is of a kind which strikes the senses. It is hardly possible for any person to visit a great foundry, listen to the clank of the machinery, see the flames light up the evening sky, and watch the forms of a hundred workmen in active motion, without being impressed with the belief that he sees before him an activity of great national importance. If he were asked how the labor of five hundred washerwomen in the country compared in importance with that of the foundry employing a hundred men and making a noise which could be heard miles away, it would strike him as very odd that the work of five quiet women should be compared with that of one man working a great steam-hammer. It is perfectly certain that the washerwomen do not receive as much attention at the hands of the public as the iron-founders. Whether the importance of the two classes to public comfort and happiness is proportional to the attention they receive is an instructive question for the student to think over.

On this question of the desirableness of industry in itself the free-trader and the protectionist come squarely at issue. The former, if he is going to take any tenable ground, must take the ground that industry in itself is a positive evil, or, to speak more accurately, that an increased necessity of employing it in any particular direction is a drawback to human enjoyment. The protectionist, if he is logical, and if he accepts his own argument, must join issue and claim that industry in itself is a good. To decide the point it is necessary to make abstraction of everything but the industry, and inquire whether industrial activity is a good in itself. For example, if a man were to do work in a foundry, and all the hammering, melting, burning, and labor went on without any iron being produced, or if these processes were all performed over and over again on the same iron, we should still have all the industry. Whatever benefits and advantages would then inhere in the foundry must be considered as so much in favor of pure industry. " The men would have the "benefit of the exercise, and the managers would gain experience in organization.

In this particular comparison the iron produced must be left out of consideration, because we get that under either system. The claim of the protectionist is, not that we should get no iron under free trade, for we would get rather more than we would make, but that we should get it without any hammering, burning, digging, or other forms of labor. The question whether it is better to get it with or without these operations must depend on whether the operations are in themselves a good. If iron plus industry is better than iron without industry, it can only be because industry without iron is a good thing. This is a point on which the student must make up his mind for himself.

SECOND ARGUMENT FOR PROTECTION. Our labor cannot compete with the low-priced labor of Europe without the wages of our operatives being depressed to nearly the scale which prevails abroad. Since there cannot be two prices for the same commodity where free competition is allowed, the rate of wages in countries between which trade is free cannot differ by more than the cost of exchange and transportation. We may therefore lay it down as a general law that whenever free trade is permitted between two countries in which the scale of wages is decidedly different, the resulting competition will tend to the disadvantage of laborers in the country where the wages are the highest.

At first sight this argument might seem identical with the former one. The difference is this : in the first argument we are concerned only with industry and not with the rate of wages. Wages are different from industry in the abstract. Very low wages might promote industry by compelling men to labor more in order to make a living.

One fallacy of this argument lies in its not taking account of the very different circumstances of different countries. To those who will not accept any proofs except of fact, the fact that in England, which is the typical free-trade country of the world, wages have long been much higher than in the neighboring countries of Europe where protective tariffs are in vogue, ought to be a sufficient proof. But the use of this particular method of proof is quite beneath the economist, for the simple reason that it proves nothing except that free competition does not necessarily depress wages in the country where they are highest. There may be great numbers of causes for this difference besides free trade, so that we are not justified in attributing it to the latter.. The only satisfactory proof of the fallacy is shown by the reason of the thing. We have shown in Book IV., Chapter VIII., that no cheapening of products can lessen the sum total of the demand for labor in the country, because the money saved on any product goes into the market for the purchase of labor on some other product. Thus the only effect which can be produced by free trade is an increase of wages for one class of laborers, with a corresponding diminution for another class. Should we introduce free trade, and, in consequence, should there be an importation of x dollars' worth of goods which we had been making for ourselves, there would be a falling off of x in the demand for labor to make these goods. But there would be an increased demand y for labor to make the goods we should have to give in exchange. If y were less than x, the people who had been paying x dollars would save the difference, and have it to spend for labor of some other kind. The two demands y and x - y would exactly compensate the loss x. The equilibrium is restored by a gradual change in the direction of labor from the production of x dollars' worth of goods of one kind to x dollars' worth of some other kind. Such a change, as we have already shown, can nearly always be made faster than any change in the demand.

To the cry, "We cannot compete with the pauper labor of Europe," the answer is, Why do you want to compete? And this brings us to the question, Why are wages higher here than in Europe? The answer is, Because we have a larger and more profitable field for labor in developing the resources of our country. Erecting houses, building railways, cutting down the forests, digging ore from our mines, and raising wheat from our prairies afford a more remunerative employment for labor than can be obtained in densely populated countries where the rail-ways are already built and the fields of wheat are limited. Our laborer compares with him of Europe in a small degree as the successful lawyer does with the bootblack. The lawyer cannot compete with the bootblack in the art of the latter. Does he therefore desire the price of blacking boots to be raised lest his professional income shall be reduced? Not at all. He simply does not compete, but employs himself more profitably in other directions.

To look at the matter from a different point of view, let us consider the case of some great glass-factory. Here we have a great industry employing, we may suppose, a thousand men and a large amount of capital, consisting of buildings, furnaces, and raw materials. Under free trade this factory would perhaps never have existed, and if free trade were permitted it would perhaps have to stop. Now what does all this, mean ? It means that one thousand men who, had there been no protective tariff, would have been at work building railways, erecting houses, digging in the silver-mines, raising wool, or rearing cattle, have been turned from these employments into building chimneys and making glass. Instead of making things to give foreigners in exchange for glass they are making the glass itself. Now, the question whether this change is advantageous depends very largely upon whether we are to assign any special value to the work of making glass rather than to the other work which we have described. By fostering the glass in dustry we have diversified employment. But is this diversity of any general advantage? Is the country any better off be-cause a thousand men spend their lives in inhaling noxious fumes from furnaces rather than working in the open air? These are questions for every one to consider for himself.

Another consideration which may be adduced is that of the possible amount of foreign competition were all restrictions removed. Mr. Edward Atkinson* estimates the value of the total products of industry in the United States during the year 1884 at $10,000,000,000. During the same year the total value of imported merchandise was $668,000,000, or less than seven per cent of our home production. Were the tariff abolished, it is hardly possible that our imports could be doubled; indeed it would take a long time to build the ships necessary to bring in the double quantity. It is therefore hardly possible that 7 per cent more of our labor would meet with foreign competition. And, if it did, we should have to produce $700,000,000 more of goods to export in payment. We should also have to build railways and rolling-stock to transport the goods to the sea-coast, and bring back those received in exchange. Thus, altogether, even the small percentage in which the competition was felt would be balanced by new demands incident to the change.

A Protective Policy mutual and Reciprocal. To completely understand the workings of a protective tariff it is necessary to see that it is reciprocal in its action; that is to say, if a country A wishes to protect its industries against the competition of a country B, that protection can be secured by the action of B as well as by that of A itself. The reason of this is that trade is mutual, and will not go on unless each country receives an equivalent for what it exports. A stream of values is constantly flowing in each direction, and the two streams being equal, an obstruction produces the same effect whether at one point of the stream or another. One example of this is seen in the effect of an export duty.

Suppose that the English nation should require all cotton goods exported to America to pay a tax of 50 per cent, while no duty was levied by America. It would make no difference either to the exporter of the cotton from Liverpool or its importer in New York whether this tax was paid on sailing from Liverpool or on arriving in New York. Hence the price in New York would be affected in the same way, and the stimulus to our own industry would be the same as if the duty of 50 per cent had been levied by America. The only difference would be that it would be the British Government and not our own which would collect the revenue. But this would make no difference to the cotton-manufacturers of our country.

Again, suppose that all foreign countries should unite in laying a heavy duty upon our wheat, cotton, and other exports ; this would diminish all our exports, and would therefore discourage the production of wheat and cotton in our own country. It would also prevent our importing so many manufactured goods from abroad, and would thus in two ways cause our industry to forsake the production of wheat and cotton and to engage in the manufacture of those things which, had foreign countries not levied the tariff, would have been imported from abroad. Thus the general effect in stimulating and diversifying industry would be the same whether we or foreigners levied the tariff (cf. III. 70).

Still there would be important differences in detail, depending upon the magnitude of the tariff : if it were not sufficient to stop all trade, then foreign governments would get the benefit of the revenue and we would get none. Moreover, such a foreign tariff on our exports would not encourage any special industry among us, but only industries in general. That is to say, we could not say that it would encourage the iron industry or the cotton industry separately, but would, so to speak, encourage equally the production of everything which, under free trade, we would import from abroad. On the other hand, a, domestic tariff can be so adjusted as to protect any particular industry, the silk-manufacture for example, and to leave any or all others unprotected. Our own tendency is, however, to protect all our manufactures equally; and this can be effected by the foreigners levying their tariff on our goods as well as by we levying our own tariff on theirs. Moreover, the effects of the two tariffs become identical as they approach the prohibitory limit. If all foreign governments should levy such tariffs as to actually prevent the export of American products, all trade in both directions would be stopped, and the effects would be the same as if we should levy a prohibitory tariff, upon all foreign products whatever.

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