The Return to Protection

Protection is protection against competition from outside. It does not say that home producers must for ever be subsidised. It uses generally the Infant Industry argument, which might, indeed, have some weight if it were not for the notorious fact that these infants never grow up. What does grow up is the Vested Interest, against which nothing short of an economic revolution seems strong enough to prevail.

ONE may very well deprecate the word Protection. It seems to assume that industry can be put under the government as the citizen is put under police—that is, under a power which can protect honest people against those who would do them harm.

But the Protection with which we are dealing is not protection against evil doers: in spite of the militant expressions of many of its advocates, the foreigner who sends us cheap goods is not an evil doer. It is protection against Competition from outside, and therefore from Service from outside. It always seems to me remarkably like that kind of protection which closes the entries of village sports against the, presumably, stronger outsider, and so secures the prizes—raised by subscription from the countryside, of course—to the villagers. And, being protection against competition, it is protection against Cheapness—protection against Abundance.

Other nations want to send in their goods at what we may, roughly, call “cost price”—meaning cost plus carriage. The protected country says, “No, you shall not, because our people cannot produce so cheaply even when the ‘natural protection’ of distance is taken into account; they must not be undersold; they must be allowed to sell at their cost price.” That is to say, the home consumer must pay a higher price in order to let the home producer sell his goods at all. For, if the protected country could make as cheaply or more cheaply, the argument for Protection would disappear.

The rationale of the matter comes out in the absurd provision of the United States, that “works of art by American artists temporarily residing abroad are admitted free; all other works of art, including paintings, pastels, pen and ink drawings, and statuary, pay a duty of 20 per cent.” American artists, evidently, are regarded by their government as tradesmen. No wicked nonsense of Art for Art’s sake there. If Americans will buy pictures from Italy and France—well, they must pay for passing by their own countrymen. It is a very good illustration of the contagion of Protection: if a people, with government funds and powers, protect one industry, they must protect all, even the professions!

How, then, does Protection protect?

Let us suppose that, in England and America, the cost price of equal goods is 100s. And, for clearness sake, let us disregard the additional cost of ocean carriage. America puts on a tariff of 50 per cent. English goods, then, would require to be sold in America for 150s.

At these prices, if the American goods are of equal quality, the English goods will not be sold at all. In this case, American producers find that they have the monopoly of their own market, and it would be remarkable if they did not take advantage of it to raise their prices. So long as they can get something under 150s., they keep the English goods shut out and that is all they want. This is certainly protection of American producers. But the question, of course, is, Where, in this case, is the need of Protection? If there were no tariff, the American would sell at 100s. and have his profit. Why penalise the American consumer to give the American producer an extra profit?

Take another extreme case. Suppose that the English cost price is 100s. and the American cost price 200s. Then the English goods sell in America at 150s. The result, of course, is that the Americans cannot sell at all. The American consumer gets his goods cheap enough, but there is no American manufacture.

Take, lastly, the more likely case, that the English cost is 100s. and the American cost 150s. Then the English goods come in on an equal footing of competition with the American goods. The American consumer has, indeed, to Pay 50 per cent. more for his goods than he need have paid if he had taken them all from England, but the American manufacturer has his profit, and his industry is “protected.”

Of course it would not appeal to anybody, if the claim were baldly put forward that a country must, permanently, pay a half more for its goods than it need pay, in order that certain home manufacturers may get a living. The nation would naturally ask, “Cannot we get on without these manufacturers; are there not other industries that do not need such a costly poor-rate; would it not be wise to devote our labour and capital to these, taking the cheap goods from abroad with thanks?” And, certainly, a nation like America, which sends us every year some £127 millions, mostly the produce of her magnificent natural resources, would know that she had plenty of industries which need no protection, and that the exported products of these industries would pay for all the imports she wanted.

But this bare-faced claim, of home producers to live permanently at the expense of home consumers, is not put forward. What is put forward is an argument that appeals to everyone on the face of it, and has even met with some countenance from economists, the Infant Industry argument.1 Here Protection is defended as a kind of Patent Law privilege, or Copyright for a certain limited period; or, to use a favourite metaphor, a kind of apprenticeship, during which the apprentice simply spoils things, and cannot earn a wage. It is the contention, not so much that manufactures are profitable per se, as that a varied industry is necessary to a nation’s continuous growth, just as a varied diet is. Free Trade, it is said, would condemn a young country too long to mere exploitation of its natural resources, to the neglect of industries for which the country is naturally fitted, or is, at least, under no disadvantage: these industries are prevented from rising by this exclusive attention to what is easiest, or by some artificial or removable cause. Cotton spinning and weaving in America are cases in point. It seems most natural that they should be carried on where the raw material grows, and where power and coal are abundant. But how are these industries to arise among a population bred in agriculture, unskilled in machinery, unaccustomed to an indoor life, unless steps are taken to protect them in their first stages?

The argument is very plausible. Owing to the progress of science and invention, quick and cheap transit, the mobility of capital and of highly skilled men, Mill’s words are much more true now than when they were written, that “the superiority of one country over another in a branch of production often arises only from having begun it sooner,” and that a country which can get or hire skill and experience may, in other respects, be better adapted to the production than those which were earlier in the field. I am not, however, going to contest Mill’s statement that “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,”2 because it has no bearing on our present problem.

I consider it fallacious to say that Protection is necessary for the rise of a diversified industry. Industries would naturally take root in an agricultural country by the growth of what one might call the supplementary industries; beginning with the jobbing and repairing trades that merely put things together, and make things that cannot be imported—just as the smith and the joiner set up repairing sheds in country districts, and are found ere long to be taking contracts for making and building.3 But the argument has no application to us. If we are going to adopt Protection, it will certainly not be because our industries are infants. And, as it happens, this is exactly where the argument breaks down as regards America.

The suggestion is that manufacture, in a new country, is a child which requires to be protected against winter and rough weather, till such time as it is fuller grown and is able to take its place in the competition of nations. Unfortunately, experience shows us that this time never arrives. Once an infant, always an infant.

Sir Charles Tupper declared long ago that, given fifteen years of Protection, the infant industries of Canada would be able to stand alone. The fifteen years are gone; twenty-five years are gone. The infants are still in arms.

So with America, whose favourite argument this still is, even as regards that Mellin’s Food baby, the Steel Trust. Practically, all industries there are protected. We must conclude, then, either that all the industries are yet in their infancy—and a century is a long time for long clothes—or else we commit ourselves to some theory of permanent infancy.

When the question, then, is put—as it should be put—why America is still protectionist, the answer may be given in a sentence. It is the strength of the Vested Interest.

It is not sufficiently remembered that, while Free Trade may be called the “natural” policy, inasmuch as it applies to foreign trade the policy and principles which we find every country adopting in its home trade, it is not the historical policy.

It is only since the Reformation that the idea of the Nation-State began to evolve. The Nation then became an entity—a whole, which it was worth any sacrifice to hold together, and inspire with a common purpose. Naturally, for some centuries, the course of evolution was that each nation became an object of jealousy, suspicion, and dislike to other nations. When Colbert, Louis XIV.’s great Minister, established a heavy tariff against all other countries, he did indeed draw the French nation together. But, at the same time, he accentuated the enmity of other states, and thus, says Adam Smith, “began the spirit of hostility which has subsisted between the two nations ever since.”

This policy was followed by every other country, under the pernicious idea that one nation’s gain is another nation’s loss. Consequently, down till the middle of last century, all nations were shut in by a tariff based on the principle known in Scotland as “keeping their ain fish guts for their ain sea maws.” We ourselves were as heavily protected as other countries; and we had, moreover, enjoyed the very special protection of the twenty years of the Napoleonic war, during which we had freedom to apply the new discoveries and inventions to manufacture, while the rest of Europe was devastated by invading armies, and had enough to do to live.

The abolition of the Corn Laws in 1846, and the adoption of Free Trade, was an almost revolutionary movement, made possible perhaps by the dread of a bloodier revolution. It was a quick, sharp spasm, like the cut of the surgeon’s knife. It introduced the “natural” system at great loss and suffering to some, but it cleared the way for the free development and full use of the great inventions and cheap communication which were changing the face of the world.

That is to say, the innumerable vested interests, which had grown up under Protection, were ruthlessly cut at the root. But in other countries they remained, still remain, and tend to grow stronger the older they grow.

I should not like it to be thought that I mention “vested interests” with any contempt, or that the expression carries its own condemnation. Most of our interests are vested, in greater or lesser degree. I only take it as a fact of human nature that, when a man’s bread and butter is bound up with the continuance of a system, however bad, the vested interest that appeals to him is the interest of the wife and children at home; and these interests sometimes make him singularly shortsighted as to the real interests of himself and others.

In early days, it is said, the joiners in Japan protested against the introduction of the fire engine, on the ground that it interfered with their industry of rebuilding the wooden houses.4 This seems absurd enough, but it is absurd only because the interest is a small one. But consider this case. Of the 39 millions of population in France, nearly one-half are interested in agriculture. Most of them are small peasant proprietors.

They are the salt of France. But these peasants could not compete with foreign grain introduced free. Free Trade would mean an entire reorganisation of agriculture, and, probably, of the land system. It would be an economic revolution.

Here is one vested interest which extends over half a nation, and makes it impossible for any ministry such as France has known for thirty years to even mention the free import of grain.

But America never had an economic revolution such as we had. She had no need to protect her agriculture. Hence her people could always get the prime necessaries of life cheap and good. They never knew what it was to have wheat at 80s.—the price which, it was thought, the agricultural interests in this country should have for their own safety; and they, consequently, never saw rents rising, and one privileged class flourishing, while the people starved. This cheap agricultural produce, moreover, they could export, and with it buy what they wanted of other things. But at an early stage they adopted Protection for their manufactures, and the beginning of it was perfectly natural and explicable.

Up till 1808, the nation had remained very much as when it was a number of British colonies—exclusively agricultural; importing manufactures, and paying for them (1) by exports of agricultural produce to the West Indies and to those countries of Europe where the French armies were trampling down the fields, and (2) by the invisible exports of shipping, shipbuilding being then a chief industry of New England.

Then came the Berlin and Milan Decrees of Napoleon, the Embargo, and the Non-Intercourse Act of 1809, followed by the war with England in 1812. Practically all foreign trade was stopped, and America thrown on her home resources.

This, of course, gave an enormous stimulus to those branches of industry whose produce had before been imported, and the manufacture of cotton goods, woollen cloth, iron, glass, pottery, and other articles sprang up like mushrooms.

When the war was over, there remained, naturally, a feeling in favour of these manufactures, and higher duties were imposed to give them a chance in competition with the English goods which then began to pour in.5 This was Strengthened by the shutting out of agricultural produce from England under the Corn Laws. It was, in fact, very much our stringent protective policy which forced America into manufacturing for herself. She was not allowed to pay for her imports by agricultural exports. For twenty years from 1816, the protective policy was continuous, and it was based on the Infant Industry argument. By 1830, or perhaps earlier, the “diversified industry” was attained; the Infant Industry argument lost its force. In 1833, for instance, it was said that the cotton industry was ready and able to meet imports on a free-trade footing. Between that and 1860, there was great vacillation in the tariff policy; high and low tariffs succeeding each other in a very unprincipled way. From 1846, indeed, the country seemed to be approaching Free Trade.

Then, unhappily, came again the old spring and excuse of Protection. To raise revenue for carrying on the Civil War which began in 1860, every possible article, home and foreign, was taxed, and taxed heavily. The statesmen in power were protectionists, and Protection ran riot. After the war, the removal of internal and excise taxation was not accompanied by removal of the customs tariff. The war tariff of 1864 remained in force for twenty years without reduction. The growing feeling towards Free Trade disappeared. Many industries had grown up, or been greatly extended, under the influence of the war legislation. That some were unsuitable to the country did not appeal to those who had sunk their fortunes in them. The infant industry, crippled from its Birth, appeared as good a subject for protection as the infant industry that only required benevolent care during its early years.6

And, ever since, the Vested Interest has riveted its hold. What appears, then, in America is the phenomenon of the employers in practically all manufacturing industries crying out, in the name of justice, for equal Protection; and the workers are easily persuaded that their living depends on the continuance of these industries.

At the back of it all are the two facts: that America is a country of such vast natural resources that it would be difficult for any fiscal system to keep back the progress of the nation, and that, within its great area, there is absolute free trade.

7This argument, unanimously adopted by American protectionists on the appearance of Alexander Hamilton’s famous Report on Manufactures in 1791, was elaborated by Friedrich List in his National System of Political Economy, published 1841. Protection, he said, was a “national apprenticeship”; a stage in a nation’s progress, not its final form. List is often quoted as an out-and-out Protectionist. He was nothing of the kind. He said, for instance, that the maintenance of Protection in England at the time he wrote was a mistake due to the stupidity of the ruling class. Going over the history of the great nations, he showed that they had all had this period of apprenticeship: first, Free Trade in the agricultural stage, when there were no separate manufactures on a great scale; then Protection; last, he said, should come Free Trade. The same ideas, and the same moderation, are found in Alexander Hamilton.

8This concession of Mill has so often been torn from its context and used to support doctrines which he would have abhorred, that it is advisable to quote the next sentence: ‘‘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.”—Principles of Political Economy, v. x., 1. One may read along with this Sidgwick’s statement: “I hold that, when the matter is considered from the point of view of abstract theory, it is easy to show that Protection, under certain not improbable circumstances, would yield a direct economic gain to the protecting country; but that, from the difficulty of securing in any actual government sufficient wisdom, strength, and singleness of aim to introduce protection only so far as it is advantageous to the community, and withdraw it inexorably so soon as the public interests require its withdrawal, it is practically best for a statesman to adhere to the broad and simple rule of taxation for revenue only.”—Principles of Political Economy, book iii., chap. v. It may be said that we, in this country, have statesmen with such wisdom, strength, and singleness of aim. But how long should we have them if they were exposed to the influences which attend Protection?

9What is meant may be illustrated from the history of Barrow-in-Furness. Fifty years ago it was a sandhill. Then hematite ore deposits were discovered, and steel-making settled down beside the raw material. Next came shipbuilding to take advantage of the steel. Clustered round this are now all manner of subsidiary industries, making machinery and other auxiliaries for shipbuilding and steel-making, and the prosperity of the town is no longer dependent on any one industry. Or take the familiar phenomenon of the overflow of capital in South Africa from the gold mines to coal fields, water supplies, machinery making, etc. Does any one think that the working out of the gold mines would leave nothing but a few holes in the ground? Has not, indeed, gold-mining set many communities on their feet, and left them with the “varied industry” desiderated?

10At the end of the eighteenth century, the southern counties of England petitioned Parliament against the opening of the Great North Road, on the ground that it would bring the products of the northern counties into the London market.

11“The manufacturers of Great Britain, well knowing the needs of the American markets, made haste to send over their goods, which, in the early summer of 1815, began to arrive in fleets of merchant vessels, in such quantities as had never before been known. Coming over consigned to nobody, the goods were hurried by the supercargoes and captains in charge of them to the auction block, where, to the surprise of the owners, high prices were obtained by the sharp competition of eager buyers. . . . During April, May, and June, 1815, the duties paid at the New York custom houses on goods, wares, and merchandise brought from England amounted to 3,960,000 dollars. When the news of the quick sales and great profits at auction reached Great Britain, whole fleets of vessels were loaded and despatched to America. One day in November, 1815, twenty square-rigged ships came up the harbour of New York. On another day fifteen ships and eight brigs arrive; and what went on at New York was repeated at every seaport along the Atlantic coast. The gainers by this unusual trade were the British manufacturers, the British ship-owners, the auctioneers, and the Federal and State treasuries. The sufferers were the American importers, manufacturers, and wholesale merchants, who without delay appealed to Congress for protection.”—Prof. M‘Master in Cambridge Modern History, vol. vii. p. 354.

12See passim Taussig’s Tariff History of the United States, and Rabbeno’s American Commercial Policy.

• 1“When, on Pike’s Peak in Colorado, the thermometer is down to 12° or 13°, and, in the North-west is only a few degrees above freezing point, in New England it will be moderately cool—say 43°; in the Mississippi valley it will be comparatively warm—say 52°; and in Florida it will be at summer heat—75°.”—Lawson, American Industrial Problems, p. 43.
• 2The above figures of Imports and Exports, taken from the Statistical Abstract 1903, do not include Bullion and Specie, of which we imported, in 1902, £21,629,000 of gold (£8 millions from South Africa, £3¼ millions from India, £5 millions from Australia), and £9,764,000 of silver (£8 millions from the United States), and exported £15,409,000 of gold and £10,716,000 of silver. Nor do they include, either as imports, exports, or re-exports, excisable foreign merchandise transhipped under Bond, (£13,683,000). To the imports should be added £5,380,000 of diamonds from the Cape, not declared to the Customs. It may be noted that fish of British take, landed in the United Kingdom, are not included among imports. The value of these in 1901 was £9,000,000.
• 3Without going into the mysteries of banking, it may suffice to say that the reason why payment for foreign goods is not made by cheque is that each country’s banking system does not extend beyond its own shores.
• 4It is strong testimony to the literal “trust” which underlies the credit system that, in the great majority of home transactions, the promise is not put in documentary shape at all; goods are sold on customary terms of credit, and paid on a mere reminder that payment is due. Perhaps there is no better instance of the recognition of a “common interest” and a “general will” among whole peoples than this.
• 5Giffen’s calculation was first made in 1882 (Essays in Finance, Second Series, p. 132), and was revised in 1898 (Royal Statistical Society’s Journal, 1899, p. 11). His method was to take the British gross tonnage earnings at £15 and £5, for steamers and sailers respectively, at the former date, and at £12 and £4 at the latter. The Board of Trade, on the other hand, took the total exports and imports of the principal countries of the world, which are, of course, the same goods valued at points of departure and arrival; accepted the £224,000,000 difference in their value (see p. 41) as representing freights and insurance; halved this sum to represent our share of the carrying tonnage of the world; deducted 9 per cent. for colonial ships, and further deducted £12½ millions for coals and stores purchased abroad, harbour and other dues; and arrived at the figure of £89½ millions.
• 6The importance of Shipping as a British export industry may be realised by remembering that £90,000,000 is just about the value of our cotton and woollen exports combined.
• 7IT would be rather short-sighted to gauge the importance to us of foreign trade by the fact that it is perhaps only one tenth or one eighth of our total trade. If the United States were to shut herself up inside a prohibitive wall of tariffs, she would still be almost self-sufficient. But we lie between 50 and 60 degrees north latitude; ours is a very small country at best, with a dense population; and we have, besides, sunk much of our capital and specialised much of our labour in industries which depend on other countries for their material and for their market. It seems, too, as if we were destined by nature to be ocean carriers.
• 8Our foreign trade, then, altogether amounts to £877,000,000; made up of £528,000,000 of Imports, and £349,000,000 of Exports (£65,000,000 of these being re-exports). These are values of solid Commodities brought in and taken out over British seas; and—partly as reflex and consequence—of the 32,000,000 gross tons of shipping in the world, we own the half.
• 9Nor yet is the way in which payment is made essentially different. In due time, home goods are paid by a cheque; foreign goods, by a bill of exchange. Indeed, in many cases, when goods are put on board ship, the Bill of Lading is given to a bank here, which does not give it up till cash is paid abroad, the bank meantime giving an advance to the exporter to a large proportion of the value. In either case, the sender gets his payment, in British money, through his own bank, and each transaction ends with a payment. The export of goods, again, from other countries to us takes place in exactly the same way—merchants and manufacturers, there also, sending out goods for a profit, getting paid in their own money, and the transaction ending with the payment.
• 10It takes a little thinking to realise that, in home trade, payments are made by setting debts against debts, and that this is merely another way of saying, “setting goods against goods.” You send me £100 worth of goods, and I, for the moment, am in debt, and send you a record of it in the shape of a promise to pay in three months. On the other hand, I send you £100 worth of goods, and you give me a promise to pay in three months. The promises may be bought and sold and pass into other hands; in any case, they remain in existence as debts for three months. At the end of that time they are brought together and cancel each other. What really has happened, of course, is that the one sending of goods has been put in contra-account against the other. So banking is just a vast complex system of contra-accounting—value of goods represented for the moment by documents put to the debit and credit sides of bankers’ books. Happily, this need not be dwelt on, because, in international trade, the foundation of the contra-account is quite obvious and prominent.
• 11It may be expected, then, that a nation which owns half the world’s shipping, and carries for foreigners as well as for British merchants, will be paid a very large sum for this service. The amount was estimated by Giffen, in 1898, as £90,000,000. An independent calculation, on quite different lines, was put forward by the Board of Trade in 1903, and makes it £89½ millions.
• 12This is the first item which explains our apparent Balance of Imports. Our exports are really £90,000,000 more than the statistical exports shown by the official returns.