The Return to Protection

CHAPTER VIII. THE PRINCIPLE OF A PROTECTIVE TARIFF.

What principle regulates the differentiation of rates in a tariff? Is it prohibition, or equalisation of labour costs, or equalisation of costs generally? Whatever principle be alleged, experience shows that rates are determined by warring interests, either as a victory or as a compromise.

SO much for the genesis of Protection and its continuance. It does not arise from a thought-out policy: the economists are not consulted. During the restriction of a war, a country starts making things for itself, without regard to “natural advantages,” or, indeed, to anything but necessity. When the war is over, it is thought that the producers have deserved well of their countrymen; the government undertakes to secure them from rapid extinction at the hands of more advanced nations; and it is only a question of time till the vested interests can neither be overlooked nor silenced.1

But a tariff is not a simple thing. It is not a uniform rate. It consists of a great range of differential duties, some low, others high, some few prohibitive. And, inevitably, at every revision—and the American tariff has been altered some forty times since 1789—the question is raised as to what is the principle of these differences.

I cannot answer this question. It is not as if the protected country drew up a tariff with the object of getting the largest revenue at the least hardship to the consumers. It admits foreign goods of compulsion and unwillingly. A self-sufficient country like the United States, for instance, might be quite content to have no imports. But, as Sumner says, “As soon as we get the home market firmly shut, so that nobody else can get in, we find that it is a question of life and death with us to get out ourselves.”2 And the exports inevitably bring the imports which pay for them. Hence the need of differentiating the tariff, so as to admit imports with the least harm to home producers. In such circumstances, a principle is scarcely to be looked for. But I may quote some utterances which seem to admit that the need of a principle is felt—if it be only to make the tariff respectable.

President M‘Kinley, presented his revised tariff Bill with the following words: “The object of tariff taxation is not the raising of revenue, but, on the contrary, the reduction of revenue, and ultimately the extinction of revenue, by duties to be raised to a height sufficient for the accomplishment of this end.”

Here is a confession that the aim of Protection is Prohibition. First put on a tariff. If foreign goods come in, raise it higher. If they still come in, raise it again, till “revenue is extinguished”; that is, till no goods come in at all.

With more plausibility, President Roosevelt, in the Message to Congress, December, 1901, said: “Every application of our tariff policy to meet our shifting national needs must be conditional upon the cardinal fact that the duties must never be reduced below the point that will cover the difference between the labour here and abroad.”

This seems to assume that the American labourer has, somehow or other, got his wages up so high that the wages have raised the cost of production of American goods, and that the goods coming from other nations must be taxed to raise them to the same price, or else wages will be brought down. It is the so-called Pauper Labour argument—an argument, by the way, which was used by ourselves in 1779 in regard to Irish labour, when Lord North proposed to allow Ireland to trade with the Colonies and with foreigners on the same footing as England. But it reads very strangely to those who remember that France and Germany urge the need of protection against America for precisely the opposite reason, namely, that American labour is so well paid and productive!

One could understand this if the high wages of America were artificial; if, for instance, Trade Unionism were there so powerful that wages were raised quite apart from the product of work. But, notoriously, this is not the case. Trade Unionism in America is weak. The high wage is evidently the result—the natural and happy result—of high industrial skill, working with cheap raw material, and fed on abundant food. “This claim for Protection to American industry, founded on the high scale of American remuneration, is a demand for special legislation and in consideration of the possession of special industrial facilities—a complaint, in short, against the exceptional bounty of nature.”3

If the proposition is read in any other way, it seems to amount to this: that prices generally in a protected country are high; living, accordingly, is dear; and workers need high wages to pay the high prices. But, as wages are “labour cost,” the high prices are assumed to be the result of high wages! High prices explain high wages, and high wages explain high prices—a very pretty example of circular reasoning.

All this is exceedingly crude; so I turn to a principle suggested by an American economist, for whom we all have a very high respect, Professor J. B. Clark, of Columbia University.4 “It would be entirely reasonable,” he says, “to reduce each duty to an amount that equals the difference in cost between the American and the foreign article. Find out accurately how much the owner of an American mill has to spend in the creating of a particular product, ascertain with the same accuracy how much the European spends for the same purpose, and make the duty on the completed article equal to the difference between the two sums. The European can then place his goods on the American market at an outlay which, when duties are paid, equals the outlay incurred by his American rival. The two will then be more nearly on an equal footing, and success will come to the one who improves his processes more rapidly, and makes the largest savings in the advertising and selling of his wares. The public will get the benefit of this rivalry in economical production, and will get its goods at the maximum of cheapness.”5 The principle is, that a tariff should put home producer and foreign producer on a footing of perfect competition; competition, in Professor Clark’s view, being “the regulator of prices and wages, and the general protector of the interests of the public.”6 The idea that a tariff should give any monopoly to the home producer is expressly disclaimed.

This is not the place to go into any detailed criticism of the principle thus laid down. It is enough, perhaps, to say that, when Professor Clark says “European,” he seems to have been thinking of “British”; in other words, to have been thinking of the difference of cost as between a protected and a free-trade country. But other protected nations send their goods into America, and every nation has a different cost. A tariff based on his principle, then, would seem to involve differential duties against every separate country. And I do not think he has sufficiently considered the difficulty of arriving “accurately” at cost in any country except by taking the selling price. Apart from all this, it seems clear that few Protectionists would admit that the end of a tariff is merely to equalise costs and secure competition. They always aim at partial or total monopoly.

But one gets tired of seeking for a principle in a tariff where, at each revision, the changes are so obviously determined, not by sober scientific and economic calculation, but by the weight of the influence brought to bear on the politicians.7 In 1882, Congress appointed a Tariff Commission to collect evidence and report. With the exception of one person, it consisted entirely of Protectionists. It recommended a reduction of 25 per cent., saying wisely: “Excessive duties are positively injurious to the interests which they are supposed to benefit. They encourage the investment of capital in manufacturing enterprises by rash and unskilled speculators, to be followed by disaster to the adventurers and their employés, and a plethora of commodities which deranges the operation of skilled and prudent enterprise.” Its recommendations were simply put aside; and the new tariff of the next year was “kicked about in committee till it came out a grotesque compromise of warring interests.”

The experience of France is the same. To quote M. Yves Guyot: “Not only does Protectionism plunge the country which adopts it into a war of tariffs with all other countries, but, even within the country, it rouses a spirit of antagonism in every district which thinks itself sacrificed to other districts, and in every industry which demands to be protected over and above other industries, and at their expense. Under Protection, economic rivalry gives place to political rivalry. This is confirmed by the daily experience of every Protectionist country. I have had special opportunities of seeing how private interests combine against the public interest in the French Parliament. The whole art of M. Méline, who has been the Protectionist leader for close on 25 years, has consisted in uniting groups of often contradictory interests, paying court to them, effecting bargains between this and that party, always to the detriment of the consumer, who is the general public. ‘Beetroot strikes a bargain with Wine; Cotton and Iron come to an understanding.’ There, in a nutshell, you have the part which Protection plays in parliamentary life.”8

Lastly, take our own experience. In 1840 a Committee of the House of Commons reported as follows: “The tariff of the United Kingdom presents neither congruity nor unity of purpose. No general principles seem to have been applied. The tariff often aims at incompatible ends; the duties are sometimes meant to be both productive of revenue and for protection, objects which are frequently inconsistent with each other. Hence they sometimes operate to the complete exclusion of foreign produce, and in so far no revenue can of course be received; and sometimes, when the duty is inordinately high, the amount of revenue is, in consequence, trifling. They do not make the receipt of revenue the main consideration, but allow that primary object of fiscal regulations to be thwarted by the attempt to protect a great variety of particular interests at the expense of revenue, and of the commercial intercourse with other countries. Whilst the tariff has been made subordinate to many small producing interests at home, by the sacrifice of revenue, in order to support their interest, the same principle of interference is largely applied by the various discriminating duties, to the produce of our colonies, by which exclusive advantages are given to the colonial interests at the expense of the mother country.”

The conclusion seems inevitable; that, where duties are differentiated with the view of protecting, not the industries which should exist but the industries which do exist, and where the amount of the differentiation is arrived at by a struggle of competing interests and unequal weight of influence, it is useless to look for a principle.

 

9 This, of course, does not account for the rise of Protection in our self-governing Colonies. Here the explanation is the natural tendency of a tariff for revenue to pass into a tariff for protection. Every colony, however new, needs a revenue. It is difficult to get it from internal taxation (whether levied directly on income or land, or, levied indirectly, on commodities), on account of the small and scattered population; and the obvious course is taken of imposing heavy taxes on imports. Behind these import duties, gradually rise vested interests. It is represented, in the usual way, that a “diversified industry “is necessary, and cannot spring up without enough protection to overcome the natural handicaps. The infant industries, once supported by government crutches, never willingly abandon them, and the vested interest does the rest.

There is another explanation forcibly put by Fawcett (Free Trade and Protection, p. 11). It is that emigrant artizans have difficulty in finding in a colony the kind of employment to which they have been accustomed. They do not take willingly to the land; even gold mining is found not always a short cut to wealth. So they naturally favour the establishment by Protection of industries where their old skill can find opportunity. And, in several of our Colonies, “labour legislation,” as it is called, is almost alarmingly prominent. While these sheets were passing through the press, the Premier of New South Wales had to point out to a deputation of men unemployed through the cessation of public works that the government did not borrow money merely to find employment for the citizens.

10Protectionism, p. 88.

11Cairnes, Some Leading Principles, p. 385.

12The Control of Trusts: Macmillan, 1901. Economists in America are in rather a difficult position. If they speak in defence of Protection, they lose their scientific reputation. If they speak fearlessly against it, even if they escape being turned out of their Universities, they lose their influence with the people—for Political Economy in America, it has been said, is regarded as the science of tariff regulation. Besides, they have always the consciousness that an industrial system which is protected from head to heel requires a revolution to change it, and they have to weigh the advantages of setting industry on a sound economic basis against the gigantic disturbance and loss which would, in the first instance, accrue. “Whatever may be said about the wisdom of having tariffs at all,” says Professor Clark, “a country which actually has one, and which under it has built up industries that are still in some degree dependent on it, will be cautious in abolishing it.” But they are all tariff reformers; and, in the present case, Professor Clark, acknowledging that the actual tariff is “irrationally protective,” puts forward a principle which, without saying anything for the abolition of Protection, would show that a reduction of tariff was “entirely reasonable.”

13The Control of Trusts, p. 43.

14Ibid. Preface, p. v.

15I once asked a manufacturer in the United States why the duty on his goods was 40 per cent.—not 30 per cent. or 50 per cent. His answer, I fancy, put the truth in a nutshell. “Our Congressman,” he said, “came round and asked, what duty do you want? and we said 40 per cent, would do.”

16Fortnightly Review, July, 1903.

• 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.
• 7“Unfortunately, there are no official figures with regard to the investments of foreigners in this country, though they are certainly very much smaller in the aggregate than British investments abroad. America is the only foreign country, so far as known, whichh as made important investments in the United Kingdom in recent years,” Board of Trade Blue Book, p. 102. On this whole subject, the admirable article in the Blue Book should be referred to.
• 8Royal Statistical Society’s Journal, March, 1899. Giffen’s calculation, however, includes Pensions, etc., from India and other countries to civil servants living here, of which the Board of Trade says nothing.
• 9IT 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.
• 10Our 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.
• 11Nor 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.
• 12It 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.
• 13It 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.
• 14This 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.
• 15The corresponding returns which pay income tax in our country amount to £62½ millions, but this includes only the interest on foreign and colonial securities, coupons, and railways. To this must be added the dividends on miscellaneous industrial undertakings abroad. After all deductions on account of other countries which have lent and invested capital with us, we may accept the Board of Trade conclusion that “£62½ millions is a minimum figure, which is probably largely exceeded.” In 1898, Sir Robert Giffen estimated it at £90 millions, and probably more.
• 16The corresponding returns which pay income tax in our country amount to £62½ millions, but this includes only the interest on foreign and colonial securities, coupons, and railways. To this must be added the dividends on miscellaneous industrial undertakings abroad. After all deductions on account of other countries which have lent and invested capital with us, we may accept the Board of Trade conclusion that “£62½ millions is a minimum figure, which is probably largely exceeded.” In 1898, Sir Robert Giffen estimated it at £90 millions, and probably more.