The Return to Protection

CHAPTER XIV. RETALIATION ON PROTECTIVE TARIFFS: PROSPECTS OF SUCCESS.

The only justification of Retaliation is success. Did the retaliation before 1846 succeed? Have the tariff wars since succeeded? Granted, however, that other nations are anxious to keep our great Free Trade market, and are open to conviction through force; (l) we are quite unprepared for a retaliatory policy; (2) they believe in Protection, and, besides, could not give us better terms without giving the same to others.

IN this and in the succeeding chapter, we shall consider Retaliation simply as a weapon employed to lower the protective tariffs of other nations in our favour.

As those who advocate Retaliation generally call themselves Free Traders, we must assume that it is a temporary measure. If retaliatory duties are imposed, it must be on the understanding that they are to be taken off whenever they have served their purpose. Retaliation is a weapon used solely “for the purpose of increasing free trade.”1

The first thing that strikes one as to this proposal is: that, as putting on duties will evidently do some harm to our own people, in preventing them getting the cheap goods which other nations wish to sell, it must be shown that the advantage which certain of our producers are to gain at least warrants the sacrifice.

If, then, Retaliation aims at anything worth doing, its justification must be its success; that it will give us what we want, and not merely inflict an injury; particularly when—as in the lovers’ quarrel—the Retaliation is likely to hurt most the person who retaliates. Has Retaliation of this kind ever succeeded?

Adam Smith, at least, did not think it had, and he lived in a time of bitter tariff wars. He said there “might be good policy in retaliations when there is a probability that they will secure the repeal of high duties and prohibition,” and then he went on to show that the first result of Colbert’s tariff was actual war between France and Holland, and “the rise of that spirit of hostility between France and this country which has subsisted ever since, and prevented either nation from moderating its duties against the other.” Adam Smith, then, can scarcely be cited as a witness for Retaliation.

Coming down three-quarters of a century, what do we find? In 1843, J. L. Ricardo spoke of the commercial wars as “now bringing us such calamities.” In 1844, the tariffs of France, Austria, and Germany were “restrictive,” that of Spain was “tyrannical,” that of Portugal, “inconsistent and capricious”—I am quoting the words of a former Secretary of the Board of Trade. In 1845, the Edinburgh Review said that a war of tariffs was being carried on between the civilised nations of the world.

It was amid such circumstances of Retaliation and Counter-Retaliation that Peel said: “Wearied with our long and unavailing efforts to enter into satisfactory commercial treaties with other countries, we have resolved at length to consult our own interests, and not to punish other countries, for the wrong they do us in continuing their high tariffs upon the importation of our products and manufactures, by continuing high duties ourselves.”

But this is ancient history, and it may be reasonable to think that we can manage better now. Take, then, more recent experience. We have had tariff wars within the last few years. In 1893, Russia raised the duties on all German goods by 50 per cent. Germany replied by raising her own tariff—already higher for Russian exports than for those of any other country—against Russian goods. The war lasted only eight months—not long enough to dislocate permanently the conditions of trade, particularly as it took place during the winter, when, for most of the time, the Baltic ports were closed by ice. Nevertheless the suffering and loss caused by it were very considerable, as appears from the confessions made on both sides when the struggle was concluded. In the opinion of both governments, a continuation of the war would have led to very serious consequences—some of a political character—and there appears to have been great relief when peace was concluded.

There was another tariff war between France and Switzerland from 1893 to 1895. By the substitution of the general for the minimum tariff, Swiss goods entered France at an increase of duty of 41 per cent. French goods entered Switzerland at an increase of 190 per cent. The decline in the French exports to Switzerland, in three years, amounted to nearly 45 per cent., while the decline in Swiss exports to France was nearly 35 per cent. In the end, Switzerland obtained some small concessions from France. The trade relations between the two countries have not even yet recovered their prosperity of thirteen years ago.

France and Italy played the same game from 1889 to 1898. Special duties were imposed by the two nations on each other’s goods, and differential dues and surtaxes were imposed on each other’s shipping. In ten years, the import of Italian goods for consumption into France fell off by 57 ½ per cent. and the imports of French goods into Italy fell by fully 50 per cent. The whole loss of trade to the two countries during the continuance of the war has been estimated at £120,000,000. Italy now finds the French market practically closed to her exports of silks and wines, which formerly represented the most important part of her trade with France. In spite of the new Commercial Treaty, Franco-Italian trade has not shown any permanent indication of improvement since—the total volume not exceeding the half of what it was before.2

As a fact, the explanation of the monstrous tariffs of continental countries is not hostility to England, so much as hostility to and fear of each other; each country keeping a very high general tariff in order that it may be able to “give something off”; one tariff rising as another rises, on the principle that one bad turn deserves another. Meantime, during those tariff wars, England stood by, holding the hats; stealing away what trade she could; and enjoying afterwards, under the Most Favoured Nation Clause, what little good result came from it. It is not, perhaps, known that we have forty-two treaties with foreign powers which contain this clause, giving us the same minimum tariff as they give to any other—even to the nation with which they may have just been fighting.3

Perhaps, too, the corollary is still less realised; that, if we engage in Retaliation against any one nation, and manage to reduce its duties, other nations, under this clause, get the same advantage as we do. There is a beautiful unselfishness about Retaliation which one cannot but admire.

This is worth remembering when we are told that we made a mistake in giving up our duties; that, if we had kept them on, we should at any rate have had “something to give away.” Other nations have not made this mistake: they have always had plenty to give away: if they offered to conclude treaties giving mutual concessions, and failed, then they put on something more, in order to give it away: and what has it all ended in? That the tariffs of protected countries against each other have risen and risen, and that we are at least as well off as any of them—under the Most Favoured Nation Clause.

If, then, it be the case that other nations have not been conspicuously successful in their retaliatory wars, while we have gained by them, the question comes to be if there is any good reason for thinking that we shall succeed better than they have.

The chief argument for the success of Retaliation on our part is that we are the largest market for the foreign trade of most other countries; that the stake which they have in keeping this market open is very great; and that they are, accordingly, very open to conviction if our persuasion takes the shape of a “revolver.” Indeed, it is freely said that the only reason why we have not got better terms is that we have done no more than show uneasiness; we have not even asked for them. So, it is argued, quite honestly I believe, that Retaliation will be no more than an unloaded revolver; it will not require to be fired.

This is a respectable argument, and respectable arguments deserve respectful answers. One sees quite well that the industries of new countries to-day are a kind of hot-house growth. These countries do not pass slowly and by centuries from the wilds and wastes of barbarism to the condition of England. They have—what no state in past time had—every rich nation waiting at their gates, hat in hand, offering to lend them money. They pledge their future against loans, and instantly the whole resources of civilisation are at work turning the desert into a rose garden. “Take our money,” we say. “Let us send you goods and men; build your towns; reclaim your land; net it over with railways. We simply ask your note of hand for the amount, and an annual sum for interest.” This explains their rapid growth. But that growth would be arrested were it not that the old countries provide them with a market infinitely larger than their own. Could the United States, for instance, or Canada, or Australia, have developed so fast were it not that this great hungry England has taken all their millions of wheat and maize and meat and wool and timber? This, too, explains why new countries, when they start industries, go in for buildings and plant on the same large scale as ours: they cannot afford, they say truly, to manufacture at greater cost than old countries; they want the best and they get the best. And then, perhaps, they discover, when the mills are up, that they have forgotten to ask where the trade is to come from; for the new country cannot buy more than it has wealth to buy with, and a nation of corn growers may not have a use for millions of yards of fine cloth, or even for steel girders. But what matters? They have this great free market of Great Britain to fall back on. They can sell their goods in their own country, under Protection, at a high price, and they can get rid of the balance to us. Surely such countries are very open to the “argument of the revolver.”

Undoubtedly, the contention is a strong one. Our gigantic imports show that it is. The amount that the great nations send us in comparison with what they take from us, shows that it is. One is tempted to believe that the mere showing of our teeth would bring other nations to their senses. And certainly if, by a threat, we could lower the tariffs of other nations, we should have done a great thing.

But “bluff” is a game which a nation dare not play without showing that it is ready to follow up the threat, and we must look into a good many things before we begin.

I. The first consideration I would put forward is, that retaliation by import duties is a thing for which we are utterly unprepared. It is like an English civilian accepting a challenge from a German officer when he has forgotten his fencing—if he ever knew it. Putting on duties and taking them off—heightening and lowering—is part of the day’s work with other countries. They have all the machinery for Retaliation. A few instructions to the port officers, that such and such goods are to be taxed 10 per cent. or 50 per cent. more, and the thing is done. But we have no such machinery except the limited tariff for revenue goods, and we chose these revenue goods for taxation very much because they involved so little machinery in their collection.4 We have, as I say, forgotten our duelling weapons.5

II. The second consideration I would put forward, is to ask: How will other nations take this new departure?

To answer that such a question is “pusillanimous”; that we have nothing to do with how other nations take it; that they have done as they liked, and we are going to do as we like;—is mere folly. Looked at from the standpoint of other countries, this Retaliation of ours seems to me, as regards the end it proposes, little short of an impertinence. We are urged to retaliate in order to force other nations into free or freer trade. Force, however, is not usually the weapon by which you make a person reason; you may “bring him to reason,” but it is not his own idea of reason you bring him to. It is an old theological argument that the fear of hell was a means of compelling people to walk straight; I never heard of it being of any use to make a person love God.

One must remember that Protection is not mere stupid adherence to a shibboleth. It is at least a respectable creed. Rightly or wrongly, the protectionist country believes in Protection just as firmly as we believe—or did believe—in Free Trade, and is as little disposed to be patient under dictation or compulsion as we should be.

Nor should it be forgotten that the taxation system of protected countries is bound up with Protection—that they calculate on it to provide them with a great part of their revenue—that their peoples have become accustomed to be without internal taxes which are familiar to us. One may see how this works out by the obstinate refusal of France and America to face a direct Income Tax.

If, then, we practically declare: We shall tax your products in order to make you go against your own cherished convictions; how will a strong nation take it? It is only to be expected that, in the first instance, it will re-retaliate—for this, of course, is not in the very least contrary to its policy. Indeed, the adoption of Protection on our part would be less of a challenge. A protected nation cannot possibly object to other countries becoming protective, but it may very well object to be threatened with the object of making it give up its own Protection.

Thus if our Retaliation is aimed undisguisedly at making Germany or the United States reduce their duties, so as to allow us to send in our goods, surely the first answer of these nations will be: We did not frame our tariffs primarily to shut you out. It was not a hostile measure, but a policy framed to “protect” our own manufacturers. That you are kept out, is an incident. At any rate, the intention to favour our own people must not be interpreted to be the same thing as the intention to injure other people. Be sure that, if we forbid you the house, it is not to punish you, but to keep our family from your influence. And now you ask us to drop our tariff because it hurts you; that is, to abandon the policy which we have deliberately entered on for the protection of our own children; and you threaten us that, if we don’t comply with your demand, you will do us an injury. It is an impertinence which we resent.

And their second answer will be: Suppose that, as an incidence of our policy, our tariffs shut you out, they shut other nations out as well. Whether, then, it might or might not suit us to reduce our duties to you, we have no intention to reduce them to other nations which either do not treat us so well or cannot use so big a revolver as you can.

This brings us back to the Most Favoured Nation Clause. It seems to me that this clause makes it very difficult for any protected country to “back down” over our Retaliation—even if it wished to—even if it suited it to do so. With true British conceit, we are always thinking ourselves first and other nations nowhere. So we ask indignantly, “Why do these countries not give better terms to us—us, who give them free ports, while the rest of the world shuts its doors?” What we forget is, that, in its commercial policy, every other nation has to think of its tariff relations with the whole of the world—of which we are not always the largest part. And what we should remember is, that it would be a very serious thing for a protected country to give us advantages that it might otherwise be inclined to give us, when, under its Most Favoured Nation Clause, it would have to give the same advantages to other nations.

Here, then, is a consideration which may well make us doubtful of the success of Retaliation. We are asked to engage in a war at which the other nations stand by rejoicing. We fight their battles and our victory is theirs. And, in refusing our demand and fighting, the other country is not fighting us alone, but fighting all our temporary allies—those who will get the Most Favoured Nation treatment whatever happens. America, for instance, might be very sensible of our claims to better treatment, and inclined to give it, while she would not be willing to give the same to, say, Germany This seems to me a very strong presumption against our success.

 

6The words are Mr. Balfour’s.

7The above details are taken from Reports on Tariff Wars between certain European States, Cd. 1938: Commercial No. 1 (1904). These reports are particularly interesting as indicating the diversion of trade during the struggle to other countries and other routes.

8The Most Favoured Nation Clause may be defined as that clause in a commercial treaty which binds the parties to give to each other, in certain matters, the same treatment they give, or may afterwards give, to the nation which receives from them the most favourable terms in respect of these matters. Of course, the clause does not operate in our favour in two cases: where we cannot export, and where we should probably be the largest exporters but for the duty. The German reduction on petroleum to Russia does us no good; and duties, say, on textiles, are not likely to be lowered to any other country.

9It is, of course, quite misleading to point to our action as regards bounty-fed sugar as an example of how easily Retaliation may be carried out. To say nothing of the facts that sugar is already a revenue article, and that, as coming in bulk—often in whole cargoes—it is easily watched and detected, it cannot already be forgotten that we are only one member in an international combination, all taking similar prohibitory measures.

10There is a special difficulty which comes of our freer political organisation. Other countries have a much stronger and more irresponsible Executive than we have. A German Chancellor “hits back,” and afterwards comes to Parliament to confirm the mandate: the German government is not liable to votes of censure. We should not allow our Executive any such power. Every act of Retaliation would have to be submitted to Parliament; argued out there; all the details made public, so that our enemies might be well prepared; and, if there were a strong Opposition, I am not sanguine that any government would get a very clear mandate at the best. For this is not a political matter. Every interest hurt, as well as every interest advantaged, would make itself heard, and the most rigorous party discipline would not be able to secure a party vote.

• 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.
• 6IT 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.
• 7Our 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.
• 8Nor 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.
• 9It 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.
• 10It 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.