The Principles of Economics Part 47

[Sidenote: Effects upon home industry]

But if the article can be produced in the importing country at the new price, "home industries" will start. If the whole demand at home is thus supplied, imports stop and therewith stop all revenues to the government from that source. This is a prohibitive or completely protective tariff.

Most tariffs combine the characters both of revenue and protective measures. Where the freight charges are low along the coast and on the main lines of transportation, some imports take place; while farther inland, where freight charges are high, some home production of the same goods takes place. A tariff that reduces imports but does not cut them off entirely is either a revenue tariff with incidental protection or a protective tariff with incidental revenue. The difference is partly one of legislative intention, partly one of degree only.

[Sidenote: The beginning of the tariff under the Const.i.tution]

2. _The tariff question has been the most discussed of economic questions in American politics._ The tariff bill pa.s.sed by the first session of Congress in 1789 was primarily a revenue measure with rates averaging only about five per cent.; but incidentally it was protective (as most tariffs are), being laid on imports of iron and cloth, the production of which had been undertaken to some extent before, but which thus were further encouraged. Between 1808 and 1812, the United States and England were in constant disagreement, and our government repeatedly laid an embargo on British commerce, closing our ports to British ships, and British ports to our ships. The war from 1812 to 1815 almost annihilated American trade on the ocean. Added to this discouragement of foreign trade was the high tariff imposed, in the vain effort to get revenue from greatly decreased imports. Altogether these causes almost completely stopped importation and forced the American people to rely on their own efforts for such goods. Some industries having been "stimulated" in a high degree, their destruction was threatened by the repeal of the high war tariffs. Many investments and interests were at stake, and the tariff became a most important question.

[Sidenote: The tariff controversy before 1865]

The first period of real discussion of the protective policy was between 1816 and 1846. The result of the first twelve years was an increase of the tariff rates which, in 1828, reached a high point. By the compromise of 1832, the rates were reduced by steps till 1841. Again from 1842 to 1846 was a brief period of higher duties, followed by a policy which, relatively speaking, was one for revenue, from 1846 to 1860. Again in the Civil War, 1861-65, the rates were steadily increased without much discussion, the tariff not being the leading question at a time when the prosecution of the war was absorbing nearly all attention.

[Sidenote: Recent discussion of the tariff]

The latest period of discussion was from 1874 to 1892. In the Tilden and Hayes campaign of 1876 the tariff was made the leading issue and the advocates of a lower tariff were very nearly successful. In 1880, protection again triumphed in the election of Garfield. In the election of Cleveland in 1884, the issue of tariff reform had some part, but no effective legislation on the subject was enacted in the next four years.

In 1888, Cleveland was defeated in a campaign fought mainly on the tariff issue, and Harrison was elected as a p.r.o.nounced protectionist. In 1892, Cleveland was reelected on the issue of tariff reform. From that time, however, there has been a lull in the discussion of the tariff question. The campaign of 1892 was the last presidential election in which the tariff was the dominant issue. Since 1896, the money question and imperialism have quite crowded the tariff issue off the stage.

[Sidenote: The "balance of trade" argument]

3. _A leading argument in favor of a protective tariff is that by encouraging an excess of exports it maintains a favorable balance of trade._ This notion of the favorable balance of trade appears in several forms. One of these, already discussed in connection with foreign exchanges, is that the exports of a country in the form of merchandise must exceed the imports if the country is to prosper. The ideal cherished is to keep more merchandise constantly flowing out of the country than comes in. An interesting commentary on this delusion is the fact that this is the usual situation in poor debtor countries having constant interest payments to meet; while the opposite of the ideal is the situation in rich creditor countries. England for many years in the period of her greatest prosperity has had a constant excess of imports, these being goods to the value of the interest payments due to Englishmen from investments abroad.

[Sidenote: "To keep money at home"]

4. _Another argument is that the protective tariff keeps money at home which, if trade is free, will be sent abroad to buy foreign goods, thus impoverishing the country._ This is the "favorable balance of trade"

argument, with the emphasis on money rather than on goods. A superficial glance at the trade relations of an old and rich country with a new province seems to give evidence for such a belief. The older country is lending capital (which it sends to the debtor country in the form of goods) and it has at the same time a larger supply of money. These two facts--the lack of money and the poverty of the newer country--are looked upon by the protectionist as due to the importation of goods. The real cause of the imports to the newer country and of its scanty money-supply, it need hardly be said, is its comparative poverty. Europe and the United States, in their trade with China and South America, do not get gold in exchange, but merchandise of various sorts. It is true that in the trade of England and New York with great gold-producing districts, such as California, South Africa, and Alaska, gold is received in return for merchandise, for to these districts gold is merchandise and its export does not drain them of their supply. The richer states in the Union do not drain the poorer states of money. A few years ago the states of Kansas, Nebraska, Iowa, and their neighbors were filled with resentment against the money-lenders of the Eastern states. There was a widespread belief that hard times were due to an insufficient currency. Attempted action took the form of the greenback and free-silver movements, which were defeated by the opposition of the East, but there can be little doubt that if the Federal Const.i.tution had not forbidden it, the discontented states would have established a protective tariff "to keep their money at home." Few advocates of protective tariffs are ready to admit that the money-supply of the country is dependent on the general wealth of the country, and on the methods of doing business, rather than on a protective tariff.

[Sidenote: The "two profits" argument]

5. _It is said that the tariff keeps "two profits" at home, foreign trade gives but one._ The word "profits" is here used in the popular sense of gain from a single transaction. This argument becomes somewhat confused, for certainly in the admission that there are "two profits" in a trade, the notion that "one man's gain is another's loss" is rejected.

Both parties are said to profit and both profits are thought to be secured at home when two citizens are forced to trade with each other.

There is an error in elementary arithmetic here, both as to the number and as to the aggregate amount of profits. The purpose of a protective tariff is to compel _two_ of the citizens of a country to trade with each other instead of trading with _two_ citizens of a foreign state; the number of profits is therefore not increased by subst.i.tuting domestic for foreign trade. What, then, as to the size and aggregate amount of the profits? The margin of advantage is not the same on all exchanges; the exchange is made if there is a margin to both parties, no matter how small it is; but the generous "profit" on one transaction where the conditions of the two parties are very different may be greater than the total of petty margins on a dozen exchanges between two traders of evenly matched powers. Can it safely be a.s.sumed that every trade with a foreigner is less advantageous than one with a fellow-citizen? Diamond cuts diamond, but two shrewd Yankees left to themselves surely should not be worsted in bargains with the universe.

If they could exchange to better advantage with each other they probably would discover it as soon as the interested manufacturers and political orators who can prove so eloquently that they know the other man's business better than he knows it himself. Forcing the home trade is doubtless to the advantage of one citizen, but it is not likely to be to the advantage of both citizens.

[Sidenote: The claim that protection raises wages]

6. _The most effective popular argument for protection is that it raises, or maintains, the general scale of wages in the country._ This argument is two-fold: first, when wages are low in a country it is claimed that a tariff is needed to raise them; and, secondly, when wages are high it is argued that a tariff alone can preserve them. In Germany the fear is of the higher paid and more efficient labor of England. In America, where wages at all times have been higher than in England, it was first argued that because of the greater cost of production, due to high wages, the tariff was needed to start certain industries; but after the tariff had long been established and the old argument had been forgotten, it was said that the tariff was the cause of the high wages and must be maintained to protect against the (so-called) "pauper" labor of the older countries. That wages generally are higher in new countries and where a tariff prevails is always claimed to be one of the chief fruits of a protective policy. The cause of the high wages in America appears to be the productive efficiency of industry under existing conditions. Labor is surrounded here with advantages in the forms of rich natural resources and of mechanical appliances such as never before were combined. Because of the scarcity of workers in particular protected industries, wages may be higher in them than in some other industries; but such workers form a small fraction of the population.

The claim that the general scale of wages in all occupations is raised by the tariff protecting this fraction, is no less invalid than the sweeping claims in favor of trade-unions.

-- II. THE REASONABLE MEASURE OF JUSTIFICATION OF PROTECTION

[Sidenote: Political arguments for protection]

1. _For military and political reasons an otherwise uneconomic tariff may be justified._ It usually is admitted by the believers in free trade that in the interest of diplomacy, to secure proper concessions, tariffs may sometimes be levied. Even in England, where protective arguments long have had little acceptance, Mr. Chamberlain, with his eye on a tariff union and imperial federation of England and her colonies, has been advocating this policy. In such a case there is no pretense that the justification of the tariff is its immediate economic advantages; it is an expenditure for ultimate gain. By the same argument a protective tariff is upheld as a means of defense--to encourage the building of ships, a.r.s.enals, and factories for munitions. It is always questionable whether an outright expenditure would not be better, whether the government cannot build its own a.r.s.enals, ship-yards, etc., more cheaply than it can foster private enterprise by means of a tariff.

[Sidenote: The infant-industry argument]

[Sidenote: Applied to America]

2. _Protection may be defended as encouraging infant industries and thus diversifying the industries of the country._ Most free-trade writers concede a limited validity to this argument. If the natural resources of a land are adapted to an industry, it may be called into being early by a fostering protective tariff. This is merely antic.i.p.ating and hastening the natural order of progress. In the American colonies the manufactures of iron, cloth, hats, ships, and furniture sprang up not only without "protection," but despite numerous hara.s.sing trade restrictions made in the interest of the English merchants; and they continued in some cases despite their absolute prohibition by Parliament. Can it be doubted that many of these industries would have developed and flourished in America under no other fostering influences than those of rich resources and of economy in freights? The growth of industries in the Middle West in the last twenty-five years has been phenomenal. The discovery of natural gas and the presence of abundant coal, ore, and timber have enabled them to develop without protection against the Eastern states. Industries capable of eventual self-support must in most cases naturally appear in due time. Economic forces will bring them out. It is a trite but valid remark that protective tariffs are often like hothouse culture, antic.i.p.ating the season by a few weeks and at great cost. The question is whether the mere possession of the hothouse is a luxury worth the price, if meantime the products can be gotten more cheaply by exchange.

English manufactures flourished because they were well established, had excellent coal supplies, great stores of iron ore, and low-paid labor which did not have the opportunity of better alternatives, as did the American workman. If America had imported _more_ (it would not have been _all_) of her iron and coal, the English mines would have been exhausted earlier, and America's advantage surely would have a.s.serted itself in time. Her iron manufactures undoubtedly were hastened--they cannot truly be said to have been created--by the protective tariff.

[Sidenote: Social effects of the tariff]

Industries are forced into an earlier diversification by tariffs. The peculiar advantages of a new country attract labor and enterprise into a few lines. Is it an evil? Contrast Iowa, Dakota, and Minnesota, or Kansas, if you please, with New York and Pennsylvania. Is it so certain that a dense population congested in cities and crowded in factories and mines is a more ideal social aggregation than is a community of prosperous farmers? The smoky industrialism fostered by protection often puts a premium on a low grade of immigrant and keeps him an alien to the American spirit. It would be surprising if Americanism on the Western plains were not as good as in the Eastern cities. But the infant-industry argument appeals strongly to the enterprise and the speculative spirit of Americans, who like to do all things rapidly and on a large scale. Every village aspires to be a great industrial center.

Americans are impatient of the suggestion that things "will come in time"; they like things to come at once.

[Sidenote: The "home-market" argument as to freights]

3. _The tariff develops a home market for the products of agriculture._ It has been especially hard to reconcile the farmers in America to the tariff. While in England the protection that existed before 1846 was almost entirely for the benefit of the landholding interests, the tariff in America has been peculiarly favorable to manufactures. The "home-market" argument is the protectionist appeal that has proved most effective with the American farmers. This argument, which takes on several aspects, is akin to the "two-profits" argument when it declares that the shipping of food to Europe and the importing of manufactures involve a great cost for freight which could be saved by manufacturing "at home." Of course the farmer is supposed to pay this cost, although there is nothing in the argument to show that it is not all paid by the European, either the manufacturer or the food consumer. Home trade "saves the freights" for the farmer only in case he can buy goods under a tariff with less of his own labor and products than under free trade.

The payment of freight charges is true economy when the goods can be bought at a distance on more favorable terms than near home. The freight-argument proves too much, for it condemns every exchange, within the country, of goods produced a stone's throw away from the consumer.

[Sidenote: As to security of trade]

Again, the home-market argument dwells on the greater steadiness of domestic trade. War or political changes, it is said, may change the demand for products. This is true, but no other changes have affected American agriculture so radically as the peaceful development of domestic transportation and the opening of the West.

[Sidenote: As to the value of farm-lands]

The home-market argument is strongest when addressed, not to all farmers, but to one cla.s.s of farmers, those whose lands are situated nearer the manufacturing cities. The higher value taken on by land as it is converted from the extensive cultivation of corn and wheat to dairying, fruit, and market-gardening, is pointed to as a benefit of protection. The decaying agriculture and deserted farms throughout the great industrial states during the past twenty-five years are pathetic evidence that this benefit has failed to come to the average farmer just where it should be most expected. There is, however, a partial validity in the argument as applied to a comparatively small number of farmers, who gain as landholders, not as tillers of the soil.

[Sidenote: Exports and exhaustion of the soil]

4. _The tariff may keep some of the natural resources of a new country from becoming quickly exhausted._ The export of food takes out of the soil and out of the country fertile qualities never to be returned. The shipment of several hundred million dollars of food products year after year represents a tremendous drain from the soil of the United States.

The a.s.sumption, however, that the use of the food in this country would preserve the fertility of our own fields has been in the main mistaken.

The fertile material in the food shipped for human consumption five miles away from the field is almost absolutely lost. Engineering skill has as yet succeeded in saving hardly a fraction of the fertile organic matter that flows into the sewers, that is dumped into river and ocean, and that is buried in heaps at the borders of our cities. On the other hand, the increased use of iron, coal, and timber, as a result of encouraging manufactures, has very effectually aided in exhausting the natural resources of the country.

[Sidenote: Protection as a monopoly measure]

5. _A new country has a limited potential monopoly in certain kinds of products; a tariff may make it effective._ The opening up of a new country with rich natural resources may be a great gain to the average consumer in the older countries, although it causes a loss to a special cla.s.s of landowners. Whether the citizens of the older or of the newer country shall reap the greater benefit in the trade depends on the reciprocal demand for the two cla.s.ses of goods, as was seen in discussing the equation of international demand. A wide margin of advantage may go to one party and a narrow margin to the citizen of the more favored land. To put it concretely: if America, having great natural resources for agriculture, continues to exchange food for manufactures up to the narrowest margin of advantage, England reaps most of the benefits of the trade. An American tariff on manufactures from England will, under such conditions, check the demand for English products and compel some Americans to leave farming. This reduction of the American supply of wheat or corn and of the American demand for English manufactures compels a new ratio of exchange. It is conceivable that exchanging fewer goods at a larger margin of advantage, will give a larger total of gain to the favored nation. Thus, by the shifting of the ratio of exchange, foreigners may be compelled to pay a part of the tariff to enjoy the favored market. This is but a special case of the monopoly principle; the government by law artificially limits the supply of goods offered by its citizens.

[Sidenote: Limited monopoly advantages of America]

This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed conditions seldom occur, but they may exist, and probably have existed in America. When the great system of internal transportation was developed in the United States before that of the other new countries, this country had such peculiar advantages for the production of food that the quant.i.ty was enormously increased and the prices fell. At such a time the tariff may work toward r.e.t.a.r.ding the unfavorable turn in the ratio of exchange and toward reestablishing early a more favorable ratio. But the limited application of the principle must be recognized. The potential compet.i.tion of undeveloped countries on all sides, seeking to develop their resources, to raise their own food, and to profit by the higher prices in the world-market caused by the tariff, threaten the peculiar advantages of the favored land. A great nation with its manifold interests is not eminently fitted to practice the gentle art of monopoly.

-- III. VALUES AS AFFECTED BY PROTECTION

[Sidenote: Influence on the value of capital]

1. _An increase of the tariff is favorable to many capitalists and to many owners of natural resources._ A denial of large general advantages in protection is not the denial of all its influence on value. On the contrary, it cannot be too strongly emphasized that manifold interests are affected by the tariff. Owners of natural mineral resources are among the first to benefit. When the price of iron is low, many iron- and coal-mines may yield no rent and have small prospective values. A tariff forcing home production opens the marginal resources and gives them a large capital value. Factory sites and surrounding lands leap from the level of rural prices to that of city real estate. The owners of farms situated near the new industries have a home market and get scarcity prices, as they alone can supply the needed fresh vegetables and dairy products. Wealth less favorably situated, however, is in many cases depressed in value because its products exchange for smaller amounts of other products.

[Sidenote: The special gains and the general burden]

2. _A tariff is immediately favorable to some enterprises and to special cla.s.ses of workmen._ Enterprisers already acquainted with and engaged in a business always may hope to gain by the higher prices immediately following a rise in the tariff rates on their particular products.

Though they are granted no enduring monopoly by the protection, they for the time enjoy the advantage of being on the ground and reap the first fruits of the favoring conditions. The enterpriser usually profits when the price of his product suddenly rises. Usually skilled workmen are affected slowly by compet.i.tion when there is any considerable increase of their special industry. The burden of higher prices is very soon distributed to a number of less favored citizens. A part of it may be borne by the retail merchant, a part by his customers. The weight falling on each is usually small, often unsuspected, always hard to measure. The increased benefit is concentrated in a few industries and accrues to a comparatively few producers. Here is a recipe for riches: get everybody to give you a penny; they'll not miss it, and it will mean a great deal to you. Something like this happens in the case of many protected industries; every consumer of the article pays a penny more, a few wage-earners gain, and a few enterprisers wax wealthy.

[Sidenote: Sudden tariff reduction injurious]