<h2>CHAPTER 51</h2>
<h3>THE PROTECTIVE TARIFF</h3>
<h4>§ I. THE NATURE AND CLAIMS OF PROTECTION</h4>
<div class="sidenote">Nature of a tariff for revenue</div>
<p>1. <i>A protective tariff is a schedule of import duties so arranged as to
give appreciably more favorable conditions to some domestic industries
than they would enjoy with free trade.</i> Tariff duties were first laid to
get revenues for the government. The first effect of the tariff is the
same as that of any tax that enters as a new factor into enterpriser's
cost—the domestic price of the taxed article tends to rise. Other
results then follow. If the article cannot be produced within the
country (as oranges, spices, and coffee, in England, Norway, and
Sweden), its consumption is reduced. The lessening of demand may affect
somewhat the price in the producing country and may compel the foreign
producers to sell each unit for less than before. As such a tariff does
not increase home production, it is for revenue, not for protection.</p>
<div class="sidenote">Effects upon home industry</div>
<p>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.<span class="pagenum"><SPAN name="Page_492" id="Page_492">[Pg 492]</SPAN></span> 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.</p>
<div class="sidenote">The beginning of the tariff under the Constitution</div>
<p>2. <i>The tariff question has been the most discussed of economic
questions in American politics.</i> The tariff bill passed 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.</p>
<div class="sidenote">The tariff controversy before 1865</div>
<p>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<span class="pagenum"><SPAN name="Page_493" id="Page_493">[Pg 493]</SPAN></span> being the leading question at a time when
the prosecution of the war was absorbing nearly all attention.</p>
<div class="sidenote">Recent discussion of the tariff</div>
<p>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 pronounced protectionist. In
1892, Cleveland was reëlected 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.</p>
<div class="sidenote">The "balance of trade" argument</div>
<p>3. <i>A leading argument in favor of a protective tariff is that by
encouraging an excess of exports it maintains a favorable balance of
trade.</i> 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.</p>
<div class="sidenote">"To keep money at home"</div>
<p>4. <i>Another argument is that the protective tariff keeps money at home
which, if trade is free, will be sent abroad to<span class="pagenum"><SPAN name="Page_494" id="Page_494">[Pg 494]</SPAN></span> buy foreign goods, thus
impoverishing the country.</i> 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 Constitution 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.</p>
<div class="sidenote">The "two profits" argument</div>
<p>5. <i>It is said that the tariff keeps "two profits" at home, foreign
trade gives but one.</i> The word "profits" is here<span class="pagenum"><SPAN name="Page_495" id="Page_495">[Pg 495]</SPAN></span> 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 <i>two</i> of the citizens of a country to trade with
each other instead of trading with <i>two</i> citizens of a foreign state;
the number of profits is therefore not increased by substituting
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 assumed 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.</p>
<div class="sidenote">The claim that protection raises wages</div>
<p>6. <i>The most effective popular argument for protection is that it
raises, or maintains, the general scale of wages in the country.</i> 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<span class="pagenum"><SPAN name="Page_496" id="Page_496">[Pg 496]</SPAN></span> 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.</p>
<h4>§ II. THE REASONABLE MEASURE OF JUSTIFICATION OF PROTECTION</h4>
<div class="sidenote">Political arguments for protection</div>
<p>1. <i>For military and political reasons an otherwise uneconomic tariff
may be justified.</i> 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<span class="pagenum"><SPAN name="Page_497" id="Page_497">[Pg 497]</SPAN></span> 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, arsenals, and factories for munitions. It is always
questionable whether an outright expenditure would not be better,
whether the government cannot build its own arsenals, ship-yards, etc.,
more cheaply than it can foster private enterprise by means of a tariff.</p>
<div class="sidenote">The infant-industry argument</div>
<div class="sidenote">Applied to America</div>
<p>2. <i>Protection may be defended as encouraging infant industries and thus
diversifying the industries of the country.</i> 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 anticipating 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 harassing 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,
anticipating 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,<span class="pagenum"><SPAN name="Page_498" id="Page_498">[Pg 498]</SPAN></span> 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 <i>more</i> (it would not have been
<i>all</i>) of her iron and coal, the English mines would have been exhausted
earlier, and America's advantage surely would have asserted itself in
time. Her iron manufactures undoubtedly were hastened—they cannot truly
be said to have been created—by the protective tariff.</p>
<div class="sidenote">Social effects of the tariff</div>
<p>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.</p>
<div class="sidenote">The "home-market" argument as to freights</div>
<p>3. <i>The tariff develops a home market for the products of agriculture.</i>
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<span class="pagenum"><SPAN name="Page_499" id="Page_499">[Pg 499]</SPAN></span> "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.</p>
<div class="sidenote">As to security of trade</div>
<p>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.</p>
<div class="sidenote">As to the value of farm-lands</div>
<p>The home-market argument is strongest when addressed, not to all
farmers, but to one class 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.</p>
<div class="sidenote">Exports and exhaustion of the soil</div>
<p>4. <i>The tariff may keep some of the natural resources of a new country
from becoming quickly exhausted.</i> The export<span class="pagenum"><SPAN name="Page_500" id="Page_500">[Pg 500]</SPAN></span> 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 assumption, 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.</p>
<div class="sidenote">Protection as a monopoly measure</div>
<p>5. <i>A new country has a limited potential monopoly in certain kinds of
products; a tariff may make it effective.</i> 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
class 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 classes 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<span class="pagenum"><SPAN name="Page_501" id="Page_501">[Pg 501]</SPAN></span>
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.</p>
<div class="sidenote">Limited monopoly advantages of America</div>
<p>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 quantity was enormously
increased and the prices fell. At such a time the tariff may work toward
retarding the unfavorable turn in the ratio of exchange and toward
reëstablishing early a more favorable ratio. But the limited application
of the principle must be recognized. The potential competition 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.</p>
<h4>§ III. VALUES AS AFFECTED BY PROTECTION</h4>
<div class="sidenote">Influence on the value of capital</div>
<p>1. <i>An increase of the tariff is favorable to many capitalists and to
many owners of natural resources.</i> 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<span class="pagenum"><SPAN name="Page_502" id="Page_502">[Pg 502]</SPAN></span> 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.</p>
<div class="sidenote">The special gains and the general burden</div>
<p>2. <i>A tariff is immediately favorable to some enterprises and to special
classes of workmen.</i> 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 competition 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.</p>
<div class="sidenote">Sudden tariff reduction injurious</div>
<p>3. <i>A sudden reduction of the tariff causes local crises and may bring
on a general crisis.</i> The repeal of the tariff works in a direction the
reverse of its enactment. The benefits<span class="pagenum"><SPAN name="Page_503" id="Page_503">[Pg 503]</SPAN></span> of the lower prices are
diffused; the immediate injury is concentrated and acute. Factories are
closed, capital is depreciated, labor is thrown out of employment. The
organic nature of local industry causes the evil to be felt by many
classes. Merchants, professional men, servants, and skilled laborers
that are tributary to the depressed industry, suffer. The effects are
transmitted to commercial and financial centers and credit is shaken.
The readjustment of industry is slow and much capital is lost in the
process.</p>
<div class="sidenote">The two policies in political discussion</div>
<p>It is rarely appreciated how great is the tactical advantage enjoyed in
political contests by the advocates of a high tariff. They can so easily
impress the popular judgment with the evident fruits of their own
policy, and with the immediate dangers of the policy of their opponents.
The low-tariff advocates in America undoubtedly have made the mistake of
underestimating or of quite overlooking these immediate effects. They
have been too abstractly doctrinaire, and have argued too absolutely for
the merits of free trade. They have opposed one extreme system by
another, with no thought of the inexpediency and injustice of sweeping
changes. There is a strong feeling among business men that any tariff,
be it high or low, is better than a shifting policy. Despite the great
preponderance of domestic production over foreign trade, it is perhaps
too much to say that the tariff is unimportant in our present
conditions. It can, however, be said that the tariff agitation has
taught that radical changes, especially sudden and large reductions, are
fraught with evils, and that business can adjust itself in large measure
to any settled conditions. The future of the tariff discussion in
America is hard to prophesy. The infant-industry argument now is of
little force. With the widening of our international relations are
growing interests favorable to reciprocity or to other freer trade
relations.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_504" id="Page_504">[Pg 504]</SPAN></span></p>
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