The tariff problem

Front matter

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THE GIFT OF

Preface

To place the industry of this country on a secure basis, and at the same time to consolidate the British Empire, is a task not yet beyond the power of a bold and constructive statesmanship. The gradual creation of a system of Imperial inter-dependence will, indeed, be the work of a generation ; and it will be an exceedingly delicate and difficult business. What we have now to do is to soberly set our faces in the right direction, and to trust to the common sense and mutual forbearance of the British peoples. That there are great risks to be run in doing anything. is only an argument for those who do not recognise that there are greater risks in doing nothing.

In view of my present academic position I may be allowed to add a word of personal explanation. By upbringing and sympathies I am a Liberal. As an economist my main interest has always been in the condition

VI

PREFACE.

of the working classes. But the general opinions expressed in the following chapters were formed long before I returned to England, and while I was still a teacher, first in a Canadian and then in an American university.

Llanfairfechan,

September 7, 1903.

PREFACE

TO THE SECOND EDITION.

The opportunity has been taken to add to this second edition some observations on British Shipping and on the position of England as Entrepot, as well as a few notes on certain points which have emerged in the course of the current discussion. In the body of the book no changes have been made except a few verbal corrections which do not affect the argument.

Edgbaston,

December 17, 1903.

Contents

CHAP. p;lOE

I. STATE CONTROL IN GENERAL : ITS REMOVAL

AND RESTORATION I

Chapter II. The Policy Of Free Imports: The Arguments Of Its Original Advo- Cates

We may perhaps be enabled to approach the consideration of the present crisis the more dispassionately if we take the trouble to look first at the arguments by which the policy of free imports was commended to the English people and at the relation of those arguments to the circumstances of the time. It will not be worth while for our immediate purpose to go back further than Adam Smith. I have elsewhere shown^ that before his time the policy of Free Trade (there can hardly be said to have been a doctrine of it) was associated with the Tory or country party; and that the traditional policy of the Whig party from before the Revolution down to the time of Fox was an extreme form of Protectionism.

The Protectionism which Smith attacked was that of the manufacturing and commercial classes, and the name of " mercantile policy " which he gave to it has clung to it ever since.

Smith started with clearing out of the way the notion of money which underlay the current

' " Surveys, Historic and Economic" (1900), pp. 268 seq.

doctrine of the Balance of Trade. The purpose of trade is not to obtain money, but to obtain consumable commodities; and unless a country possesses gold mines, it does not ultimately pay for its imports in money, but in commodities. Smith's argument is not so compact as' that of his great predecessor Hume, from whom he took his doctrine of money ,^ but it is suificiently clear. With both Hume and Smith the most convincing part of their case lay in the appeal to facts ; if an unfavourable balance of trade was paid for in coin, Ireland, said Hume, would long ago have been completely denuded of money; if, under modern circumstances, even war in distant parts was carried on by the exportation of money, England, as Smith observed, must have sent out its whole currency twice in six years without anyone's noticing it.

The proposition that exports pay for imports is not, indeed, true under all circumstances ; ^ it may also take a long " long run " to balance the sides of the account ; and in any case " invisible " goods (freight, &c.) must be added to "visible " in making up the totals. There is some little excuse even for the much ridiculed recent remark of a Colonial Premier ; circumstances might really arise in which England paid (for a time) for her surplus of imports with "golden sovereigns." But there is a very good reason for believing that England has not yet done so, and this is the same reason as convinced

" Essays," xvii. Of the Balance of Trade. '^ Cf. Roscher, " Handel- und Gewerbefleiss," § 37.

Hume, viz., that the excess of imports has been incomparably greater than the whole coinage of the country. With England as she has been for some centuries, the notion that imports are paid for by money which might otherwise be " spent at home" is the crudest of popular fallacies, and ought no longer to need refutation.

Smith then proceeds to expound his fundamental doctrine, the doctrine which has remained fundamental with Free Traders ever since. It is that Protection diverts industry from more to less advantageous employments. The argument is easy. " No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction in which it might not otherwise have gone." Left to himself, every individual endeavours to employ his capital in such a way that "its produce may be of the greatest value " ; and this means that he necessarily " labours to render the annual revenue of the society {i.e., the nation) as great as he can." The very fact that Protection is necessary for an industry means that the article cannot be produced at home as cheaply as abroad ; it means that the consumer pays more than he would if he were allowed to buy the foreign article ; and that, therefore, there is a waste of national labour which were better employed in some other way in which we have an advantage.

As List, the founder of '■ Scientific Protectionism , '

pointed out later, this teaching of Smith is evidently true as a doctrine of present exchangeable values, or, less technically, of present and immediate advantage. We may grant that, at any particular moment of time, every country possesses certain advantages over others in some direction of production. Let it produce these, and exchange them for those which other countries produce more advantageously, and each country will gain the advantages of international division of labour. If an industry is set up which needs a protective tariff to survive, the increment of price which the consumer has to pay is but an index of the social loss involved in this particular employment of its energy. This is the truth which popular Protectionism is always so unwilling to recognise, and which scientific Protectionism has always begun by recognising. Protection always involves at first a loss — not, indeed, always proportionate to the tariff; this is a Free Trade exaggeration to which I shall return later — a loss which is expressed in the easiest way by saying that the consumer has to pay more than he otherwise would for the protected commodities. If he does not. Protection is unnecessary. But everything turns upon the words at first.

It is very well known that John Stuart Mill made a remarkable concession — the so-called "infant industries argument."

"Protective duties can be defensible, on mere grounds of political economy, when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry in itself perfectly suitable to the circumstances of the country." '

Mill, with that inconsecutiveness of thought which adds so much to the charm of his character, always regarded this as a comparatively small and theoretically unimportant concession. His Free Trade friends, however, alarmed by the use made of the concession in America, regarded it as a lamentable aberration of judgment on the part of so great and good a man ; and Bright, who did not mince his words, did not hesitate to say that this one paragraph would cause more injury to the world than all his writings would do good.^ They were quite right in their alarm. It may be true that the infant industries argument has been the excuse for a vast amount of folly ; the criticism that infant industries have a way of never growing up may be only too well deserved. It is certain, also, that the experience of the world in this matter has shown that, whatever else it may be, Free Trade is the easiest policy to pursue. None the less Mill's concession knocks the bottom out of Adam Smith's doctrine as one of universal validity — applicable to every country at any time. For it is but a concrete way of stating what List had already made the basis of his Protectionist doctrine. As List phrased it, the question of the

1 " Principles of Political Economy," Bk. v., ch. x., § i. ' Remark to Mr. Carnegie ; " Empire of Business," p. 313.

productive powers of a country and their possible development is far more important than that of present values; it might be well worth while to incur a loss for a time in order to secure a more than proportionate future gain.

Considerations such as these were not absolutely unknown to Adam Smith : it is remarkable how many ideas which we are wont to ascribe to later times are to be found somewhere in his pages. He recognises that "advantages " are not always "natural"; they may be "acquired," and the effect will be just the same. But against the obvious reply that some countries may have advantages still to " acquire," he has absolutely nothing to say but to express his doubt as to the probability of ever recouping the temporary loss. Yet it is evident that to leave the matter to a judgment of probability is to concede the possibility that a protective policy may in some cases be economically justifiable ; and it is evident also that Smith's policy involves the stereotyping of existing conditions. To take the favourite example of Mill, Poland had once an " advantage " over England in the production of wheat. Will it be maintained by any who know the social conditions of Poland that it would have been well for Poland that it should continue to be a purely agricultural country ?

The point is one of more than antiquarian interest. Smith's whole conception is a static one — oi permanent advantages enjoyed by one country over another. But suppose goods are for a time offered to us at a lower price than that at which they can as a rule be produced in the country of origin. Suppose the cheapness does not correspond to a real advantage enjoyed by the exporting country but to a temporary need. Suppose that our buying them, and refusing to protect the competing industry, means not that we permanently enjoy the lower prices, but that when our market is captured and the competing English industry is killed (for a time or for ever) we have to pay (for a time or for ever) higher prices than we otherwise should. Does it follow in this case that "what is prudence in the conduct of a private family " — to buy in the cheapest market — " can scarce be folly in that of a great kingdom ? " What Adam Smith would have said in such a case it were idle to discuss — it is simpler to say that the case never presented itself to him. Yet, as will be shown later, it is a case increasingly likely to be presented under modern conditions.

So far we have seen Adam Smith as the abstract reasoner. But Adam Smith was more than an abstract reasoner ; he was also a man of wide historical reading ; and, as he needed his arguments not so much for the construction of a logical structure as for the removal of certain definite evils, he was quite ready to temper their severity by large concessions. In spite of his previous contention, there are, he says, " two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry," and there are " two in which it may sometimes be a matter of dehberation."^ Of the first two, one is to countervail an excise already imposed on the same article at home. This is universally conceded and needs no further notice. The other is far more important, but it may best be considered after looking at the two cases of the less positive class. The first case

" in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods is when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. There may be good policy in retaliations of this kind when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods."

With elephantine humour he adds :

" To judge whether such retaliations are likely to produce such an effect does not, perhaps, belong so much to the science of a legislator" (by which he means an economist like himself), " whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal vulgarly called a statesman or politician, whosecounsels are directed by the momentary fluctuations of affairs."

Evidently Adam Smith does not think the policy will meet with much success, and I do not

1 " Wealth of Nations," Bk. iv., ch. ii. (i. 35, 40).

for a moment wish to invoke his authority as in favour of retaliation. But he is fair-minded enough to allow that it may conceivably be successful ; and for an opinion as to whether it has a fair chance of success to-day one would naturally turn to the men who have had practical experience in commercial negotiations. It is obvious that the same appeal to a balance of advantages which Smith allows in the case of a temporary impost is, on the same reasoning, allowable in the case of a more or less permanent low duty, if it secures more or less permanently a considerable diminution of a foreign tariff.

I suppose it is useless to refer to the opinions of English or Continental statesmen as to the usefulness of tariffs for purposes of negotiation : they will be all charged with partisan bias. I myself think it a tenable proposition that, if England had not so completely divested itself of its weapons in i860, it could in subsequent years have obtained larger concessions from other nations, and that the " most favoured nation " practice would have secured the diffusion of the advantages thus secured. The whole world, with relatively moderate tariffs, might now have been enjoying greater freedom of trade than it does with one country completely free and the others barred by high tariff walls. But this is of course not susceptible of proof.

Possibly, though I am not sure, for we English ?ire very self-opinionative, it may be worth while in this connection to refer to the German economists. Nobody who knows the Enghsh and American universities will deny that it is to the example of German scholars that we owe in large measure the revival of economic studies among the English-speaking peoples in the last two or three decades. Nobody will deny also that the most characteristic product of German economists has been the work of the so-called " historical school." Now, Professor Gustav Schmoller, of Berlin, is undoubtedly the leader of the historical school, and he is also personally and academically the most influential of contemporary German economists; and his attitude towards the tariff question is precisely that of valuing them for purposes of negotiation. In the interesting debate at the annual meeting of the Verein fur Socialpolitik at Munich in 1901, Professor Schmoller put this point of view in the clearest possible way:

" The new era of Protection has arisen not because economists and statesmen have been unable to understand the beautiful arguments of Free Trade, nor because a few monopolists and manufacturers have dominated the Government : it has arisen from the natural instincts of the peoples. It does not only rest — in many cases it does not primarily rest — on List's doctrine of educative tariffs (the ' productive powers ' or ' infant industries ' argument) ; it arises from a motive which is rather instinctively felt than clearly understood, viz., that tariffs are international weapons (Machtmittel) which may benefit a country, if skilfully used."

Being a perfectly fair-minded observer, he goes on to observe :

" This new mercantilism often overlooks, as every movement of the kind which is based on popular cries is sure to do, that these weapons may, as often as not, be used unskilfully. And thus Russia, the United States and France, have fallen back on an extravagantly high protective system. But their action drives all other states to a certain amount of tariff regulation, if only not to be quite defenceless. Without such weapons we cannot expect to make commercial treaties. And therefore Professor Schumacher " (who had read a previous paper) " has been very much to the point in emphasizing the importance of negotiation-tariffs (Verhandlungszollen). The man who ignores these facts dwells in Cloudcookoo'^ land, and does not descend to the real earth with its opposing interests and struggles."'

And all this from the man who forty years ago was ready to risk his career to bring about freer trade in his native state. It is not without its significance that the younger economist whom he refers to, Professor Schumacher, is the director of the recently established Handelshochschule, or commercial college of university rank, in the city of Cologne. This, with its large staff and crowds of students, is by far the most successful experiment that has hitherto been made in any European country in the direction of the more thorough training of industrial leaders. Evidently its director does not trust the future of his country to "technical education" alone.

Schriften des Vereins fiir Socialpolitik," xcviii. 370.

I do not wish to suggest that German economists are unanimous ; there are of course among them a few able representatives of the out-and-out Free Trade doctrine, like Professor Brentano. But the moderate Protection party is in the majority ; and though it is in my opinion most characteristically represented by Professor SchmoUer, it includes the leader of the opposite and more theoretical school, Professor Wagner. This, however, as we shall see later, is mainly on other grounds.

We pass now to Adam Smith's other case.

" It may sometimes be a matter of deliberation how far or in what manner it is proper to restore the free importation of foreign goods after it has been some time interrupted, when particular manufactures, by means of high duties, &c., have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a great deal of reserve and circumspection. Were these high duties taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence."

It would be quite fair to hold that " humanity " would likewise require that foreign goods should be admitted only by slow gradations, and with a great deal of reserve if they were likely to destroy an industry which had not previously been protected. But the case is somewhat different, and it is better to say that Adam Smith did not contemplate it. But let us look at Smith's further discussion of the subject. He proceeds to whittle away his concession, and to argue that "the disorder would, in all probability, be much less than is commonly imagined." He points out that, as a matter of fact, several of the chief manufactures of England at that time — including " a great part" of what was then the leading staple, the woollen manufacture — produced so cheaply that they were in no practical danger. And if a great number in other industries should be thrown out of employment, they could without much difficulty find other work. "To the greater part of manufactures there are other collateral manufactures of so similar a nature that a workman can easily transfer his industry from one of them to another. The greater part of such workmen, too, are occasionally employed in country labour." This last remark will show how far the industrial world has changed since Adam Smith's time. England was then a far more agricultural country ; industry, on the "domestic system," was carried on much more largely in a certain loose association with rural employments ; and the manufacturing population had a second string to their bow to a considerably greater extent than at present.^ If for this reason only, we might to-day permit of the destruction of an existing industry with even more "reserve and

' For the combination, for instance, of handicrafts with small freehold pasture-farms in the cloth trade of the West Riding, see Toynbee, " Industrial Revolution," p. 53, and the well-known quotation from Defoe there given.

T.P. D circumspection." But what shall be said of Smith's first point ? Bagehot pointed out a quarter of a century ago " that the transferability of labour " was one of the two postulates, or assumptions, of the orthodox political economy of his time — "the transferability of capital " being the other. It can no doubt be argued with a great deal of force that though they are not by any means completely " transferable," they are sufficiently fluid to bring about that equalisation of the rates of wages and of profits which the theorist makes a starting point for further reasoning, though this is open to greater objection than Bagehot and others have realised.^ But even if the transferability of labour is sufficiently true to real life to be made the postulate of an abstract theory — which avowedly cannot be applied to any particular case without due regard to the " friction " which may impede its complete realisation — it does not follow that it is sufficiently true to be made the basis of a practical economic policy. Even to Adam Smith, when he approached the subject in another connection, it appeared " evident from experience that a man is, of all sorts of luggage, the most difficult to be transported." ^ How much actual movement of labour there is from occupation to occupation is a matter on which economists will still differ ; it is one of the many subjects on

^ Bagehot, "Economic Studies," pp. 31 scq.; and for criticism, see ClifFe Leslie in " Essays," pp. 334 seq, ' Bk. i., ch. viii. (i, 79).

which we need further information. Of course, it varies with the district and the trade and the social grade. My own impression, based on some Uttle observation, is that in the more highly skilled crafts there is exceedingly little fluidity — that men cling to a customary occupation, in which they have a special skill, with a pathetic (or, if you please, a stupid) persistency. But all economists will, I think, now grant that the older writers minimised unduly the difficulty with which labour transfers itself from one industry to another, even a closely allied one. Even supposing that all the labour thrown out of employment pretty soon finds an equally well-paid occupation, there is inevitably an economic loss in the temporary dislocation — the resort to savings or to charity while waiting for the new job, the cost of removal from place to place and the like, which must be set against the gain to the consumer in cheaper goods. But this is the most favourable supposition ; and we must further consider — and to this we shall return — the relative value to the national economy as a whole of the old and of the substituted employment.

We now come at last to the case in which Adam Smith thought it would be positively expedient to lay some burden upon foreign for the encouragement of domestic industry. It is common to say that this was the case of the Navigation Act, which Smith calls "perhaps the wisest of all the commercial regulations of England"; and it is amusing to

D 2 see how the extreme free traders have hastened to declare that Adam Smith was quite mistaken, and that the Navigation Laws did nothing for English mercantile shipping and " did not diminish the naval power of Holland." The late Mr. Thorold Rogers, indeed, cast doubt on Smith's mental honesty ; he thought it " singular that Smith should have deferred so much to municipal prejudice as to have lauded the Navigation Laws."^ That they became unnecessary in the nineteenth century is doubtless true ; on the question whether they were useful in the seventeenth century most unbiased readers of history will agree with Adam Smith. But the Navigation Act is justified by Adam Smith only as an example of a great principle : "It will be advantageous to lay some burden upon foreign for the encouragement of domestic industry when some particular sort of industry is necessary for the defence of the country." After showing how the defence of Great Britain depended very much on the number of its sailors and shipping, and how the Act of Navigation stimulated their increase. Smith takes pains to show how in some ways it checked the growth of opulence, and prevented Englishmen from buying as cheaply and selling as dearly as possible. But " defence is of much more importance than opulence."

Smith, it will be perceived, was much less cosmopolitan than many of his followers; he ' Note in his edition of Adam Smith, i. 37 n.

still had strong national feelings; and he did not anticipate an unbroken era of international peace. Moreover, he did not think it his business as an economist to disregard political considerations, nor did he apologise for introducing " noneconomic" arguments. But the alarm of the Free Trade precisian at Smith's concession was altogether justified ; for it opens the door to very much more than its author contemplated. One wonders, for instance, what Smith would have said to the present condition of affairs when the English people is dependent upon importation for more than three-quarters of its bread, and for almost half of it upon importation from a country with which we have quite recently seemed on the verge of war. Or again, if he had lived in these days of steel-built battleships, would he have viewed with equanimity a state of things which may well make its appearance — a flourishing shipbuilding trade absolutely dependent upon importation for the cruder forms of steel which it needs as its raw material ? We cannot say, and it were vain to imagine. Modern circumstances are so much more complex than those of the time of Cromwell, that the maxim " defence is more important than opulence " may not be as easy for us to observe as it was for the Long Parliament. Yet it would be extravagant optimism to maintain that it can safely be forgotten.

The reader must now once more be reminded that the protection which Adam Smith attacked was entirely that of the manufacturing and mercantile classes. At this time importation of wheat was indeed prohibited until the price reached a certain point ; but this was practically unnecessary, for during the first half and more of the eighteenth century Great Britain was a corn-exporting country. A year or so before Adam Smith wrote, corn began to be imported to some extent at certain seasons of the year ; but an equal quantity was still exported, and it was not till 1793 that there was a net import. Accordingly the interests of landlords and their tenants were not yet, when Smith wrote, enlisted on the side of import duties; and he could lavish his praise upon "the generosity natural to their station," in happy unconsciousness of the change that time was speedily to bring. To pass from the compliment of Smith, " Country gentlemen and farmers are, to their great honour, of all people the least subject to the wretched spirit of monopoly,"^ to the index to Cobden's speeches under the words "monopoly" and "monopolists," is to receive a lesson in history. But Smith did not rely entirely on the generosity of the agricultural classes. He pointed out that "manufactures were much more easily transported than corn or cattle " ; that accordingly " the free importation of foreign corn could very little affect the interest of the farmers of Great Britain," since they were effectively protected by the heavy freight charges : ' "Wealth of Nations," ii. 34.

" The small quantity of foreign corn imported even in times of the greatest scarcity may satisfy our farmers that they can have nothing to fear. The average quantity imported, one year with another, does not exceed ^^j of the annual consumption."

Let us now pass to the first period of Free Trade legislation, that beginning in 1820. Three years before that time Ricardo had formulated in his " Principles " a doctrine of international trade which he derived from Torrens. It was afterwards systematically worked out by John Stuart Mill, and has been the subject of much subtle discussion by theoretical writers. I shall return to it in a later chapter; here it need only be said that it was a further elaboration of Adam Smith's doctrine of the benefits to be derived from devotion to industries in which each country has an "advantage." It had very little, if any, effect upon public opinion, and entered but little into political controversy ; and it can be here passed over for the time.