Free Trade And Protection

Preface

IN the autumn of last year I delivered at Cambridge a course of Lectures on Free Trade and Prot4?tion. One of the chief objects I had in view was \c^ endeavour to explain the causes which have retarded* the progress of Free Trade, and which have enabled Protectionists still to occupy so strong a position on the Continent, in America, and in many of our Colonies. I first thought of publishing these Lectures almost in the form in which they were delivered ; but I afterwards came to the conclusion that it would be better, for many reasons, to adopt a different arrangement, and I have consequently divided the book into six chapters.

I have had occasion frequently to refer to Mr. Frederick Martin's Statesman's Year Book, and I have also derived great assistance from the admirably-arranged Statistical Abstracts which are published annually by the Board of Trade. Whenever I have required additional information bearing on the subjects to which these Abstracts refer, it has always been most readily supplied to me by two vi PREFACE.

gentlemen holding official positions at the Board of Trade Mr. Edwin J. Pearson, and Mr. Robert Giffen, the well-known economist and statist. I desire here to acknowledge their kindness, and to offer them my sincere thanks.

I also wish to say how much I appreciate the assistance I have derived from my wife, who has revised the book as it was passing through the press, and from my Secretary, Mr. F. J. Dryhurst, who has not only acted as my amanuensis, but who has constantly aided me in various ways, and has prepared a summary of contents, which I believe will prove useful for purposes of reference.

SUMMARY OF CONTENTS.

Chapter I

THE expectations, formerly entertained in this country, that the example of England in adopting a free-trade policy would be followed by other nations, have not been realized. Nothing is more likely to retard the cause of free trade than to underrate the strength of the opposition to it, and to ignore the arguments of its opponents. The adoption of free trade in England was hastened by the fact that protection was most strictly carried out with regard to agriculture, and consequently its most obvious result was the rise in the price of food ; while, in other countries, protection is almost entirely confined to manufactured products. The abolition of protection may cause much suffering and loss to those employed in the industries jvhich have been brought into existence through protection. This loss corresponds to that which is caused to workmen who possess special manual skill in any handicraft, if the necessity for their labour is superseded by the invention of a machine. The motives which have prompted the opposition to the introduction of free trade in America and other countries are analogous to those which have led workmen employed in certain trades to resist the introduction of machinery. The adoption of protectionist principles in the Colonies has been encouraged by the opinion expressed by Mr. Mill, that the imposition of a protective duty, with the view of promoting a new industry in a recentlysettled country, may be justified as a temporary expedient. Protection in the Colonies has also been promoted by the fact viii SUMMARY OF CONTENTS.

that the gold discoveries in Australia attracted thither large numbers of operatives and artizans from England, who, finding gold-digging to be less remunerative than they had anticipated, welcomed any proposal to establish, by the aid of protective duties, those industries to which they had been accustomed. The industrial prosperity of England not entirely due to her adoption of a free-trade policy. Among other causes, the development of our railway system and fiscal reform have contributed to bring about this prosperity. Other arguments are necessary to advance the cause of free trade besides the appeals which are continually made to the growth of trade and accumulation of wealth in England. The benefits conferred by free trade are apparently still imperfectly understood in England. Some of the strongest supporters of free trade not unfrequently display a tendency to favour some form of industrial restriction.- This tendency has been recently illustrated by the disposition shown by English workmen to resist the introduction of foreign labourers into this country.

Pages I 1 6

PART I. Bounties on Exports

Protection has been in recent times supported with the object of giving assistance to home industry, and has been chiefly carried out by giving bounties on exports and imposing restraints on imports. The system of encouraging exports and discouraging imports was a product of the mercantile system, and was originally adopted with the object of securing a "favourable balance of trades'Protection is now chiefly carried out by imposing import duties ; bounties on exports are, however, occasionally granted at the present time. Formerly, bounties on exports were as general in England as protective duties on imports. The effect of the bounties on the export, and restraints on the import, of corn which formerly prevailed in England. Examination of the effects produced by the bounty given on the export of sugar from France. This bounty simply enables the English people, and

SUMMARY OF CONTENTS.

others who use French sugar, to purchase it at considerably below cost price ; the reduction in price approximating to the amount of the bounty. The only class who can permanently profit from any particular produce being made artificially dear are the owners of the land on which the produce is grown. Reasons against the proposal of the English sugar refiners that they should be protected against French competition by the imposition of an import duty equivalent to the amount of the bounty.

PART II. Restraints on Imports

The difference between an import duty imposed for purposes of revenue, and one imposed to protect home industry against foreign competition. The import duties levied in England have no protective influence. The home trader njoys a kind of natural protection in his own market as the cost of carriage is less in the case of home than in that of foreign produce. It is important to distinguish between the effect exerted by a protective duty in the country in which it is imposed, and its effect on the countries from which produce subject to the duties is imported. The consequences of the protection formerly given to agriculture in England. It was generally supposed that the continuance of high prices secured industrial prosperity, and it was consequently thought that the profits of all concerned in the cultivation of the land increased with the growing dearness of agricultural produce. Protective duties were not simply imposed on corn ; live stock, fresh meat, and various other articles were excluded altogether from our markets. Attempts were made to encourage the growth of British wool and flax by placing difficulties in the way of the manufacture of cotton in England. The enactment of the Corn Laws after the fall in prices consequent on the peace of 1815. The evils associated with the sliding-scale. The influence exerted by protection in England upon the classes concerned in agriculture. The farmers derived no benefit from the high prices of agricultural produce, as each rise in prices immediately led to an increase in rents. Between 1815 and 1845, when the Corn Laws were in operation, agriculture was in a state of exceptional depression. Meeting at Colchester, July, 1843. Speech of Mr. Cobden, by which many tenant farmers were convinced they had been injured by the Corn Laws. Deterioration in the condition of the agricultural labourers. Although protection led to an increase in the price

SUMMARY OF CONTENTS.

of agricultural produce, the competition of capital seeking investment prevented the farmers gaining more than the normal rate of profit. The depression in agriculture, though to a considerable degree brought about by the undue extent to which rents were raised after the passing of the Corn Laws, and also by the operation of the old Poor Law, was mainly owing to the fact that the dearness of food consequent on protection diminished the productiveness both of labour and capital, and led to a decline in profits and wages in all industries, including agriculture. The stagnation of English trade during the existence of protection. The general distress at the time of Sir Robert Peel's accession to office in 1841. The competition of the general labour market renders it impossible for the labourers employed in protected industries to secure higher wages than those employed in industries which are not protected. The only class that can derive benefit from protection are the owners of the land from which the products, such as wheat, coal, iron, c., that are made dearer by protection, are obtained. This conclusion not disproved by the fact that the rent of land in England has not declined since protection was abolished; many causes, such as the improved administration of the poor law, and the increased demand for food, consequent on the increase of population and the general development of trade, have served to maintain the value of land at its former rate Pages 17 47

Chapter III. Free Trade And Reciprocity

The economic advantages produced by free trade are the same, whether the exchange of commodities is between different countries, or between different parts of the same country. Examination of the argument that, although interference with the freedom of trade between different parts of the same country would be indefensible, protection may be expedient, when it is confined to restricting the importation from other countries of articles which come into successful competition with those of home production. Protective duties produce the same effects, whether the industry of any particular locality is protected

SUMMARY OF CONTENTS.

against home or foreign competition ; in support of this conclusion the question considered, Whether it is less advantageous for the people of France to trade freely with Alsace and Lorraine at the present time, than it was before these provinces were annexed to Germany. Supposing protective duties to be imposed on articles imported from Alsace, it may be argued that the French people would be compensated for the loss resulting from their having to pay higher prices for these articles, because a new industry would be brought into existence in France. This however implies that some branch of trade is being carried on in a locality where the labour and capital employed in it do not yield the maximum results. Although the French may urge that, as Alsace is now a part of Germany instead of a part of France, it would be to their advantage to injure Alsace, the economic loss to France of discouraging some industry most suited to Alsace is the same whether Alsace is, or is not, part of France. Protection only defensible on the supposition that it is advantageous for a country to make pecuniary sacrifices in order to injure the prosperity of its neighbours. Consideration of the alleged impolicy on the part of England in permitting foreign countries, which impose protective duties on her products, to send their goods freely to her markets. English trade is more severely injured by the American than by any other tariff, the protective duties imposed in the United States being largely in excess of those levied in any other country. Examination of the proposal that England should retaliate on America by levying import duties on American goods. The exports of manufactured articles from the United States to England are so small, that England could only produce any practical effect on American trade by imposing duties on the various articles of food and raw material imported from America. Any loss we could inflict on America by such a policy would be trilling, in comparison with the loss we should inflict on ourselves. The argument that retaliation may be carried out when an article imported from some country that maintains protection comes into competition with an article of the same kind produced at home. The alleged injury to English trade arising from the importation of iron from Belgium. Further examples to show that it is impracticable for England to carry out a policy of " reciprocity." The effect that would be produced by the adoption of a policy of "reciprocity," if it were possible to carry it out. A policy of "reciprocity" would aggravate the present depression in English trade /fyw 48 73 xii SUMMARY OF CONTENTS.

Chapter IV. The Arguments Of Protectionists

The arguments advanced in support of protection by its leading advocates in America, in the Colonies, and in various Continental countries, considered in detail under the following thirteen heads :

1. Protection is desirable, especially in a young country, because it secures diversity of industry . . . Pages 76 81

2. Protection, by encouraging various branches of home industry, makes a community less dependent on foreign countries Pages 81 85

3. American protectionists assume that the cost of carriage is paid by the exporting country ; and they therefore argue that America would be placed at a disadvantage if she imported all the manufactured goods she wanted in exchange for raw produce, which, being more bulky, is more expensive to export Pages 8587

4. The home manufacturer, having to pay taxes which are not paid by his foreign competitor, must be compensated by protection Pages 87 89

5. Protection is advantageous, because it encourages home trade and discourages the trade of foreign countries . Pages 89 93

6. It is asserted that protective duties are paid by the foreign producer ; consequently, home industry is encouraged by them, and the trade of foreign countries is injured . . Pages 93 97

7. As profits and wages are not higher in protected, than in unprotected industries, protection is not open to the charge that it benefits a special trade at the expense of the general consumer

Pages 9798

8. Protection is advantageous, because if a country obtains its produce at home, instead of importing it from a distance, the labour employed in transporting it is saved ; and this labour is assumed to be unproductive . . . Pages 98 99

9. Protection is represented as benefiting the workmen employed in the protected industries in America, because they earn higher wages than are paid in the same industries

in England Pages 99 103

10. Although protection is indefensible, if only one industry is protected from foreign competition, a policy of restriction is justifiable if the entire industry of the country participates

in its advantages Pages 103 105

SUMMARY OF CONTENTS.

11. Protection is defended on the ground that wages are higher in America and the Colonies than in England ; traders in those countries require protection in order that they may be placed in a position of equality with their English competitors Pages 105108

12. Protection, having been established, cannot be abolished without loss both to employers and employed in those trades which are protected ..... Pages 108 109

13. Protection can be advantageously introduced in a young country as a temporary expedient, since various industries which will ultimately prosper without protection require

its aid in the early stages of their existence . Pages 109 1 19

Chapter V. Commercial Depression'

The confidence felt in England in the advantages of a free- trade policy having increased with the growth of English prosperity, and been mainly supported by appeals to that prosperity, the present depression in trade has produced a disposition among some persons to lapse into the fallacies of protection. In a similar manner, depressed trade in America has led many of the advocates of protection in that country to doubt its efficacy to secure commercial prosperity. The strength of this change of opinion shown by the proposal of the new tariff. A comparison of the commercial position of the United States and of England, respectively, shows that this country has no reason to waver in its adherence to a free-trade policy. The greater severity of the depression in trade in America, in spite of the greater natural advantages of that country, is shown by the fact that the emigration from this country to America is now hardly, if at all, greater than the emigration from America to England. Evidence to show that the present commercial depression has produced much more serious effects in America, with its protectionist tariff, than in free-trade England. The fears that have been lately expressed in this country at the large excess of imports over exports, considered. This alarm has been increased by the fact that in no other country is there any great excess of imports over exports, while in the United States the exports considerably exceed the imports. The excess of imports in England to n great extent due to the fact, that in the statistical xiv SUMMARY OF CONTENTS.

tables of English trade, the value at which any article imported is estimated includes the cost of carriage and the profit of the importing merchant ; whereas, in estimating the value of the exports, both the cost of carriage and the profit of the exporting merchants are excluded. This fact to a considerable extent accounts for the excess of exports over imports in America as compared with the excess of imports over exports in England. This excess of imports in England is also owing to the circumstance that no other country has so large an amount of capital embarked in foreign investments. The dread expressed in England on the subject is probably a survival from the Mercantile System. The excess of imports over exports in any country may be regarded as a measure of the extent to which it is a creditor of other countries. That the excess of imports over exports in England is due to the circumstances before explained, is shown by the statistics of the English exports and imports of bullion and specie in recent years. Although it is impossible to doubt the existence of very severe depression in many branches of English industry, there is reason to believe that the effects of the depression in trade in this country have been exaggerated, and that they are considerably greater in protectionist countries, such as America, The increase in the English importation of articles of general consumption, such as tea. A consideration of the effects produced by industrial activity, in some special trades, on the general body of the people. The exceptionally high profits prevalent during the activity in the iron and coal trades, a few years since, were obtained at the expense of the general community. The price of coal having, in consequence of the present industrial depression, fallen to its former level, the country has been relieved of a serious burden. This relief to the general body of the people may be regarded as some compensation for the losses brought on certain special classes by the present depression in trade. From the continuous decline in pauperism, the maintenance of the Savings Banks deposits, and the increase in the traffic returns of the railways, it may be concluded, that the inactivity in some special branches of trade has produced less effect on the general condition of the country than is usually supposed. A great portion of the additional wealth created when certain trades are unusually active being simply a transfer from the general community to a special class, the cessation of this activity implies a corresponding benefit to the general community. All persons in receipt of fixed incomes being severely injured

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by the inflation of prices which takes place in a period of great industrial activity, they are consequently benefited by the fall in prices which occurs when trade declines. The present depression in many branches of English trade is not, as is often supposed, the result of the free- trade policy of England, but is the natural outcome of the exceptional prosperity these trades enjoyed a few years since. This conclusion illustrated by a reference to the English coal trade. The reduction in the cost of living, consequent on the fall in prices, has greatly contributed to enable the country to tide over the present period of industrial depression. The protectionist policy of America, by increasing the price of numerous commodities (import duties being imposed by the American tariff on 2,000 different articles), prevents this compensating influence coining into operation. The great increase of pauperism in the United States, and the disastrous losses sustained by the American railways, afford conclusive evidence that the present depression in trade has produced much more serious results in that country than in England. A comparison, favourable to this country, may also be drawn between the commercial condition of free-trade England during a period of depression, and that of various other countries, such as Germany, Russia, and France, where restrictive tariffs are maintained. The effects of depression on the Continent are aggravated by the strain resulting from the enormous armies maintained by the European powers. Hence, the conclusion that a free-trade policy diminishes the effect of industrial depression, is strikingly corroborated by the comparison which has been made between the present condition of England and that of America, which possesses exceptional advantages, and does not maintain a large standing army . . . Pages 120 i $3

Chapter VI. Commkrcial Treaties

The increasing unpopularity of, and opposition to, commercial treaties are due to the fact that those engaged in any trade which may have been affected by the treaty, and which is suffering from the general trade depression, attribute this depression almost entirely to the treaty. The objections urged by the French protectionists to the renewal of the Angloxvi SUMMARY OF CONTENTS.

French treaty considered. A similar dread to that which has already been referred to as existing in England is expressed in France, at the excess of imports over exports. The tendency which is shown in this country to revert to a protectionist policy, has taken effect in the proposal that we should increase the import duties on French goods, in the event of a refusal on the part of France to renew the Treaty of Commerce with this country. The consequences that would result from carrying out the proposal that the import duties on French silk should be increased. The impossibility of limiting a policy of " reciprocity " to the proposed protection of the English silk trade. The disastrous effects that would result from the proposed retaliatory export duties on English coal and machinery considered. Conclusion that the adoption of the proposed policy of reciprocity would aggravate, instead of mitigating, the mischief which is done to our trade by the protectionist tariffs of other countries. Although the advantages resulting to both countries from such a Commercial Treaty as that existing between France and England are undoubtedly great, they are accompanied by one not inconsiderable disadvantage, inasmuch as during the operation of the treaty the freedom of each country to introduce changes in its tariff is somewhat curtailed. This objection is important with reference to the mode in which the duties on French and Spanish wines respectively are arranged. The grounds of the demand made by English manufacturers for the repeal of the Indian import duties on cotton goods examined. Although the tax must be condemned on economic grounds, the subject cannot be regarded as one involving economic considerations only. In deciding the question as to the repeal of these duties the position of Indian finance must be taken into account. Although many English Colonies maintain a system of protection far more onerous in its character than that involved in the retention of the Indian cotton duties, it has not been proposed that the Colonies should abolish their duties in the interests of English manufacturers. In the appeals that arc made for the repeal of the cotton duties too much attention has been given to the interests of the English manufacturers as producers, and too little to the interests of the Indian people as consumers Pages i^ 173

FREE TRADE AND PROTECTION.

Chapter I. Introductory Remarks

THE chief object I have in view in the following pages is to endeavour to explain the causes which in recent years have not only retarded the general adoption of free trade, but have in many countries given a fresh vitality to the doctrines of protection. The subject I think requires careful explanation, for we have to account for the fact that although it is admitted that England during the last thirty years has derived the most marked advantages from the adoption of a free-trade policy, yet most countries seem as disinclined to abandon protection as if the free-trade experiment in England had failed as signally as it has succeeded. Not only in countries where protection has been long established is there this disinclination to follow the example set by England, but even in new countries, such as Australia, there is constantly displayed an eagerness to introduce protection in one or other of its various forms. Competent authorities have, in fact, predicted that the leading political question in Australia during the next few years is not unlikely to be a keen struggle for supremacy between the advocates of free trade and protection. The strong position which is now occupied in many countries by protection has surprised no less than disappointed those who have been the leading advocates of free trade in England. Nothing could exceed

FREE TRADE AND PROTECTION. [CIIAI*.

the confidence with which it was predicted that when England had once enjoyed the advantages of unrestricted commerce, other countries would be led to follow her example by the irresistible force of self-interest. During the memorable debates which took place thirty years since, -when the financial reforms of Sir Robert Peel were before Parliament, it was again and again unhesitatingly asserted that all commercial countries would soon be eagerly striving to share with England the advantage of buying in the cheapest, and selling in the dearest market. Even as recently as 1860, when the French commercial treaty was on the eve of ratification, its author declared that " nothing would be able to withstand the moral contagion of the example of England and France acting together on the principles of free trade;" and he predicted that the stimulus tlius given to free trade " would extend far beyond the limits of the two countries." Instead of these anticipations being realised it would seem that the renewal of the commercial treaty with France and the establishment of similar treaties with other countries will now have to contend with even more opposition from protectionists than had to be encountered when that treaty was first proposed.

I think it desirable thus to direct special attention to the firm hold which protectionist doctrines have obtained in many countries, because nothing is more likely to retard the cause of free trade than to underrate the strength of the forces which are arrayed against it, and to ignore the circumstances on which its opponents rely for support. It is unfortunate that in discussing the subject English free-traders frequently adopt a tone which is not calculated to convince those who differ from them. When protectionists are spoken of as if they were either solely prompted by a desire to sacrifice the welfare of the community in order to promote their own selfish ends, or when they are derided as the victims of economic fallacies so transparent that they ought not to mislead a child, it should be remembered that it is not many

INTRODUCTORY REMARKS.

years since the great majority of the English people were ardent protectionists, and the fallacies for which we now feel so much contempt were unhesitatingly accepted by many of the most eminent of our countrymen. Less than forty years ago Lord Melbourne, who was then Prime Minister, declared in the House of Commons, with the cordial approval of the great majority of those whom he addressed, that " during his long life it had been his lot to hear many mad things proposed, but the maddest of all the mad things to which he had ever had to listen was a proposal to abolish the corn laws." Sir James Graham was a statesman who had the reputation of possessing great practical sagacity and much shrewd common sense. A deputation from Manchester waited upon him in 1840 to urge the repeal of the corn laws, and in reply to their arguments he said that " If the corn laws were repealed great disasters would fall upon the country, that the land would go out of cultivation, that Church and State could not be upheld, that all our institutions would be reduced to their primitive elements, and that the people we were exciting would pull down our houses about our ears." l It cannot, I think, be denied that those who endorsed this sweeping declaration in favour of protection were not less misled by economic fallacies than are the protectionists of the present day. All the most effective arguments that can now be urged in favour of free trade had many years previously been stated with the most admirable clearness and force by Adam Smith, Ricardo, and other economists. In the pages of these writers are to be found many passages which furnish the best reply that can be made to the modern opponents of free trade. It may however be no doubt fairly urged that although little has of late been added to the theoretical arguments which can be advanced against protection, yet emancipation from the doctrines of this system was far more difficult before free trade had been tried, and that the striking success of

utt the l.tagut % by Mr. Henry Ashworth, of Hoi ton, p. 42.

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FREE TRADE AND PROTECTION. [CHAP.

the experiment in England ought to render a ready acceptance of the true principles which should regulate the commerce between nations indefinitely more easy. It should, however, be remembered that the adoption of free trade in England was powerfully promoted by circumstances of so purely exceptional a character that they do not now exist in any country where a protectionist tariff either has been, or is proposed to be, introduced. Between England and the countries which now maintain protection there is this fundamental distinction. In England it was agricultural produce that was most carefully protected, whereas in Continental countries, in America, and in the Colonies at the present time, it is home manufacturing industry that is most zealously shielded against foreign competition. In England, therefore, protection made such a first necessary of life as bread, dear ; whereas protection in those countries where it now exists increases the price of such commodities as wearing apparel and various articles of household furniture. It at once, therefore, becomes evident that a force of popular indignation could be brought against the maintenance of protection in England which cannot be brought against it in America and Australia. In a period of scarcity and of popular distress such as existed in England in 1843-45 the appeal in favour of free trade became irresistible. Every one who was suffering the pangs of hunger, every one who was pinched by want could be told, " Bread is made dear, and starvation is brought upon you because the cheap wheat which foreign countries eagerly wish to send you is refused admittance to your ports." No such plea in favour of free trade can be brought home to thg 1 people of the United States. It may be impressed upon them that they pay a needlessly high price for various manufactured commodities; that cloth, linen, shoes, hardware, and innumerable other articles are made dearer by protection ; but having to pay a higher price for a coat, a shirt, or a hat, can never arouse the same popular indignation as when, in time of scarcity, the i.] INTRODUCTORY REMARKS. 5