355. THE PRINCIPLE OF EXCHANGE.—In Chapters VII and VIII it was pointed out that when individuals divide up their labor so that each becomes a highly specialized workman there is a resultant increase in the community's productivity. Similarly, when one section of the country is adapted primarily to manufacturing, while another section is peculiarly suited to farming, there is a gain in national productivity when each of these areas specializes in those activities which it can carry on most effectively, and is content to resort to trade in order to secure the benefit of industries specialized in elsewhere. So far as the economic principle is concerned, there is likewise a gain when different countries specialize in those forms of production at which their citizens are most effective, and are content to secure through international trade the products of specialization in other countries.

356. NATURE OF THE TARIFF.—But though all civilized nations allow and even encourage the division of labor among their individual citizens and among the various areas within their own boundaries, many countries restrict the degree to which their citizens may exchange their surplus products for the surplus products of foreign producers. In the United States, for example, Congress has the power to levy a duty or tariff on foreign-made goods which are brought into this country for sale.

This tariff may be levied primarily to increase national revenue, in which case the rate of duty is generally too low to keep foreign goods out of our markets. When the tariff is purely a revenue measure, "free trade" is said to exist. On the other hand, a tariff may be so high that domestic goods will be protected in our markets against competition from foreign-made goods of a similar grade. In this case a protective tariff is said to exist, though such a measure also brings in revenue. Most tariff measures, indeed, contain both "revenue" and "protective" elements, and it is only when a tariff act is primarily a protective measure that we speak of it as a protective tariff.

357. THE MEANING OF "PROTECTION."—Let us be sure that we understand exactly what is meant by "protection." Suppose that in the absence of a protective tariff an English-made shoe can be produced and brought to this country at a total cost of $3.00. Let us assume that this shoe competes in the American market with an American-made shoe which is of similar grade, but which, for various reasons, it costs $3.50 to produce. Suppose, further, that both English and American producer must make a profit of $0.50 per pair of shoes, or go out of business. In the resulting rivalry, the English shoe can sell for $3.50 and make a profit. Competition would force the American producer to sell his shoe for $3.50 also, but since this would give him no profit, he would be forced out of business. In such a case the American manufacturer might secure the passage of a protective tariff on this type of shoe, so that the English shoe would be charged $0.75 to enter this country for sale here. This would bring the total cost of the English shoe up to $3.75, and to make a profit the shoe would have to sell for $4.25. But since the American shoe can be sold for $4.00, the English shoe is forced out of the market. [Footnote: If, in this example, the duty were, say, $.25, the foreign shoe could continue to enter our markets and compete with the American shoe. In this case the tariff would be a revenue, and not a protective measure.]

The tariff question arises primarily in connection with the matter of protection, and may be stated as follows: Ought Congress to interfere with international trade by levying protective duties on imports; and, if so, just how and to what extent should such duties be levied?

358. TARIFF HISTORY OF THE UNITED STATES.—The first tariff measure in our national history was the Act of 1789. This was a revenue measure, though it gave some degree of protection to American industries. Down to the close of the War of 1812 our tariff was mainly for revenue purposes. After the close of that war a heavy duty on foreign iron and textile products was imposed for the purpose of protecting domestic producers against the cheaply-selling English goods which were flooding our markets. After 1816 it became our policy to combine in the same tariff act high protective duties with revenue duties. In 1824 the general level of duties was raised. In 1828 Congress endeavored to lay a tariff which would suit all sections of the country, but the attempt failed.

Between 1828 and 1842 the tariff was gradually lowered. Between 1842 and 1861 our tariff policy was unsettled, but in the latter year the domestic disturbances brought on by the Civil War resulted in the passage of a tariff which turned out to be highly protective. In the period immediately following the Civil War the tariff continued to be very high, due chiefly to pressure from industrial interests which had secured protection from the war rates. In spite of attempted reform in 1870, 1873, and 1883, the tariff continued to be highly protective.

In 1894 the Democrats reduced the tariff somewhat, and in 1909 the Republicans attempted to satisfy a popular demand for lower rates by the passage of the Payne-Aldrich Act. This measure reduced some rates, but not enough to satisfy the popular mind. In 1912 the Democrats returned to power, and the following year passed the Underwood-Simmons Act, lowering the rates on many classes of commodities, and placing a number of important articles on the free list. In 1920 the Republican party again secured control of the government, and the tariff was raised. At present our tariff is highly protective.

359. COMPROMISE CHARACTER OF TARIFF.—Our tariff history is full of inconsistencies. The pendulum has swung first to low duties and then to severely high duties. No tariff has satisfied all the interests involved; indeed, no other issue, with the possible exception of slavery, has provoked as much political strife as the tariff. Every tariff is essentially a compromise, for a duty upon practically any commodity which we might select will benefit some of our citizens, while it will either prove of no use to other individuals or will actually injure them. Animated by self-interest, the farmer, the lumberman, the miner, or the manufacturer, each desires a protective duty on the commodity which he produces, and a low rate, or no duty at all, upon commodities which he consumes. As a result, the tariff has become a sectional problem, in the solving of which Congressmen have too often considered as paramount the economic interests of the particular locality which they represent.

360. NATURE OF THE TARIFF ARGUMENT.—The tariff question generally divides men into two camps, those favoring "free trade," and those demanding duties that are highly protective. From the standpoint of economics, the most vital argument against protection is that there is no fundamental reason why there should not be free trade between nations. Protection is economically wasteful because it diverts capital and labor from industries in which we are relatively effective to industries in which our productivity is relatively low. High protection is thus said to decrease national productivity, and to impose a burden upon the consumer by preventing him from purchasing cheaper foreign-made goods.

In view of these facts, the free trader claims that to the extent that the tariff is an economic proposition, the burden of proof rests upon the protectionist. If this assertion is accepted, the tariff argument consists of the attempts of the protectionist to outweigh the above economic argument for free trade by putting forth economic arguments for protection, and by developing social and political reasons for a protective tariff.

361. AN EARLIER TARIFF ARGUMENT.—Formerly one of the most important arguments for protection was the home market theory. This theory was advanced in 1824 by Henry Clay. In the effort to win the agricultural interests to protection, Clay maintained that a protective tariff on manufactures would develop urban centers, and that this would increase the purchasing power of the city dwellers. This increased purchasing power, Clay declared, would assure the farmer of a steady domestic market, not only for his staples, but also for perishable goods which could not be shipped to foreign countries.

Though still heard in tariff discussions, this argument now exerts less influence than formerly. Perfected means of transportation have tended to place domestic and foreign markets on an equal footing. Moreover, the population of our cities has increased so much more rapidly than has the productivity of our farms, that it is unnecessary artificially to create a home market for the farmer's produce.

362. THE WAGES ARGUMENT.—At the present time one of the most important arguments in favor of a protective tariff is that it either creates or maintains a relatively high level of wages for workmen engaged in the protected industries. Those advancing this argument believe that free trade would lower wages and depress the standard of living for large groups of workmen.

The free trader maintains that high wages do not depend upon protection, and this for three reasons: First, equally high wages are often paid in protected and unprotected industries alike; second, high wages do exist in a number of protected industries, but many of these industries also paid high wages before protection had been secured; third, there is nothing in a protective tariff to force employers to pay more than the current wage. Rather than raising wages, Professor Taussig maintains, "protection restricts the geographical division of labor, causes industry to turn to less advantageous channels, lessens the productivity of labor, and so tends to lower the general rate of wages."

363. THE VESTED INTERESTS ARGUMENT.—An important argument in favor of continued protection is that the introduction of free trade would ruin valuable manufacturing businesses which have been built up under protection, and which are unprepared or unable to maintain themselves against foreign competition. In the case of such industries, it is maintained, the removal of protection might result in economic disaster. Factories would have to close, investments would depreciate, and numerous laborers would be thrown out of employment.

There is great force in this argument. Even the most ardent free trader will admit that a sudden removal of tariff duties might be demoralizing to industries long used to protection. Nevertheless, the vested interests argument is not so much an argument for continued protection as it is a reason why there should be a gradual rather than a sudden removal of protective duties. If protection were to be scaled down gradually and wisely, there is no reason why capital invested in industries unable to stand foreign competition could not be gradually transferred to industries unaffected by foreign competition.

364. TARIFF ARGUMENTS ACCENTUATED BY THE WORLD WAR.—Three arguments in favor of protection have taken on greater importance because of the World War.

One of these is the anti-dumping argument. From the standpoint of the American tariff, dumping is the practice which some foreign producers have of temporarily selling their surplus goods in this country at an abnormally low price. [Footnote: Some American producers in turn "dump" in foreign markets, but with this practice we are not here concerned.] If dumping were permanent, we would gain because we would be getting goods at a much lower price than we could manufacture them. The evil of dumping grows out of the fact that it tends to force domestic producers out of business. Then later the foreign supply may diminish, in which case we suffer from a shortage of goods. If foreign producers do continue to supply the American market they may take advantage of the fact that American competitors have been forced out of business, and demand monopoly prices. The free trader admits the force of the anti-dumping argument, and concedes that the intense economic rivalry growing out of the World War rendered desirable tariff rates which would protect domestic producers against dumping.

Another protectionist argument which has gained in strength because of the War is the "infant industries" argument. Protectionists claim that industries really adapted to this country may be prevented from arising here because of their inability, while still in the experimental stage, to meet strong competition from well-established foreign producers. When an industry is in the experimental stage the cost of production is relatively high, and the price will be correspondingly high. Well established and economically-conducted businesses can undersell these experimental or "infant" industries. Protection for such "infant" industries is therefore sought until such time as they will be able to stand foreign competition. The free trader has generally replied that such protection may be desirable in some cases, but maintains that care should be taken to make such protection both moderate and temporary, otherwise protection will perpetuate industries for which we are really unsuited. During the World War American producers began to manufacture dyes and chemicals formerly imported from Germany. The industrial importance of these products gave weight to the belief that the new industries which sprang up in this country during the War were entitled to protection against foreign competition.

A third protectionist argument which was strengthened by the World War is the military or self-sufficiency argument. It has long been the claim of the protectionist that high tariff duties encourage the development in this country of all industries producing the necessities of life, as well as all supplies which are vital in war time. High protection was thus defended on the grounds that it permitted the United States to be nationally self-sufficing, thus allowing us to be relatively independent of other countries, especially in war time. Previous to the World War many free traders scoffed at this argument as resting upon an unjustified fear of war, but this attitude was changed by the dangers to which we were subjected by the interruption of our foreign trade during the war. At present the military or self-sufficiency argument is of great importance.

365. THE TREND TOWARD PROTECTION.—Of late years, therefore, there has been a distinct trend toward protection in this country. The fear of dumping, the desire to protect infant industries established during the World War, and the increased importance of the military or self- sufficiency argument have been factors in this trend. Another factor has been that the Republican party, traditionally committed to a policy of high protection, returned to power in 1920. A last important influence has been an increased need for Federal revenue. The World War not only increased our indebtedness, but the advent of national prohibition in 1919 cut off a source of Federal revenue formerly very important.

366. TARIFF NEEDS.—From the standpoint of practical politics, one of the greatest needs of our time is for an intelligent and public- spirited handling of tariff problems. The tariff is a technical and highly complex question, upon which politicians have heretofore had too much to say, and trained economists too little. Too often, vague claims and political propaganda have carried more weight than have facts.

It is asserted by many that the tariff can never be taken out of politics, but this is perhaps too strong a statement. In this connection an interesting development was the establishment in 1916 of the United States Tariff Commission. This Commission consists of six members appointed by the President for twelve years. Not more than three of the members may belong to the same political party. It is the duty of the Commission to investigate conditions bearing upon the tariff and to report its findings to Congress. It is hoped that this plan will place at the disposal of Congress scientific data on which to base tariff legislation. So far the Commission has not materially reduced the influence of politics upon tariff legislation, though it is perhaps too soon to expect results.

It is sometimes said that our tariff policy ought to be less changeable. Certain it is that our tariff history is full of inconsistencies and irrational fluctuations. But the question of a tariff policy is a thorny one. Manifestly, business should not be forced to accommodate itself to a purely political manipulation of the tariff; on the contrary, the tariff ought to vary with changes in business conditions at home and abroad. Whatever may be implied by a tariff "policy," it is also certain that the tariff should somewhat accommodate itself to revenue needs. Beyond these somewhat general statements, however, it is hardly safe to say what should be the basic elements in a national tariff policy.

QUESTIONS ON THE TEXT

1. Explain the gain from exchange.

2. What is meant by the tariff? Distinguish between a revenue and a protective tariff.

3. State the tariff problem.

4. Outline briefly the tariff history of the United States.

5. Why is tariff practically always a compromise?

6. Discuss the home market argument.

7. What can be said for and against the wages argument?

8. What is the vested interests argument?

9. What effect did the World War have upon the anti-dumping argument?

10. What is the military or self-sufficiency argument?

11. How did the war affect the infant industries argument?

12. Why was there a trend toward protection after the World War?

13. What is the nature and purpose of the United States Tariff Commission?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxix.

Or all of the following:

2. Carver, Elementary Economics, chapter xxvii.

3. Fetter, Modern Economic Problems, chapter xv.

4. Seager, Principles of Economics, chapter xxii.

5. Thompson, Elementary Economics, chapter xix.

QUESTIONS ON THE REQUIRED READINGS

1. What is the extent of the protective tariff throughout the world? (Fetter, page 218.)

2. Distinguish between a specific and an ad valorem duty. (Fetter, pages 219-220.)

3. What is meant by a free list? (Fetter, pages 220-221.)

4. What is the fundamental proposition of the free trader? (Carver, page 244; Thompson, pages 262-263.)

5. What is the "no buying no selling" argument? (Thompson, page 263.)

6. What is the balance-of-trade argument? (Carver, page 245.)

7. What is the origin of the present tariff system? (Seager, pages 394-395.)

8. What is the political argument in tariff discussions? (Seager, page 397.)

9. What is the relation of tariff to political corruption? (Seager, page 405.)

10. What was the character of the Payne-Aldrich tariff of 1909? (Fetter, pages 233-234.)

11. What was the character of the Underwood tariff of 1913? (Fetter, pages 234-236.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. The home market argument with reference to conditions in your section.

2. The infant industries argument with reference to conditions in your section.

3. Commodities essential to the prosperity of your community which are imported from abroad.

4. The attitude of your section of the country toward the tariff. Has this attitude changed in the past fifty years?

5. Write to your Representative in Congress for his opinion on the need of a "fixed tariff policy."

6. Interview several friendly business men on their attitude toward the tariff.

7. Interview a member of the Democratic party upon the attitude of his party toward the tariff.

8. Interview a member of the Republican party upon the attitude of his party toward the tariff.

II

9. The principle of international trade. (Taussig, Principles of Economics, vol. 1, chapter xxxiv; Fetter, Modern Economic Problems, chapter xiii.)

10. The gain from international trade. (Taussig, Principles of Economics, vol. 1, chapter xxxv.)

11. The infant industries argument as applied to American industries. (Taussig, Tariff History of the United States, Part 1, chapter i.)

12. The Civil War tariff. (Taussig, Tariff History of the United States. Consult also any economic history of the United States, or any standard text on economics.)

13. Tariff administration. (Cyclopedia of American Government.)

14. Political aspects of the tariff. (Tarbell, The Tariff in Our Times, chapter xii.)

15. The history of any important tariff since the Civil War. (Consult Taussig, Tariff History of the United States; Fetter, Modern Economic Problems, chapter xv; any standard work on the economic history of the United States; or any encyclopedia under "Tariff.")

16. The tariff in Germany. (Ashley, Modern Tariff History, part i.)

17. The tariff in France. (Ashley, Modern Tariff History, part iii.)

FOR CLASSROOM DISCUSSION

18. Why has the wages argument increased in importance within the last half century?

19. How could our protective tariff be abolished without endangering present investments in protected industries?

20. The question of a national tariff policy.

21. To what extent should the formulation of our tariff acts take into consideration the wishes of foreign producers who desire to sell their goods in this country?