§ 2. Revenue and protective tariffs. An important dis tinction in principle is to be made between a tariff for rev enue and a tariff for protection. A revenue tariff is a schedule of duties on goods entering or leaving a country, so arranged that the collection of taxes may cause the least possible disturbance to domestic industry. Speaking gen erally, the duties may be on either imports or exports; but, as export duties are unconstitutional in the United States, our tariff discussions are concerned only with import duties. The purest type of revenue tariff is one touching only articles that, even at the higher prices, are not in the least to be produced profitably in the home country. A good example is that of England with most of the duties levied on tropical products.
A protective is a schedule of import duties so ar ranged as to give appreciably higher prices to some domestic enterprises than they could obtain with free trade. It shuts out some foreign goods that would otherwise enter, and in so far it "protects" the domestic producer from the foreign competitors who would sell at lower prices than those at which he can or will sell. In other words, "protection" means governmental interference with the freedom of trade.
The distinction between revenue and protective tariffs, thus clear in principle, is not always easy to make in prac tice. It does not lie in the intention of the taxing power, but in the actual effects produced. Most tariffs combine the characteristics both of revenue and of protective measures.
A tariff that reduces imports but does not cut them off en tirely may be called either a revenue tariff with incidental protection or a protective tariff with incidental revenue. The difference is one of degree. But notice particularly that the two features of protection and of revenue are mutually exclu sive. To the extent that one is present the other is impos sible. A tariff rate that in whole or in part excludes the for eign article to that extent affords "protection" but does not yield revenue. Whenever the government collects a cent of tariff taxes, the domestic producer in so far and as respects that unit of goods is "unprotected." Likewise, whenever a tariff gives to the domestic producer "protection" in re spect to any unit of goods, it does so by prohibiting the importation of the goods, and the government is deprived of any revenue whatever derived from the importation and sale of that unit of goods. In short "protection," just in so far as it "protects," is prohibition of imports. Non-impor tation and revenue are mutually contradictory.
§ 3. Growth of a protective system. The protective pol icy developed at first accidentally, as it were, out of the prac tice of levying taxes for revenue only. Tolls, dues (or du ties), customs (that is, in former times the customary dues paid by merchants, now the dues fixed by law), tariffs (that is, schedules or lists of rates of duties) were at first intended to raise revenues for the sovereign, the city, or the state. The unintended, and to some degree inevitable, result of the tax ation of goods in commerce, whether imports or exports, is to prevent and discourage trade and to raise the prices of the goods imported. Any change in tariff duties, therefore, at
once alters the previously existing adjustment of profits and of industries in a country.
The first effect of the tariff is the same as that of any new factor in enterpriser's cost ; the same, for example, as that of a new domestic tax on an article or as that of a rise of freight rates—the domestic price of the taxed article tends to rise. Other results then follow. If the article cannot, even at the higher price, be produced within the country (as in the cases of oranges, spices, and coffee in England, Norway, and Sweden), its consumption is reduced. The lessening of demand may, however, depress somewhat the price in the pro ducing country. But as such a tariff does not increase home production of the taxed article, it is therefore for revenue, not for protection.
But if the article can be profitably produced in the import ing country at the new price, "home industries" will start. Where the transportation charges are low, as on the coasts and on the main lines of railways, some imported goods may be bought, while farther inland, where transportation charges are higher, home production of some or all grades of such goods may take place. If the whole demand at home is sup plied and all imports stop, therewith cease all revenues to the government from that source. A completely protective tariff is completely prohibitive.
Experience abundantly shows that, with a few exceptions, due to climate and natural resources, it is impossible to put into effect the most moderate schedule of duties without the increase in price at once causing some men to shift their occupations, and to begin producing articles of the kinds that have risen in price. At once appears a group of "pro tected industries," the owners of which are dependent for the safety and profits of their investments, and workmen in which are dependent for the security of their present jobs (possibly for the chance to continue the pursuit of highly skilled trades), on the continuance, if not the increase, of the existing tariff rates. A tariff may be adopted mainly from stress of financial need (as in our own history in 1789 or in 1861), but its modification or repeal cannot be decided by fiscal considerations. The "incidental protection" it affords has created a wealthy and influential group of em ployers and a large body of employees who are irresistibly tempted to exercise their influence in politics almost solely in favor of continuing and of increasing the rates to the sacri fice of the higher civic life of their communities. Of course, the beneficiaries of the tariff usually believe sincerely that it is indispensable for the prosperity of the country as a whole, and they can do much to persuade others to the same opinion. This commercial motive for maintaining existing protective tariffs explains in large part their wide prevalence, whatever other reasons may be adduced in their justification.