The Policy of a Protective Tariff

This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed con ditions seldom occur in a marked measure, 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 (say from 1840 to 1894), this country had such peculiar advantages for the production of food that the quantity was enormously in creased and agricultural prices fell." At such a time the tariff may have worked toward checking the fall and earlier reestab lishing a more favorable ratio. It did this by making prices of manufactured goods in this country artificially higher and thus tempting men from rural to urban callings. But the 12 See Vol. I, p. 438, for average wheat prices in England, practically in the world-market.

limited application of the principle must be recognized. The potential competition of undeveloped countries on all sides, seeking to develop their resources, and profiting by the higher prices of food in the world-market caused by our tariff, threatens the peculiar advantages of the favored land. Rus sia, Argentine, and Australia have rapidly taken the place of America in supplying food to western Europe, in part, no doubt, because we refused to take Europe's goods in trade. A great nation with its manifold interests is not eminently fitted to practise the gentle art of monopoly.

The period in America from about 1840 to 1890 shows cer tain absurd contradictions in economic policy. By govern mental action, national, state, and municipal, enormous grants of money and lands were made in aid of transportation. Canals, roads, and railways were built into new agricultural territory far faster than was healthy and normal. A prodigal land policy put a premium upon a wastefully rapid exten sion of the farming area. These things were done to favor the agricultural states ; but agricultural prices fell so greatly that our farmers for a long period were nowhere prosperous, and great numbers of them, both in the East and in the West, were ruined. At the same time a high tariff on nearly every thing the farmers needed to buy was the political spoil ob tained by the eastern and middle states. This further de pressed the condition of the farmers and forced them or their sons into urban industries. A slower development would have occurred without the waste of national resources in such conflicting policies of artificial stimulation.

§ 12. Equalizing "costs of production."

An idea ad vanced incessantly by American advocates of a protective tariff is that the tariff on every article imported ought always be high enough to equal the difference between the higher costs here and the lower costs abroad. The equalizing-cost rule was laid down in different words by each of the two leading political parties in the campaign of 1912. The Republican platform set forth what it called the "true prin ciple." 13 The fallacy of this rule appears, however, in the study of the confusion connected with the idea of monetary costs." "Costs of production" in the "true principle" means the monetary costs of the enterpriser. Now a first difficulty is that costs are not uniform for all establishments in any one industry, and a tariff high enough to protect some is entirely too low to protect others. As long as a tariff rate is too low to exclude every unit of the foreign product, its importation is conclusive proof that for some home pro ducers the tariff rates fall short of the "true principle" (better proof, indeed, than the most elaborate investigation by any tariff board could be). The indubitable truth is that no trade ever can take place (in a monetary regime) unless the monetary price is lower in the exporting than it is in the importing country. This virtually means that the product cannot be profitably exported unless the monetary costs of production ("together with a fair profit") of the article ex ported are for each party less than those of the other party in the other country. The so-called "true principle" would lead thus to absolutely prohibiting the importation of every article to which it was applied.

In the enactment of the Underwood tariff, the Democratic party, traditionally committed to a tariff for revenue, ap plied what was called the "competitive principle." This "competitive principle" is essentially the same as the Repub lican so-called "true principle" of equalizing the cost of production. It is a prohibitive, not a free-trade, principle. Strictly applied, it would cause complete exclusion of imports. But, as applied to selected articles which it is desired to ex clude in order to "protect" the domestic producer, this princi ple would simply prevent the rate being placed appreciably higher than was needed to exclude them. Anything beyond that point but offers temptation and opportunity for the for as See A. 14, *12 14 See ch. 15, § 5 and 1 6.