The Tariff and the Tariff Commission

DECEMBER, 1910

THE TARIFF AND THE TARIFF COMMISSION.

BY F. W. TAUSSIG

THE vogue of the plan of basing the tariff on differences in costs of production is a curious phenomenon, and a significant one. Much talked of as the plan now is, it is novel. Only a faint suggestion of something of the sort appeared in the Republican platform of 1904. Not until the presidential campaign of 1908 did it receive much attention. Then, and later in the debates on the new tariff act, it came to be spoken of as the ‘true’ principle of protection, the touchstone by which the justification of every duty was to be tested. What does it mean, and how far will it avail to ‘settle’ the tariff question?

The doctrine has an engaging appearance of fairness. It seems to say, no favors, no undue rates. Offset the higher expenses of the American producer, put him in a position to meet the foreign competitor without being under a disadvantage, and then let the best man win. Conditions being thus equalized, the competition will become a fair one. Protected producers will get only the profit to which they are reasonably entitled, and the domestic consumers are secured against prices which are unreasonable.

In order to apply the principle, the country is in train for an elaborate and expensive set of investigations. The Tariff Board is prepared to spend hundreds of thousands in ascertaining the cost of production at home and abroad of protected articles. The information secured is expected to be the basis of future tariff legislation. No one who stops to think will suppose that inquiries of this sort will be easy, or will lead to other than rough and approximate results. ‘Cost of production’ is a slippery phrase. Costs differ in different establishments, and cannot be figured out with accuracy in any one establishment without an elaborate system of special accounts, such as few establishments keep. None the less, approximate figures are to be had. If the principle is sound, it will be of great service to have careful preparation for its application, and to reach the nearest approach to accuracy that the complexities of industry permit. To repeat our question — how far is it all worth while?

Frankly, the answer is that as a ‘solution’ of the tariff question, this much paraded ‘true principle’ is worthless. Applied with consistency, it would lead to the complete annihilation of foreign trade. It is usually thought of as likely to result in a moderation of protection. Yet, if carried out to the full, it would lead to the utmost extreme of protection.

Consider for a moment what equalization of cost of production means. The higher the expenses of an American producer, and the greater the excess of the expenses incurred by him over those incurred by a foreign competitor, the higher the duty. Applied unflinchingly, this means that the production of any and every thing is to be encouraged, — not only encouraged, but enabled to hold its own. If the difference in expenses, or cost, is great, the duty is to be high; if the difference is small, the duty is to be low. Automatically, the duty goes up in proportion as the American cost is large. If the article is tea in South Carolina, for example, ascertain how much more expensive it is to grow the trees and prepare the leaves than it is in Ceylon, and put on a duty high enough to offset. If it is hemp in Kentucky, ascertain how much more expensive it is to grow it than in Russia or in Yucatan (for the competing sisal), and equalize conditions with a high duty.

It was on this ground — though, to be sure, with gross exaggeration as to the facts— that the duties on lemons and prunes were raised in the Payne-Aldrich tariff: equalize conditions for the California lemon-growers! If lemons in California, why not grapes in Maine? They can be grown, if only the duties be made high enough. Of course, the more unfavorable the conditions, the higher the duties must be. The climate of Maine is not favorable for grapes; they would have to be grown in hot-houses. But make the duty high enough, handicap the foreign producer up to the point, of equalization, and the grapes can be grown. So as to Kentucky hemp, or Massachusetts pig-iron. Make your duty high enough — and on this principle you must make your duty high enough — and anything in the world can be produced. The obvious consequence is, however, that the more unsuited the conditions are for efficient and economical production, the greater will be your effort to bring about protection. Under this equalizing principle, the worse the natural conditions, the more extreme will be the height of protection.

No doubt the advocates of the principle will say that it is not to be pushed to such absurd consequences. But where draw the line? We have duties in our present tariff of fifty per cent, of seventy, of one hundred and more, all of which are defended on this ground. Senator Aldrich remarked, in the course of the debates on the new tariff act, that he would cheerfully vote for a duty of three hundred per cent if it were necessary to equalize conditions for an American producer.¹ If for three hundred per cent, why not for five hundred or one thousand per cent? Shall we say that the domestic producer whose costs are so high as to require a duty of thirty per cent is to be protected, but not he who has a disadvantage of fifty or a hundred per cent? The only consistent answer is the Aldrich one — give him all he needs for equalization. And the necessary consequence is universal and unlimited protection.

It is for this simple and obvious reason that the principle seems to me worthless for settling the tariff problem. In reality, it begs the whole

question at issue. That question is, how far shall domestic producers be encouraged to enter on industries in which they are unable to meet foreign competition? The very fact of their being unable to meet it shows that for some reason or other conditions are unfavorable. Domestic costs then are high; domestic producers are under a disadvantage.

The free-trader says that this is prima facie an indication that the industry had better not be carried on within the country at all. He says, further, that the greater the disadvantage, and the higher the domestic cost, the more probable that, it is not now for the community’s good, nor ever will be, to induce labor and capital to go into it by ‘equalizing’ the conditions. In so reasoning, the free-trader is very likely unmindful of political and social considerations, or even blind to some offsetting gains of a strictly economic kind. But his opponent, the protectionist, in setting forth the equalizing notion as the ‘true’ principle, does not answer him. This principle assumes at the very outset that any and every sort of domestic production is advantageous, and that there is no problem as to the limits within which we should keep in bolstering up industries that cannot stand without legislative aid.

Underlying the ready acceptance of this ‘true’ principle are two widespread beliefs or prejudices, equally unfounded. One has just been alluded to, — that the domestic production of an article is per se good. The other is that high wages are the result of the tariff, and cannot be kept up without the tariff.

The belief that the production of a thing within the country is in itself advantageous persists with extraordinary vitality. It runs counter to the universal teaching of economists, and on any careful reflection it is obviously absurd. Yet it is maintained — though by implication rather than expressly — in most of the current talk about the effects of duties. The present tariff act, for example, raised some duties on cottons, with the object of causing the manufacture at home of fabrics previously imported. In the debates, the ‘acquisition’ of the new industry was spoken of as manifestly desirable. The mere fact of the industry’s being established at home was thought a proof of gain. So, when the duty on tin plates was raised in 1890, the domestic production of the plates was adduced as conclusive proof of the wisdom of the increase. The previous importation of these things was thought of as having been a losing business; the ensuing production at home was supposed to bring so much national profit.

The real question obviously is, which of the two ways of securing the goods is the better. To make a thing at home is not to our advantage if we make it at high cost. To import it is not a source of loss when we import the thing more cheaply than we can make it at home. These are the simplest commonplaces. Yet the ‘true’ principle runs directly counter to them. It assumes that the nation gains necessarily by so equalizing conditions that anything and everything shall be made at home.

On no subject is the difference between the economists and the general public, in point of view and in conclusions, more marked than on this of the nature of the gain from domestic and foreign supply. On other current topics the teachings of the economists are listened to with attention and respect. On money and banking, on taxation, on labor matters, on the regulation of railways and other quasi-monopolistic industries, public opinion is not out of accord with them, and has been markedly influenced by them. But on international trade and the tariff an attitude which seems obviously absurd to the trained student is tenaciously held by an immense number of intelligent legislators and citizens. They repeat the ancient fallacies which regard imports as ominous and exports as wealthbringing.

The economists are by no means unanimous on the controversy between protection and free-trade. There is hardly one among them who would not admit that there exist valid arguments for protection. But the grounds on which some economists go so far as to think the weight of argument to be in favor of protection, and others confess that there is at least something to be said for it, are very different from the grounds commonly put forward in our everyday tariff literature. This sort of disagreement is unfortunate for the economists and for the community also. The public men of the dominant party have become almost fanatically intolerant. They dismiss, as ‘theoretical,’ propositions which seem to the teachers and writers the simplest of common sense. Clear thinking and cool reasoning on all the great questions of the day are impeded by this disagreement on the very nature of international trade, — on the fundamental question whether domestic production is per se good.

The same disagreement appears, though perhaps in less overt manner, as to the other belief which gives support. to the equalizing principle of protection: namely, that wages in the United States are high because of the protective system, or at least cannot be kept high without it. The equalizing principle, in fact, may be said to be simply a revamped form of the pauper-labor argument. The American employer, it is said, finds himself compelled to pay higher wages than the foreign employer. He is in danger of being undersold by the cheap product of pauper labor. He cannot hold his own unless the foreigner is handicapped by duties. The belief that tariff duties are necessary to maintain a high level of wages is an article of faith for probably a majority of American citizens. Yet this also is opposed to the universal teaching of economists.

Consider, for a moment, the case of exported articles. They are not higher in price than similar articles in foreign countries. They must be, in the United States, somewhat lower in price — lower by the cost of transportation — or else they could not be sold abroad. Occasionally an article is ‘dumped,’that is, sold abroad at a less price than is got for it at home. But this is exceptional. The immense mass of things we export — raw cotton and the cheaper cotton textiles, bread-stuffs, meat-products, machinery, woodenware, glassware, shoes, and so on — are cheaper, quality for quality, than similar things in foreign countries. Yet they are made with high-priced labor. How can they be sold cheap, when high wages are paid to those who make them? The answer is simple enough. The labor is effective. You can pay high wages and yet sell cheap, if much is turned out by your men.

It is a familiar adage in the business world that an efficient man is cheap at high wages. Yet in its application to larger questions this adage is never thought of. In discussing the tariff and wages, people assume as a matter of course that the employer who pays high wages must therefore sell his goods at a higher price. The fact is that if the labor is well-fed and intelligent, and is applied under good natural conditions and with skillful leadership, the employer can turn out an abundant product (or a product of high quality), sell it cheap, and still pay his laborers well. And the real source and cause of general high wages, says the economist, is precisely in these conditions: efficient labor, good natural resources, skillful industrial leadership. Given these, you will always have higher wages, and need not fear competition from cheap and inefficient labor.

Further, says the economist, when you try to equalize costs of production everywhere, you induce the employer to turn to industries where labor is not efficient. The very fact that costs are high indicates that there is some cause of inefficiency. You divert labor and capital from the industries that are best worth while, diminish the general product, and so diminish the source from which all the wages eventually come. The argument goes back to the position stated a moment ago: domestic production is not good under any and all circumstances; that domestic production is good which is carried on under advantageous conditions.

I will not enter on some forms of the labor argument that are complicated, and lead to more intricate problems. The great broad facts of the case are, in the eye of the economist, plain. No respectable writer or teacher would say for a moment that high wages are due to the tariff, or that the maintenance of a high range of general wages (observe, we speak of general wages) is dependent on the tariff. The main cause of generous wages is at bottom a very simple one: generous productiveness of industry. This makes possible the combination of money wages that are higher than in other countries with money prices that are as low as in other countries or lower. Given the allaround efficiency of industry that leads to this happy combination, and you may dismiss all fear of being undersold and ruined by the competition of pauper labor.

Here again the judgment of the welltrained and thoughtful differs irreconcilably with that dominant in the nation’s councils.

From all this it might seem to follow that inquiries about relative cost of production, money-rates of wages, equalization of condition, are not worth while at all. They cannot touch the heart of the tariff problem: that really is whether it is desirable to try to equalize at all. And yet! I believe that the proposed inquiries of the excellent Tariff Board selected by President Taft are well worth while. I believe they will conduce to a better understanding of the tariff situation, and are likely to lead to considerable improvement in legislation. They may even pave the way to something like a settlement of the tariff question.

In two directions the investigation of relative costs of production will be of advantage: as to undue gains in monopolistic or quasi-monopolistic industries; and as to the extent to which there are vested interests which must be respected in a future settlement of the tariff.

The protectionists usually assume that domestic competition will prevent any excessive profits in the protected industries. In most cases they are probably right. In such an industry as the cotton manufacture, for example, where there is no trust, no combination, no monopoly, high duties are not per se the cause of high profits. In the debates on the Aldrich-Payne tariff act, the insurgent senators protested, and with reason, against some advances in the rates on cotton goods; but they took untenable ground in putting their argument on the basis of monopolies and monopoly profits. It is true that when a new duty on such an article is imposed, those who first undertake the domestic manufacture may make large profits. But competition in due time sets in. If exceptional gains prove to be permanently maintained, it must be because some mills have better organization and management than others, or shrewder judgment as to the caprices of fashion. So it is in the woollen manufacture (even though here there is much more of combination than in the case of cottons), in the silk manufacture, and so on. The real question in such cases is whether it is worth while to encourage a domestic industry if costs of production are so large that duties of sixty, eighty, one hundred per cent are called for. Most branches of the textile industries need no duties as high as this in order to enable them to hold their own. Many of them can hold their own without any duties at all. But certain branches, especially in the finer grades, clamorously ask for extremely high rates; and then their case is suspicious, not because of impending monopoly profits, but because prim a facie they had better not be established at all.

All the world knows, however, that combination and monopoly, though they are not in possession of the entire field of industry, have secured control of large sections of it; no doubt tempered more or less by potential or actual competition, but still with such degree of success that more than competitive profits are secured. Where this is the case, tariff duties may bolster up the profits, by shutting out at least the foreign competitors. Then the protective system really serves to rob Peter in order to enrich Paul; whereas, under competitive conditions, it only robs Peter in order to sustain Paul in an unsuitable industry. If the duties more than offset Paul’s costs of production (assuming these costs to be in fact higher), they give a chance for a monopoly squeeze. Now whether they do so, inquiries on the part of a Tariff Board may make clear. The vogue of the ‘ true ’ principle of protection is unquestionably promoted by a widespread feeling that duties are more than enough for equalization, and that they enable the trusts to secure more than reasonable profits. The suspicion is doubtless well-founded in many cases; but how far so, systematic inquiry alone can bring out.

Again, no rational person, even though he were the most radical freetrader, would propose to abolish at one fell swoop protecting duties to which a great industrial system had accommodated itself. We may not like the result, but it is there, and not to be suddenly modified without widespread loss. Moreover, those engaged in the industries may plead with weight that they have entered on their operations with the sanction, nay, with the direct encouragement of the government, and that the government cannot in justice leave them in the lurch. Thus, our Department of Agriculture has been preaching beet-sugar for the last fifteen years, urging farmers and manufacturers to undertake it, supplying not only seeds and agricultural instructions, but directions as to manufacturing. In the arid and semi-arid regions of such states as California, Colorado, Utah, beetgrowing (with sugar-making) seems to have an independent basis; but in the states of the corn-belt, Michigan, for example, it rests on the unstable prop of the tariff. The Michigan sugar-makers, egged on as they have been by the government, have an unanswerable claim on the ground of vested interest. We are not free to deal with the sugar duty as we were twenty years ago; nor indeed are we free to deal radically with any of the protective duties needed for the maintenance of established industries.

But the question always arises: How far are vested interests in fact involved? How high must the duties really be in order to enable the status quo to be maintained? On this topic I believe there is an enormous amount of exaggeration. Probably the greater part of our existing duties are needlessly high, on the very principle of equalization. This is the case not only with the obviously nominal duties on wheat, corn, oats,—articles regularly exported, and as cheap here as abroad, — but with those on many manufactured articles, such as the coarser grades of cottons, most boots and shoes, furniture and woodenware, iron in crude and manufactured form, glassware, and a host of miscellaneous manufactures.

The dependence of our manufacturing industries on tariff duties is enormously exaggerated. The constant shouting about foreign pauper labor has brought about a state of pusillanimity among the manufacturers themselves. Most of them know virtually nothing about foreign conditions. They are familiar only with their own business and with that which touches their daily routine. Foreign competition has been nonexistent for years. What its real possibilities are, they do not know. But the politicians and those few shrewder manufacturers who have cleverly formed plans for aid to special industries, have incessantly predicted wholesale ruin unless the tariff system were maintained without the change of a dot. I know of a case in which the superintendent of a textile mill, an Englishman who had had experience both in his native country and here, told an inquirer that goods could be turned out by the mill quite as cheaply in the United States as in England; whereas the owner told the same inquirer on the same day that the mill would have to be shut up within twenty-four hours if the tariff were touched. The owner, like thousands of manufacturers, was in a state of ignorant panic about foreign competition.

A searching inquiry would show, I am convinced, that our present system of extremely high duties could be greatly pruned without any disturbance of vested interests. The direct effect of such a change would be, no doubt, more nominal than real. Except in the case of trust-controlled articles (and there are not so many of these raised in price by the tariff as the freetraders commonly suppose), a reduction of duties on this basis would bring no lowering in prices and no advantage to consumers. It would mean only the placing of a new set of figures on the statute-book. But it would have some important advantages none the less, and very likely some considerable ulterior consequences.

One great gain from such an overhauling of the tariff would be to lessen its importance in the public mind. To the economist nothing is more nauseating than the cry about prosperity and the tariff. From much of the current campaign talk, one would suppose that the country would go to certain ruin if a single duty were reduced by a fraction of a per cent. Manufacturing industries in general are in the main not dependent on protection. This country of ours is certain to be a great manufacturing one under any tariff system.

Still less is our general prosperity dependent on the tariff. Our natural resources, our vigor, industry, and intelligence, our training in school and college and shop, the enterprise and judgment of our business leaders, — these are the things on which material welfare depends. Great harm has been done by the persistent stress on legislation. and especially on restrictive legislation, as the mainstay of prosperity. Our manufacturers and other producers need to learn to keep cool and to rely on their enterprise and skill.

Further, a readjustment of duties simply on the basis of equalization — that is, on the basis of conserving vested interests and maintaining industries as they are — would lead to a more critical attitude on the tariff question. It would be seen that a great range of industries could get on with duties much moderated or no duties at all. Others would be shown to need high duties in order to maintain themselves. Such differences, resting on the varying disadvantages of the several industries, might be fairly expected to raise the question, — which sorts of industries are, after all, the better for the country, those whose costs are high, or those whose costs are low? If there are plenty of manufactures which can get on with low duties or none, is it worth while to start up others which need high duties? Suppose it to be admitted that we must continue to prop up for an indefinite time those which now need high rates, shall we encourage new ones which demand still higher rates in order to equalize their costs of production ?

I am by no means sure that questions of this sort would be coolly asked, or would be rationally considered. The protective notions in their cruder form have a most tenacious hold, especially that notion of the inherent advantage of ‘acquiring’ any and every industry at home. Yet a system of duties really adjusted with care and precision on the basis of cost of production might be expected to help, not only in sharper scrutiny, but in more discriminating judgment on the whole tariff problem.

What has been said in the preceding paragraphs rests on a free-trade basis; that is, it rests on the assumption that it is good for a country, not to produce anything and everything at home, but to allow a process of selection or experiment in determining which among the various possible industries are the best for it.

I would not have the reader infer that I am an unqualified free-trader, or that this view of the tariff problem leads immediately, or even ultimately, to complete abolition of all except revenue duties. The case in favor of free-trade has indeed always seemed to me prima facie strong; and prolonged investigation and reflection have served to confirm me in this opinion. But it is only a prima-facie case. There may be offsetting advantages which rebut the presumption. To enter on a consideration of these would call for a volume, and lead to some very delicate balancing of losses and gains. It would be necessary to consider the young-industries argument, which used to be the mainstay of the protectionists, and now is pooh-poohed by their opponents, but seems to me still to point to some possibilities of ultimate gain. There are, again, political and social arguments; there are arguments as to the avoidance of extremes and of undue fluctuations in industry. Few economists nowadays would say that there is one good tariff policy, and one only, applicable to all countries and all conditions.

But few economists would say a good word for such an exaggerated protectionist policy, one so intolerant of foreign competition and foreign supply, as the United States has been following in the McKinley tariff of 1890, in the Dingley tariff of 1897, and now, with but slight change of essentials, in the Payne-Aldrich tariff of 1909. When duties of fifty, eighty, and one hundred per cent come to be looked upon as normal protectionist rates; when ingenious devices and ‘jokers’ are resorted to in order to bring about such high rates without its being made plain that this is the thing really aimed at and accomplished; when, by the log-rolling process, the policy comes to be applied indiscriminately to any and every article, without scrutiny of the possibility of ultimate cheapening or the promise of social or political gain, — then it is time to call a halt, and to begin a process of thorough overhauling. This is the point of view not only of the teachers and trained students of economics, but, I feel sure, of the immense majority of cool-headed and sensible people in this country.

Adam Smith—an ardent though by no means unqualified free-trader — thought in 1776 that the adoption of a free-trade policy by Great Britain was quite beyond the bounds of possibility. Had Adam Smith lived to see what changes took place in the course of the century following, he would probably have said in 1876 that free-trade would never be abandoned by any country which had once adopted it. Who would venture on a prediction now? It is among the possibilities that Great Britain herself will turn again to some sort of restrictive trade policy. I would not undertake to foretell whether free-trade will be abandoned in Great Britain, or protection in the United States. But the outlook is certainly for a moderation of extreme protectionist policies. The various nations which have stirred each other to measures of commercial warfare — and the United States has been most aggressively guilty in this regard — seem to be wearying of a game which each can play with effect against the other.

The indications are for some sort of compromise all around; an illogical proceeding, perhaps, but a very human one. In this moderated course of action the United States is likely to join; and all sorts of persons, whatever their opinions (or lack of opinions) as to the goal ultimately to be reached, will think and vote in favor of pruning a protectionist system which has become so rigidly and intolerantly restrictive as ours.