The Tariff and Social Control

FOR nearly a century, assent to the doctrine of free trade has been the accepted test of economic orthodoxy. If the student does not comprehend or subscribe to it, the fact is evidence of his laziness or stupidity. If a teacher or textbook writer falters in the faith, the same charges can be brought against him — elaborated, perhaps, with the additional suspicion of unconscious bias or outright venality. When legislators and governmental executives champion the tariff principle, they, needless to say, are victims of abysmal ignorance or cowardice. Manufacturers, of course, are defenders of purely private interests. And the ordinary voter is a dupe.

At the present moment this longfamiliar attitude of the professional freetraders has attained new strength. The scandalous logrolling which preceded the passage of the Hawley-Smoot Tariff Bill has become common knowledge; it has been easy to picture that piece of legislation as the tangible cause of all our subsequent economic distress, and to see in the removal of tariff walls the mirage of increased sales abroad, operating to counteract the evil effects of our own ineptitudes at home. For these reasons educators and specialists are winning to their free-trade dogmas many new converts among the common citizenry; even the business men, who alone are supposed to benefit by protection, are beginning to have their doubts.

It seems to me, then, that the time has come to challenge the impregnability of the free-trade doctrine, and to do so on grounds which are new, or which have come into prominence only within the last decade. Let me make it clear, however, that in undertaking to present the other side of the case I am not for a moment upholding our present tariff or any of its particular provisions.

I

The assumptions underlying the successful application of free trade may be summed up as follows: —

1. Freedom of competition is the most desirable state of affairs in the internal business activities of separate nations; hence it is also desirable in the prosecution of international commerce

2. Wealth is the end of economic activity; factors such as national pride, preservation of ancient customs, and so on, do not enter into the equation.

3. It follows that the attainment of a maximum of wealth is the final object of commercial policies, both domestic and international.

4. There are differences in the resources and abilities of the various regions and populations of the earth; these lead to natural and desirable specializations of activity.

On the basis of these assumptions the economist has pictured a world economy as the ultimate and not unattainable ideal. For him the globe itself is the only economic unit that counts. All the innumerable varieties of occupations — whether of extraction, manufacture, transportation, distribution, or finance — are free to establish themselves in those regions or among those peoples best adapted by nature to carry them on. If it were not for artificial barriers, such as tariffs, human activities would fall into a perfect balance automatically, and the result would be a maximum of the consumption or enjoyment of wealth for the earth as a whole, as well as for the separate nations and peoples of which it is composed.

One may raise objections against minor details of this argument, particularly the assumptions on which it rests; yet it seems clear that, given these premises, the economist has made his case.

In actual practice it has always been customary to admit certain exceptions to these counsels of perfection. When the resources and abilities of a nation are such that certain industries, not yet established, would be sure to prosper if they could be nursed to a point where their scale of operations would permit the required economies of production — in such cases temporary protection is considered advisable. There have been some noteworthy examples of this in the United States — tin plate, for instance; but the most notable case was the complete development of Germany from a low-scale agricultural country to a triumphantly industrial nation in the half century between Bismarck’s rise to power and the World War. Native capacities and resources were favorable; protecting tariffs and deliberate planning did the rest.

Practical realities have forced the champions of free trade to grant exceptions in still other directions. There is a certain human value in breadth of skill and diversification of activity. National pride and self-respect are involved, as well as the lower advantages of mere convenience. Then there is the vital question of national self-sufficiency from the military point of view, and this has always restrained the free distribution of economic activities. These exceptions, however, are not overwhelmingly important. How comes it, then, that free trade, with all the logic at its command, has made so little progress?

The forces which have withstood the logic of free trade may be seen in clear outline if we will glance for a moment at our own history. It has been repeatedly demonstrated in our many experiments with the tariff that the benefits derived from a particular rate or schedule flow in concentrated and evident channels to businesses and individuals that cannot help being acutely conscious of the advantages they receive. The cost of any given tariff item may far exceed the benefits conferred, but this cost is diffused over the whole body of consumers without placing any appreciable burden upon any one of them. Even if the total burden of all the items of an unwise tariff becomes really oppressive in its accumulated effect, still the cause remains concealed in the diffusion of small elements of which the tariff is composed. Since the relation of cause and effect is so difficult to trace, and since the average Congressman is well aware of this fact, tariff legislation is peculiarly subject to abuses — such abuses, for example, as the HawleySmoot tariff which is now in force.

Since the World War new factors have emerged to confound the logic of free trade. To provide for national self-sufficiency in war time has always been a serious problem with statesmen; the experiences of the years 1914-1918 served to bring it into sharper relief. In England, for example, the traditional policy of free trade has been modified to allow a protective tariff upon lenses and optical goods in general, for which she had been previously dependent on Germany. Many similar items are included in her ‘safeguarding’ act. In the United States the development of the nitrate and dyestuff industries goes back, though less purposely, to the same source. Furthermore, many of the provisions of the peace treaties — the drawing of boundaries and the distribution of colonies and mandates — were dictated by the desire to secure domestic sources of military necessities.

The tariff problem has also been affected since the war by the acute attacks of nationalism to which all the new nations have been subject, and many of the old ones as well. The rise of nationalism is, in itself, a challenge to the doctrine that national wealth is the supreme aim of national policy. A higher value is being placed upon national customs and habits of life, on native materials and traditional handicrafts. This definition of national wellbeing has been particularly stressed by Gandhi in India. Something of the same feeling obtains in Ireland. It is appearing in Mexico and Latin America in general, as well as in the new European states. To-day it is not so clear as it once seemed that the sum of human satisfactions can be adequately expressed in monetary symbols. To the extent that this sentiment prevails, it is inevitable that it should be reflected in the practical form of tariff rates.

The most serious of the new factors still remains to be named. Only since the war has it become evident that any thoroughgoing approach to free trade, or even a near approach to it, involves tremendous and cataclysmic readjustments in even the most commonplace occupations of a nation’s life. Of this truth the present condition of England stands as the finished and evident example, while the increasing embarrassment of staple agriculture in the United States represents the same thing in a formative stage.

II

For nearly three generations England’s policy of free trade has been vigorously maintained. Under it she has, until recently, reaped all the rewards which traditional economics has ascribed to the practice. Her natural resources have been an abundant supply of coal and iron. Her climate has been conducive to thought and action. Her people have been intelligent, enterprising, adaptable, reliable, and energetic. Nature, in short, had loaded the dice heavily in her favor. With these advantages, and with the added resource of vast colonial dependencies, she boldly abandoned a self-supporting agriculture, imported her food across the seas from the cheapest sources, drew her rural population into the manufacturing centres, attracted the raw materials of the whole earth to her docks and quays, and equipped her workshops to transform them into every imaginable object of beauty or use for distribution to the very outposts of civilization.

This policy brought her wealth and power — more than has fallen to the lot of any other nation in the whole course of history. Is it any wonder that her economists — as well as those of other nations who looked upon her as an object lesson — should elaborate her free-trade policy into a theory which was logically impregnable?

But where stands England now, after the menopause of the World War? Her natural resources, though still great, are visibly diminishing. Her markets are narrowing, while competition grows sharper. Her people show signs of discouragement, and for ten years without intermission millions of them have been without employment. Her monetary resources are still enormous and her financial integrity remains unquestioned, but this does not serve to correct her maladjustments. For the causes of her calamity are numerous and varied. Among them may be included the growth, among her former customers, of that sentiment of nationalism, that desire for self-sufficiency, which I have already mentioned. But the chief cause lies in the very effectiveness and whole-heartedness with which England has served the world in the decades just passed.

Since the early years of the nineteenth century she has placed no embargo on her capital and her machines, and she never did on her skill. For long years past these have been available at the going price for the benefit of mankind. Steel works in America and cotton mills in India, China, and Japan — and these were the very bone and marrow of her own economic framework — were financed by British capital, equipped with British machinery, their staffs trained by British executives. Germany, France, Italy, Sweden, and Russia, each in turn learned from her teaching, buying from her seemingly inexhaustible store the fundamentals of successful competition in the industrial age. And at last that tutelage has come to its appropriate fruition in the mature self-sufficiency of her beneficiaries.

Such is England’s present state. It is by no means hopeless, but the readjustments that are now required of her will be difficult and painful. In relinquishing her preëminent place of leadership in industry and commerce to become merely one among several eager contenders for the world’s trade, her people will be required to change their occupations, to redistribute themselves geographically, and possibly to decrease their actual numbers. The mental changes — changes in position and outlook — will be still more distressing, but they are even now under way and will eventually be effected.

There is here no refutation of the inexorable logic behind the doctrine of free trade. The apostles of free trade have always recognized the necessity of readjustment to changing conditions, the shift of industries and activities to regions where newly discovered resources and newly developed abilities offer a preponderant competitive advantage. But who foresaw the immensity of the adjustment required? Who could have believed that it would involve the fate of an empire and the happiness of its sovereign people? The truth of the economic doctrine remains, but in how ironic and disheartening a sense!

III

All this has quite a definite bearing upon our own present policies and future prospects. There is no indication that we are soon to find ourselves in England’s delicate and unstable position. We have never had, nor can we ever expect to have, so preponderant a place in the world’s commerce as she once occupied. The division in the future will be among a greater number of more nearly equal competitors. How, in any event, could the proportion of exports to total manufactures ever be so high with us? Our principal market has always been at home. The size of our population, our high standard of living, and the homogeneity of our tastes have given us a large-scale, self-supported production which must always be the backbone of our industry.

Yet there are some dangerous tendencies in evidence. One of the favorite remedies for dull business at home has been to demand an aggressive and highly organized effort in foreign markets. We are largely and profitably engaged in this endeavor at the present moment. It is possible that vigorous, concerted action would greatly increase our share of this commerce. But can we, in self-defense, allow foreign trade to absorb too much of our energies?

We are already, and quite as definitely as was England, engaged in sapping our own foundations. Our machines are now a principal item of our export. Our financial resources are freely lent for the purchase of this machinery by foreign manufacturers, as well as for the provision of other equipment and working capital. Our technical methods, at the moment the most advanced in the world, are being carefully studied and imitated by foreign groups. American sales and service engineers range freely over the six continents. As for the refinements of scientific management, the Taylor Society has long and assiduously cultivated its foreign connections; such men as Wallace Clark and the late Frank Gilbreth have carried the gospel in person to alien soils where it has been brought to profitable fruitage.

In agriculture there are signs of fundamental realignments of an international order. Unlike England, we did not abandon agriculture in taking up industry. The fertility, arability, and broad extent of our soil rendered such a course both undesirable and impossible. In consequence, our export of the great staples, such as wheat and cotton, remained as the prime factor in our trade while we were building up our foreign markets for manufactured goods. But the time is coming when a major, world-wide adjustment may require us to give up this element of our prosperity, at least in part; and the process will not be an easy one. With cotton partly superseded by rayon, and with Egypt, the Sudan, and Turkestan, among other regions, coming into everlarger production, the cotton grower in our South faces a dismal prospect.

The most serious conditions, however, are those which affect our wheat growers; here tariff policy has made its appearance as a practical problem. In the last generation enormous acreages of this cereal have been opened to cultivation in the Canadian Northwest. These lands, largely occupied by settlers from the United States, are farmed in large units and by power — therefore cheaply. In the United States the yield per acre is rising while the consumption per capita is falling; hence the exportable surplus tends to increase. We have invented an astonishingly efficient array of wheat-farming machinery — tractors, disk ploughs, seeders, and especially the combine, which harvests and threshes in one operation without requiring a threshing crew. As if all this were not enough, we have invented a new science of ‘dry farming,’ by which we have added thousands of square miles to the available wheat area of the earth.

Added to all this, Russia, after an absence of sixteen years from world markets, has appeared again upon the scene under extremely unsettling conditions. For she is a debtor, and has to sell at any price; the standard of living of her farmers is low; and she is using the most effective machinery and methods known, thanks to our own Mr. T. D. Campbell and Professor M. L. Wilson, who have instructed the Russians in our technique of large-scale, mechanized farming. It is evident that the embarrassment of the wheat farmer is not temporary, since the disturbing factors which I have mentioned are permanent and increasing.

Here we have, in the agricultural field, almost exactly the same problem that is facing British industry. The only tenable solution seems to lie in the combination of tariff protection on the one hand and a reduction of acreage on the other. It is true, of course, that the tariff will have no effect so long as we have an exportable surplus and world markets remain low. (They will probably continue to be low.) But during the process of adjustment, when the less efficient farms are being abandoned, a tariff on wheat must be maintained, and it may prove necessary to maintain it indefinitely. It will become effective as soon as production is reduced to the point where the exportable surplus becomes unimportant. It is highly imperative that that point should be reached as soon as possible.

Of course, there is another solution of the wheat grower’s difficulties — that followed by England: deny the tariff and let nature take its course. So far as we can judge of present world movements, this would lead to the increasing embarrassment of the wheat growers and perhaps to the eventual destruction of the industry. Meanwhile a large part of our population would have to endure personal distress and diminishing purchasing power.

IV

The net effect of the kind of thought and action suggested for meeting the wheat problem is to concentrate attention upon domestic difficulties rather than on world-wide markets, except as the latter affect the former. There are other quite definite and fundamental reasons for cultivating this point of view. Being an engineer by profession, I am perpetually and instinctively impressed with the fact that man has conquered the elements of material well-being. The material satisfactions of life are now made physically possible for all mankind. I am also convinced that they can be made humanly possible. Toward this end a constructive programme may be clearly envisioned in its broad outlines; it will include the stabilization of monetary values, stabilization of employment, a raised standard of living, increased leisure, and the elimination of economic fear.

There is no space to consider here the details of this programme; I can only point out that two fundamental requirements will be absolutely essential to its success: to avoid unnecessary and fruitless entanglements with world economy, and to concentrate on the well-being of our own citizens as the prime requisite of a healthy and profitable state of our industry as a whole.

With its dependencies, the territory of the United States forms one of the potential ‘ economic empires ’ into which the earth’s surface naturally falls. We are far from being completely self-sustaining, and it is not nocessary that we should be; but we are so nearly self-contained that we ought to be able to assure the material well-being of our citizens even in the face of any ordinary disturbances in the world at large. To say that we cannot work out our own salvation without first settling the difficulties of the rest of the world is to repeat a counsel of despair. We can do it, and in the very process our actions will benefit other nations also. But we must first isolate our problem as much as possible from world-wide disturbances, and to this end a moderate and judicious use of the tariff will be necessary.

Under our favorable industrial conditions the amount of tariff required for this purpose should not be large. It might be large if business men made the rates in collaboration with the committee members of the House, as has been the immemorial custom. But perhaps there is a better way. Under an entirely new conception of the functions of the Tariff Commission, a bill might be drawn up to regulate the whole desired flow of business on a self-contained basis, proper account being taken of the volume of needed imports, the amount of payments on the foreign debt, the invisible items in the balance of trade, and those of our exports which would be welcomed by other nations. A tariff so drawn would probably provide less protection than the Hawley-Smoot Bill. If the balance — for a balance should be sought — required extensive foreign travel on our part, so much the better. If the debt payments threw all the rest out of equilibrium, there would be no harm in looking with an open mind at that question also. The final aim should be to arrive at a balanced international account.

Once a scientific tariff is achieved, we shall also have to undertake certain other measures if the standard of living is to be raised to the point which is now physically possible. We shall have to restrain the expansion of industries which are already overbuilt. We shall have to work out a better control of selling costs, which, by their increase, now tend to offset all improvements in manufacture. Perhaps we may even be able to perfect a plan for selling staple articles on the basis of an official grading to standard specifications, thus eliminating a great deal of expensive and unnecessary advertising. None of these expedients is impossible. Each would tend to reduce the cost of finished goods to the consumer. The cumulative effect of all of them, successfully applied, would be to reduce the cost of many of our manufactured goods to the point where tariff protection would no longer be necessary. In the end we should be able to enjoy those fruits of our high efficiency in manufacture which are now withheld from us in large measure by unwise capital investments and wasteful selling methods.

V

The final reason which should compel us to concentrate our attention upon our own American problem is a spiritual one, in one sense of that ambiguous word. At the beginning of this article I pointed out that the advocates of free trade have always maintained that the ultimate criterion of a sound economic policy is the increase of national wealth. But a nation has no corporeal existence. It is made up of persons. When we lay careful plans to increase the national wealth, the important question to ask, therefore, is: Whose wealth is to be increased?

At the height of her success, England was incredibly wealthy, with hundreds of people in the higher income brackets and tens of thousands who were comfortably prosperous. In fact, the average scale of living of her whole population was exceeded only by that of the United States. Yet it would be a rash man who would argue that the distribution of wealth was equitable. The average was compounded of wide extremes. The poverty of London’s East End was proverbial. Underlying this situation we can detect a psychological factor. England was a workshop, and her markets were the world. To the great financiers and industrialists her home people were merely means to an end, a part of the machinery of manufacture and distribution upon which her world-wide enterprise depended. The people in distant lands who were the ultimate human sources and destinations of her commerce were doubly impersonal.

Contrast the situation of England in this respect with that of America as it has developed since the war. We send abroad innumerable shiploads from the abundant products of our mines, farms, and factories, but it still remains true that our principal market is at home. Our best customer is our fellow citizen — our friend, our neighbor, our employee. This purely physical fact has lent to our economic thinking a tinge of moral sentiment. It has given rise to a growing community of interest between employer and employee, a better understanding of their interdependence, and an increasing mutual confidence.

Recent incidents have emphasized the truth of this statement beyond any possibility of doubt. Last fall the American Federation of Labor met in Boston and presented its industrial programme. Look it up in the newspapers and try to read it in the light of the prejudices of fifteen or twenty years ago; you will be stunned by the sheer incredibility of it. Except for occasional phrases, it might have been issued by the United States Chamber of Commerce. Again, consider the reaction of American industry to President Hoover’s urgent plea of a year ago that wages be maintained. This appeal met with immediate, unforced, and general acceptance. Then, after the lapse of a year of difficulty and disappointment, a group of bankers suggested that wage rates be scaled down. And what was the result? The bankers’ proposal drew forth a volley of impetuous and resentful objections — from employers!

All of this would have been impossible a decade ago. What has happened in the meantime? We have simply discovered that there is an inseparable community of interest between the American employer and the American laborer. Employers as a class have come to see that there can be no hope of maintaining prosperity unless the purchasing power of the workers is maintained. The laboring classes have also come to understand that they cannot continue to earn high wages unless their employers are prosperous. From the point of view of the pure moralist, these sentiments are vitiated, perhaps, by the material interests on which they rest. But we need not trouble ourselves too much about this. It is enough for us that such sentiments exist and that they are sufficiently strong to weigh very heavily in the scale of conflicting interests out of which we must strike the balance that is so essential to our national well-being.

In this new discovery of a common bond uniting capital and labor we have, then, the needed and hitherto missing element upon which we can build our plans for a new and more substantial prosperity. With it, the programme which I have sketched in this article may be undertaken with confidence; without it, the prospect is hopeless.

Our dissatisfaction with the present tariff is tending to overshoot the mark by creating disillusionment with the idea of protection in general. Unless we think clearly about the matter, we are in danger of duplicating the mistakes which have brought England to her present impasse. The idea is already gaining ground that we must look for our economic recovery to an increased foreign trade, and that wages will have to be cut to the point where we can compete more favorably with other nations. Some of our foreign friends tell us flatly that we cannot hope to maintain our standard of living against the rest of the world.

These are false and dangerous doctrines. There is no access to our markets, now denied to other nations, which could ever compensate them for the losses which they would suffer if we should enter the low-scale competition in world markets to which they are inviting us. And for our part, we simply cannot resign ourselves with safety and self-respect to accept the lower standards of living which would inevitably follow in the wake of such competition. Instead of rushing to embrace the anarchy into which world economy is now plunged, we ought rather to bend all our energies to the formulation of a plan for a wisely guided national economy. This happy consummation is now within our reach. We cannot afford to ignore the opportunity.