WHO'S "PROTECTED" BY
TARIFFS?
A MERE RECITAL of the economic policies of governments all
over the world is calculated to cause any serious student of
economics to throw up his hands in despair. What possible
point can there be, he is likely to ask, in discussing refinements
and advances in economic theory, when popular thought and
the actual policies of governments, certainly in everything
connected with international relations, have not yet caught up
with Adam Smith? For present-day tariff and trade policies are
not only as bad as those in the seventeenth and eighteenth
centuries, but incomparably worse. The real reasons for those
tariffs and other trade barriers are the same, and the pretended
reasons are also the same.
Since The Wealth of Nations appeared more than two centuries
ago, the case for free trade has been stated thousands of times,
but perhaps never with more direct simplicity and force than it
was stated in that volume. In general Smith rested his case on
one fundamental proposition: "In every country it always is
and must be the interest of the great body of the people to buy
whatever they want of those who sell it cheapest." "The proposition
is so very manifest," Smith continued, "that it seems
ridiculous to take any pains to prove it; nor could it ever have
been called in question, had not the interested sophistry of
merchants and manufacturers confounded the common-sense
of mankind."
From another point of view, free trade was considered as one
aspect of the specialization of labor:
It is the maxim of every prudent master of a family,
never to attempt to make at home what it will
cost him more to make than to buy. The tailor does
not attempt to make his own shoes, but buys them of
the shoemaker. The shoemaker does not attempt to
make his own clothes, but employs a tailor. The
farmer attempts to make neither the one nor the
other, but employs those different artificers. All of
them find it for their interest to employ their whole
industry in a way in which they have some advantage
over their neighbors, and to purchase with a
part of its produce, or what is the same thing, with
the price of a part of it, whatever else they have
occasion for. What is prudence in the conduct of
every private family can scarce be folly in that of a
great kingdom.
But whatever led people to suppose that what was prudence
in the conduct of every private family could be folly in that of a
great kingdom? It was a whole network of fallacies, out of
which mankind has still been unable to cut its way. And the
chief of them was the central fallacy with which this book is
concerned. It was that of considering merely the immediate
effects of a tariff on special groups, and neglecting to consider
its long-run effects on the whole community.
An American manufacturer of woolen sweaters goes to Congress
or to the State Department and tells the committee or
officials concerned that it would be a national disaster for them
to remove or reduce the tariff on British sweaters. He now sells
his sweaters for $30 each, but English manufacturers could
sell their sweaters of the same quality for $25. A duty of $5,
therefore, is needed to keep him in business. He is not thinking
of himself, of course, but of the thousand men and women he
employs, and of the people to whom their spending in turn
gives employment. Throw them out of work, and you create
unemployment and a fall in purchasing power, which would
spread in ever-widening circles. And if he can prove that he
really would be forced out of business if the tariff were removed
or reduced, his argument against that action is regarded by
Congress as conclusive.
But the fallacy comes from looking merely at this manufacturer
and his employes, or merely at the American sweater
industry. It comes from noticing only the results that are
immediately seen, and neglecting the results that are not seen
because they are prevented from coming into existence.
The lobbyists for tariff protection are continually putting
forward arguments that are not factually correct. But let us
assume that the facts in this case are precisely as the sweater
manufacturer has stated them. Let us assume that a tariff of $5 a
sweater is necessary for him to stay in business and provide
employment at sweater-making for his workers.
We have deliberately chosen the most unfavorable example
of any for the removal of a tariff. We have not taken an argument
for the imposition of a new tariff in order to bring a new
industry into existence, but an argument for the retention of a
tariff that has already brought an industry into existence, and cannot
be repealed without hurting somebody.
The tariff is repealed; the manufacturer goes out of business;
a thousand workers are laid off; the particular tradesmen whom
they patronized are hurt. This is the immediate result that is
seen. But there are also results which, while much more difficult
to trace, are no less immediate and no less real. For now
sweaters that formerly cost retail $30 apiece can be bought for
$25. Consumers can now buy the same quality of sweater for
less money, or a much better one for the same money. If they
buy the same quality of sweater, they not only get the sweater,
but they have $5 left over, which they would not have had
under the previous conditions, to buy something else. With the
$25 that they pay for the imported sweater they help
employment—as the American manufacturer no doubt
predicted — in the sweater industry in England. With the $5 left
over they help employment in any number of other industries
in the United States.
But the results do not end there. By buying English sweaters
they furnish the English with dollars to buy American goods
here. This, in fact (if I may here disregard such complications
as fluctuating exchange rates, loans, credits, etc.) is the only
way in which the British can eventually make use of these
dollars. Because we have permitted the British to sell more to
us, they are now able to buy more from us. They are, in fact,
eventually forced to buy more from us if their dollar balances are
not to remain perpetually unused. So as a result of letting in
more British goods, we must export more American goods.
And though fewer people are now employed in the American
sweater industry, more people are employed — and much more
efficiently employed—in, say, the American washing-machine
or aircraft-building business. American employment on net
balance has not gone down, but American and British production
on net balance has gone up. Labor in each country is more
fully employed in doing just those things that it does best,
instead of being forced to do things that it does inefficiently or
badly. Consumers in both countries are better off. They are
able to buy what they want where they can get it cheapest.
American consumers are better provided with sweaters, and
British consumers are better provided with washing machines
and aircraft.
Now let us look at the matter the other way round, and see
the effect of imposing a tariff in the first place. Suppose that
there had been no tariff on foreign knit goods, that Americans
were accustomed to buying foreign sweaters without duty, and
that the argument were then put forward that we could bring a
sweater industry into existence by imposing a duty of $5 on sweaters.
There would be nothing logically wrong with this argument
so far as it went. The cost of British sweaters to the American
consumer might thereby be forced so high that American manufacturers
would find it profitable to enter the sweater business.
But American consumers would be forced to subsidize
this industry. On every American sweater they bought they
would be forced in effect to pay a tax of $5 which would be
collected from them in a higher price by the new sweater
industry.
Americans would be employed in a sweater industry who
had not previously been employed in a sweater industry. That
much is true. But there would be no net addition to the
country's industry or the country's employment. Because the
American consumer had to pay $5 more for the same quality of
sweater he would have just that much less left over to buy
anything else. He would have to reduce his expenditures by $5
somewhere else. In order that one industry might grow or come
into existence, a hundred other industries would have to
shrink. In order that 50,000 persons might be employed in a
woolen sweater industry, 50,000 fewer persons would be employed
elsewhere.
But the new industry would be visible. The number of its
employes, the capital invested in it, the market value of its
product in terms of dollars, could be easily counted. The
neighbors could see the sweater workers going to and from the
factory every day. The results would be palpable and direct.
But the shrinkage of a hundred other industries, the loss of
50,000 other jobs somewhere else, would not be so easily
noticed. It would be impossible for even the cleverest statistician
to know precisely what the incidence of the loss of other
jobs had been—precisely how many men and women had been
laid off from each particular industry, precisely how much
business each particular industry had lost—because consumers
had to pay more for their sweaters. For a loss spread among all
the other productive activities of the country would be comparatively
minute for each. It would be impossible for anyone
to know precisely how each consumer would have spent his
extra $5 if he had been allowed to retain it. The overwhelming
majority of the people, therefore, would probably suffer from
the illusion that the new industry had cost us nothing.
It is important to notice that the new tariff on sweaters would
not raise American wages. To be sure, it would enable Americans
to work in the sweater industry at approximately the average
level of American wages (for workers of their skill), instead of
having to compete in that industry at the British level of wages.
But there would be no increase of American wages in general as a
result of the duty; for, as we have seen, there would be no net
increase in the number of jobs provided, no net increase in the
demand for goods, and no increase in labor productivity. Labor
productivity would, in fact, be reduced as a result of the tariff.
And this brings us to the real effect of a tariff wall. It is not
merely that all its visible gains are offset by less obvious but no
less real losses. It results, in fact, in a net loss to the country. For
contrary to centuries of interested propaganda and disinterested
confusion, the tariff reduces the American level of
wages.
Let us observe more clearly how it does this. We have seen
that the added amount which consumers pay for a tariffprotected
article leaves them just that much less with which to
buy all other articles. There is here no net gain to industry as a
whole. But as a result of the artificial barrier erected against
foreign goods, American labor, capital and land are deflected
from what they can do more efficiently to what they do less
efficiently. Therefore, as a result of the tariff wall, the average
productivity of American labor and capital is reduced.
If we look at it now from the consumer's point of view, we
find that he can buy less with his money. Because he has to pay
more for sweaters and other protected goods, he can buy less of
everything else. The general purchasing power of his income
has therefore been reduced. Whether the net effect of the tariff
is to lower money wages or to raise money prices will depend
upon the monetary policies that are followed. But what is clear
is that the tariff—though it may increase wages above what
they would have been in the protected industries—must on net
balance, when all occupations are considered, reduce real wages
—reduce them, that is to say, compared with what they otherwise
would have been.
Only minds corrupted by generations of misleading propaganda
can regard this conclusion as paradoxical. What other
result could we expect from a policy of deliberately using our
resources of capital and manpower in less efficient ways than
we know how to use them? What other result could we expect
from deliberately erecting artificial obstacles to trade and
transportation?
For the erection of tariff walls has the same effect as the
erection of real walls. It is significant that the protectionists
habitually use the language of warfare. They talk of "repelling
an invasion" of foreign products. And the means they suggest
in the fiscal field are like those of the battlefield. The tariff
barriers that are put up to repel this invasion are like the tank
traps, trenches and barbed-wire entanglements created to repel
or slow down attempted invasion by a foreign army.
And just as the foreign army is compelled to employ more
expensive means to surmount those obstacles—bigger tanks,
mine detectors, engineer corps to cut wires, ford streams and
build bridges—so more expensive and efficient transportation
means must be developed to surmount tariff obstacles. On the
one hand, we try to reduce the cost of transportation between
England and America, or Canada and the United States, by
developing faster and more efficient planes and ships, better
roads and bridges, better locomotives and motor trucks. On the
other hand, we offset this investment inefficient transportation
by a tariff that makes it commercially even more difficult to
transport goods than it was before. We make it a dollar cheaper
to ship the sweaters, and then increase the tariff by two dollars
to prevent the sweaters from being shipped. By reducing the
freight that can be profitably carried, we reduce the value of the
investment in transport efficiency.
The tariff has been described as a means of benefiting the
producer at the expense of the consumer. In a sense this is
correct. Those who favor it think only of the interests of the
producers immediately benefited by the particular duties involved.
They forget the interests of the consumers who are
immediately injured by being forced to pay these duties. But it
is wrong to think of the tariff issue as if it represented a conflict
between the interests of producers as a unit against those of
consumers as a unit. It is true that the tariff hurts all consumers
as such. It is not true that it benefits all producers as such. On
the contrary, as we have just seen, it helps the protected producers
at the expense of all other American producers, and
particularly of those who have a comparatively large potential export
market.
We can perhaps make this last point clearer by an exaggerated
example. Suppose we make our tariff wall so high that it
becomes absolutely prohibitive, and no imports come in from
the outside world at all. Suppose, as a result of this, that the
price of sweaters in America goes up only $5. Then American
consumers, because they have to pay $5 more for a sweater, will
spend on the average five cents less in each of a hundred other
American industries. (The figures are chosen merely to illustrate
a principle: there will, of course, be no such symmetrical
distribution of the loss; moreover, the sweater industry itself
will doubtless be hurt because of protection of still other
industries. But these complications may be put aside for the
moment.)
Now because foreign industries will find their market in
America totally cut off, they will get no dollar exchange, and
therefore they will be unable to buy any American goods at all. As a
result of this, American industries will suffer in direct proportion
to the percentage of their sales previously made abroad.
Those that will be most injured, in the first instance, will be
such industries as raw cotton producers, copper producers,
makers of sewing machines, agricultural machinery, typewriters,
commercial airplanes, and so on.'
A higher tariff wall, which, however, is not prohibitive, will
produce the same kind of results as this, but merely to a smaller
degree.
The effect of a tariff, therefore, is to change the structure of
American production. It changes the number of occupations,
the kind of occupations, and the relative size of one industry as
compared with another. It makes the industries in which we are
comparatively inefficient larger, and the industries in which we
are comparatively efficient smaller. Its net effect, therefore, is
to reduce American efficiency, as well as to reduce efficiency in
the countries with which we would otherwise have traded more
largely.
In the long run, notwithstanding the mountains of argument
pro and con, a tariff is irrelevant to the question of employment.
(True, sudden changes in the tariff, either upward or
downward, can create temporary unemployment, as they force
corresponding changes in the structure of production. Such
sudden changes can even cause a depression.) But a tariff is not
irrelevant to the question of wages. In the long run it always
reduces real wages, because it reduces efficiency, production
and wealth.
Thus all the chief tariff fallacies stem from the central fallacy
with which this book is concerned. They are the result of
looking only at the immediate effects of a single tariff rate on
one group of producers, and forgetting the long-run effects
both on consumers as a whole and on all other producers.
(I hear some reader asking: "Why not solve this by giving
tariff protection to all producers?" But the fallacy here is that
this cannot help producers uniformly, and cannot help at all
domestic producers who already "outsell" foreign producers:
these efficient producers must necessarily suffer from the diversion
of purchasing power brought about by the tariff.)
On the subject of the tariff we must keep in mind one final
precaution. It is the same precaution that we found necessary in
examining the effects of machinery. It is useless to deny that a
tariff does benefit—or at least can benefit—special interests.
True, it benefits them at the expense of everyone else. But it does
benefit them. If one industry alone could get protection, while
its owners and workers enjoyed the benefits of free trade in
everything else they bought, that industry would benefit, even
on net balance. As an attempt is made to extend the tariff
blessings, however, even people in the protected industries,
both as producers and consumers, begin to suffer from other
people's protection, and may finally be worse off even on net
balance than if neither they nor anybody else had protection.
But we should not deny, as enthusiastic free traders have so
often done, the possibility of these tariff benefits to special
groups. We should not pretend, for example, that a reduction
of the tariff would help everybody and hurt nobody. It is true
that its reduction would help the country on net balance. But
somebody would be hurt. Groups previously enjoying high protection
would be hurt. That in fact is one reason why it is not
good to bring such protected interests into existence in the first
place. But clarity and candor of thinking compel us to see and
acknowledge that some industries are right when they say that a
removal of the tariff on their product would throw them out of
business and throw their workers (at least temporarily) out of
jobs. And if their workers have developed specialized skills,
they may even suffer permanently, or until they have at long
last learnt equal skills. In tracing the effects of tariffs, as in
tracing the effects of machinery, we should endeavor to see all
the chief effects, in both the short run and the long run, on all
groups.
As a postscript to this chapter I should add that its argument
is not directed against all tariffs, including duties collected
mainly for revenue, or to keep alive industries needed for war;
nor is it directed against all arguments for tariffs. It is merely
directed against the fallacy that a tariff on net balance "provides
employment," "raises wages," or "protects the American
standard of living." It does none of these things; and so far as
wages and the standard of living are concerned, it does the
precise opposite. But an examination of duties imposed for
other purposes would carry us beyond our present subject.
Nor need we here examine the effect of import quotas,
exchange controls, bilateralism and other means of reducing,
diverting or preventing international trade. Such devices have,
in general, the same effects as high or prohibitive tariffs, and
often worse effects. They present more complicated issues, but
their net results can be traced through the same kind of reasoning
that we have just applied to tariff barriers.
TARIFFS?
A MERE RECITAL of the economic policies of governments all
over the world is calculated to cause any serious student of
economics to throw up his hands in despair. What possible
point can there be, he is likely to ask, in discussing refinements
and advances in economic theory, when popular thought and
the actual policies of governments, certainly in everything
connected with international relations, have not yet caught up
with Adam Smith? For present-day tariff and trade policies are
not only as bad as those in the seventeenth and eighteenth
centuries, but incomparably worse. The real reasons for those
tariffs and other trade barriers are the same, and the pretended
reasons are also the same.
Since The Wealth of Nations appeared more than two centuries
ago, the case for free trade has been stated thousands of times,
but perhaps never with more direct simplicity and force than it
was stated in that volume. In general Smith rested his case on
one fundamental proposition: "In every country it always is
and must be the interest of the great body of the people to buy
whatever they want of those who sell it cheapest." "The proposition
is so very manifest," Smith continued, "that it seems
ridiculous to take any pains to prove it; nor could it ever have
been called in question, had not the interested sophistry of
merchants and manufacturers confounded the common-sense
of mankind."
From another point of view, free trade was considered as one
aspect of the specialization of labor:
It is the maxim of every prudent master of a family,
never to attempt to make at home what it will
cost him more to make than to buy. The tailor does
not attempt to make his own shoes, but buys them of
the shoemaker. The shoemaker does not attempt to
make his own clothes, but employs a tailor. The
farmer attempts to make neither the one nor the
other, but employs those different artificers. All of
them find it for their interest to employ their whole
industry in a way in which they have some advantage
over their neighbors, and to purchase with a
part of its produce, or what is the same thing, with
the price of a part of it, whatever else they have
occasion for. What is prudence in the conduct of
every private family can scarce be folly in that of a
great kingdom.
But whatever led people to suppose that what was prudence
in the conduct of every private family could be folly in that of a
great kingdom? It was a whole network of fallacies, out of
which mankind has still been unable to cut its way. And the
chief of them was the central fallacy with which this book is
concerned. It was that of considering merely the immediate
effects of a tariff on special groups, and neglecting to consider
its long-run effects on the whole community.
An American manufacturer of woolen sweaters goes to Congress
or to the State Department and tells the committee or
officials concerned that it would be a national disaster for them
to remove or reduce the tariff on British sweaters. He now sells
his sweaters for $30 each, but English manufacturers could
sell their sweaters of the same quality for $25. A duty of $5,
therefore, is needed to keep him in business. He is not thinking
of himself, of course, but of the thousand men and women he
employs, and of the people to whom their spending in turn
gives employment. Throw them out of work, and you create
unemployment and a fall in purchasing power, which would
spread in ever-widening circles. And if he can prove that he
really would be forced out of business if the tariff were removed
or reduced, his argument against that action is regarded by
Congress as conclusive.
But the fallacy comes from looking merely at this manufacturer
and his employes, or merely at the American sweater
industry. It comes from noticing only the results that are
immediately seen, and neglecting the results that are not seen
because they are prevented from coming into existence.
The lobbyists for tariff protection are continually putting
forward arguments that are not factually correct. But let us
assume that the facts in this case are precisely as the sweater
manufacturer has stated them. Let us assume that a tariff of $5 a
sweater is necessary for him to stay in business and provide
employment at sweater-making for his workers.
We have deliberately chosen the most unfavorable example
of any for the removal of a tariff. We have not taken an argument
for the imposition of a new tariff in order to bring a new
industry into existence, but an argument for the retention of a
tariff that has already brought an industry into existence, and cannot
be repealed without hurting somebody.
The tariff is repealed; the manufacturer goes out of business;
a thousand workers are laid off; the particular tradesmen whom
they patronized are hurt. This is the immediate result that is
seen. But there are also results which, while much more difficult
to trace, are no less immediate and no less real. For now
sweaters that formerly cost retail $30 apiece can be bought for
$25. Consumers can now buy the same quality of sweater for
less money, or a much better one for the same money. If they
buy the same quality of sweater, they not only get the sweater,
but they have $5 left over, which they would not have had
under the previous conditions, to buy something else. With the
$25 that they pay for the imported sweater they help
employment—as the American manufacturer no doubt
predicted — in the sweater industry in England. With the $5 left
over they help employment in any number of other industries
in the United States.
But the results do not end there. By buying English sweaters
they furnish the English with dollars to buy American goods
here. This, in fact (if I may here disregard such complications
as fluctuating exchange rates, loans, credits, etc.) is the only
way in which the British can eventually make use of these
dollars. Because we have permitted the British to sell more to
us, they are now able to buy more from us. They are, in fact,
eventually forced to buy more from us if their dollar balances are
not to remain perpetually unused. So as a result of letting in
more British goods, we must export more American goods.
And though fewer people are now employed in the American
sweater industry, more people are employed — and much more
efficiently employed—in, say, the American washing-machine
or aircraft-building business. American employment on net
balance has not gone down, but American and British production
on net balance has gone up. Labor in each country is more
fully employed in doing just those things that it does best,
instead of being forced to do things that it does inefficiently or
badly. Consumers in both countries are better off. They are
able to buy what they want where they can get it cheapest.
American consumers are better provided with sweaters, and
British consumers are better provided with washing machines
and aircraft.
Now let us look at the matter the other way round, and see
the effect of imposing a tariff in the first place. Suppose that
there had been no tariff on foreign knit goods, that Americans
were accustomed to buying foreign sweaters without duty, and
that the argument were then put forward that we could bring a
sweater industry into existence by imposing a duty of $5 on sweaters.
There would be nothing logically wrong with this argument
so far as it went. The cost of British sweaters to the American
consumer might thereby be forced so high that American manufacturers
would find it profitable to enter the sweater business.
But American consumers would be forced to subsidize
this industry. On every American sweater they bought they
would be forced in effect to pay a tax of $5 which would be
collected from them in a higher price by the new sweater
industry.
Americans would be employed in a sweater industry who
had not previously been employed in a sweater industry. That
much is true. But there would be no net addition to the
country's industry or the country's employment. Because the
American consumer had to pay $5 more for the same quality of
sweater he would have just that much less left over to buy
anything else. He would have to reduce his expenditures by $5
somewhere else. In order that one industry might grow or come
into existence, a hundred other industries would have to
shrink. In order that 50,000 persons might be employed in a
woolen sweater industry, 50,000 fewer persons would be employed
elsewhere.
But the new industry would be visible. The number of its
employes, the capital invested in it, the market value of its
product in terms of dollars, could be easily counted. The
neighbors could see the sweater workers going to and from the
factory every day. The results would be palpable and direct.
But the shrinkage of a hundred other industries, the loss of
50,000 other jobs somewhere else, would not be so easily
noticed. It would be impossible for even the cleverest statistician
to know precisely what the incidence of the loss of other
jobs had been—precisely how many men and women had been
laid off from each particular industry, precisely how much
business each particular industry had lost—because consumers
had to pay more for their sweaters. For a loss spread among all
the other productive activities of the country would be comparatively
minute for each. It would be impossible for anyone
to know precisely how each consumer would have spent his
extra $5 if he had been allowed to retain it. The overwhelming
majority of the people, therefore, would probably suffer from
the illusion that the new industry had cost us nothing.
It is important to notice that the new tariff on sweaters would
not raise American wages. To be sure, it would enable Americans
to work in the sweater industry at approximately the average
level of American wages (for workers of their skill), instead of
having to compete in that industry at the British level of wages.
But there would be no increase of American wages in general as a
result of the duty; for, as we have seen, there would be no net
increase in the number of jobs provided, no net increase in the
demand for goods, and no increase in labor productivity. Labor
productivity would, in fact, be reduced as a result of the tariff.
And this brings us to the real effect of a tariff wall. It is not
merely that all its visible gains are offset by less obvious but no
less real losses. It results, in fact, in a net loss to the country. For
contrary to centuries of interested propaganda and disinterested
confusion, the tariff reduces the American level of
wages.
Let us observe more clearly how it does this. We have seen
that the added amount which consumers pay for a tariffprotected
article leaves them just that much less with which to
buy all other articles. There is here no net gain to industry as a
whole. But as a result of the artificial barrier erected against
foreign goods, American labor, capital and land are deflected
from what they can do more efficiently to what they do less
efficiently. Therefore, as a result of the tariff wall, the average
productivity of American labor and capital is reduced.
If we look at it now from the consumer's point of view, we
find that he can buy less with his money. Because he has to pay
more for sweaters and other protected goods, he can buy less of
everything else. The general purchasing power of his income
has therefore been reduced. Whether the net effect of the tariff
is to lower money wages or to raise money prices will depend
upon the monetary policies that are followed. But what is clear
is that the tariff—though it may increase wages above what
they would have been in the protected industries—must on net
balance, when all occupations are considered, reduce real wages
—reduce them, that is to say, compared with what they otherwise
would have been.
Only minds corrupted by generations of misleading propaganda
can regard this conclusion as paradoxical. What other
result could we expect from a policy of deliberately using our
resources of capital and manpower in less efficient ways than
we know how to use them? What other result could we expect
from deliberately erecting artificial obstacles to trade and
transportation?
For the erection of tariff walls has the same effect as the
erection of real walls. It is significant that the protectionists
habitually use the language of warfare. They talk of "repelling
an invasion" of foreign products. And the means they suggest
in the fiscal field are like those of the battlefield. The tariff
barriers that are put up to repel this invasion are like the tank
traps, trenches and barbed-wire entanglements created to repel
or slow down attempted invasion by a foreign army.
And just as the foreign army is compelled to employ more
expensive means to surmount those obstacles—bigger tanks,
mine detectors, engineer corps to cut wires, ford streams and
build bridges—so more expensive and efficient transportation
means must be developed to surmount tariff obstacles. On the
one hand, we try to reduce the cost of transportation between
England and America, or Canada and the United States, by
developing faster and more efficient planes and ships, better
roads and bridges, better locomotives and motor trucks. On the
other hand, we offset this investment inefficient transportation
by a tariff that makes it commercially even more difficult to
transport goods than it was before. We make it a dollar cheaper
to ship the sweaters, and then increase the tariff by two dollars
to prevent the sweaters from being shipped. By reducing the
freight that can be profitably carried, we reduce the value of the
investment in transport efficiency.
The tariff has been described as a means of benefiting the
producer at the expense of the consumer. In a sense this is
correct. Those who favor it think only of the interests of the
producers immediately benefited by the particular duties involved.
They forget the interests of the consumers who are
immediately injured by being forced to pay these duties. But it
is wrong to think of the tariff issue as if it represented a conflict
between the interests of producers as a unit against those of
consumers as a unit. It is true that the tariff hurts all consumers
as such. It is not true that it benefits all producers as such. On
the contrary, as we have just seen, it helps the protected producers
at the expense of all other American producers, and
particularly of those who have a comparatively large potential export
market.
We can perhaps make this last point clearer by an exaggerated
example. Suppose we make our tariff wall so high that it
becomes absolutely prohibitive, and no imports come in from
the outside world at all. Suppose, as a result of this, that the
price of sweaters in America goes up only $5. Then American
consumers, because they have to pay $5 more for a sweater, will
spend on the average five cents less in each of a hundred other
American industries. (The figures are chosen merely to illustrate
a principle: there will, of course, be no such symmetrical
distribution of the loss; moreover, the sweater industry itself
will doubtless be hurt because of protection of still other
industries. But these complications may be put aside for the
moment.)
Now because foreign industries will find their market in
America totally cut off, they will get no dollar exchange, and
therefore they will be unable to buy any American goods at all. As a
result of this, American industries will suffer in direct proportion
to the percentage of their sales previously made abroad.
Those that will be most injured, in the first instance, will be
such industries as raw cotton producers, copper producers,
makers of sewing machines, agricultural machinery, typewriters,
commercial airplanes, and so on.'
A higher tariff wall, which, however, is not prohibitive, will
produce the same kind of results as this, but merely to a smaller
degree.
The effect of a tariff, therefore, is to change the structure of
American production. It changes the number of occupations,
the kind of occupations, and the relative size of one industry as
compared with another. It makes the industries in which we are
comparatively inefficient larger, and the industries in which we
are comparatively efficient smaller. Its net effect, therefore, is
to reduce American efficiency, as well as to reduce efficiency in
the countries with which we would otherwise have traded more
largely.
In the long run, notwithstanding the mountains of argument
pro and con, a tariff is irrelevant to the question of employment.
(True, sudden changes in the tariff, either upward or
downward, can create temporary unemployment, as they force
corresponding changes in the structure of production. Such
sudden changes can even cause a depression.) But a tariff is not
irrelevant to the question of wages. In the long run it always
reduces real wages, because it reduces efficiency, production
and wealth.
Thus all the chief tariff fallacies stem from the central fallacy
with which this book is concerned. They are the result of
looking only at the immediate effects of a single tariff rate on
one group of producers, and forgetting the long-run effects
both on consumers as a whole and on all other producers.
(I hear some reader asking: "Why not solve this by giving
tariff protection to all producers?" But the fallacy here is that
this cannot help producers uniformly, and cannot help at all
domestic producers who already "outsell" foreign producers:
these efficient producers must necessarily suffer from the diversion
of purchasing power brought about by the tariff.)
On the subject of the tariff we must keep in mind one final
precaution. It is the same precaution that we found necessary in
examining the effects of machinery. It is useless to deny that a
tariff does benefit—or at least can benefit—special interests.
True, it benefits them at the expense of everyone else. But it does
benefit them. If one industry alone could get protection, while
its owners and workers enjoyed the benefits of free trade in
everything else they bought, that industry would benefit, even
on net balance. As an attempt is made to extend the tariff
blessings, however, even people in the protected industries,
both as producers and consumers, begin to suffer from other
people's protection, and may finally be worse off even on net
balance than if neither they nor anybody else had protection.
But we should not deny, as enthusiastic free traders have so
often done, the possibility of these tariff benefits to special
groups. We should not pretend, for example, that a reduction
of the tariff would help everybody and hurt nobody. It is true
that its reduction would help the country on net balance. But
somebody would be hurt. Groups previously enjoying high protection
would be hurt. That in fact is one reason why it is not
good to bring such protected interests into existence in the first
place. But clarity and candor of thinking compel us to see and
acknowledge that some industries are right when they say that a
removal of the tariff on their product would throw them out of
business and throw their workers (at least temporarily) out of
jobs. And if their workers have developed specialized skills,
they may even suffer permanently, or until they have at long
last learnt equal skills. In tracing the effects of tariffs, as in
tracing the effects of machinery, we should endeavor to see all
the chief effects, in both the short run and the long run, on all
groups.
As a postscript to this chapter I should add that its argument
is not directed against all tariffs, including duties collected
mainly for revenue, or to keep alive industries needed for war;
nor is it directed against all arguments for tariffs. It is merely
directed against the fallacy that a tariff on net balance "provides
employment," "raises wages," or "protects the American
standard of living." It does none of these things; and so far as
wages and the standard of living are concerned, it does the
precise opposite. But an examination of duties imposed for
other purposes would carry us beyond our present subject.
Nor need we here examine the effect of import quotas,
exchange controls, bilateralism and other means of reducing,
diverting or preventing international trade. Such devices have,
in general, the same effects as high or prohibitive tariffs, and
often worse effects. They present more complicated issues, but
their net results can be traced through the same kind of reasoning
that we have just applied to tariff barriers.
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