The Industrial Protective System and International Free Trade

Appendix III.

The Industrial Protective System and International Free Trade.

SECTION I.

PROXIMATE ECONOMIC EFFECTS OF THE INDUSTRIAL PROTECTIVE SYSTEM.

That the principal measures which the mercantile system recommended, artificially to increase a nation's wealth, could not produce the immediate effects expected of them, has been shown, especially from the natural history of money. Their proximate economic consequences necessarily consisted in this, that they diverted the existing productive forces of the nation from their places of application (Verwendungsplätzen) hitherto, to others which the government thought more advantageous.

A. If home producers are in a condition to offer their commodities as good and as cheap as foreigners, all protection of the former by import duties, or even by prohibitions, is superfluous. The home producer has, as a rule, not only the advantage of the smaller cost of freight to the place of consumption, but that of being earlier informed, because of his proximity to consumers, of a change in their tastes. If, indeed, foreigners could supply us better and cheaper, and if they are kept from supplying our market only by artificial means, the state compels our consumers to a sacrifice of enjoyment; and such a sacrifice as is not fully compensated for by the profit made by the favored producers in any manner. The latter are generally soon compelled by home competition to arrange their prices in accordance with the rate of profit usual in the country. If they had no "protection" they would simply employ their productive forces in other branches of production; and in those in which they were equal or even superior to foreign competitors. By means of the products thus obtained, the people might then get in exchange all those commodities from foreign countries, the production of which it is, according to the laws of the division of labor, better to leave to foreign countries. Since one nation can lastingly pay another nation only with its own products, any limitation of imports must, under otherwise equal circumstances, be attended by a corresponding limitation of exports. Directly, therefore, these hindrances to importation produce no increase, but only a change in the direction (Umlenkung) of the national forces of capital and labor; an increase, only in case that foreign producers are thereby caused to transfer their productive forces within our limits; which may certainly be considered the greatest triumph of the protective system. Hence it is absurd when an equal extension of "protection" to all the branches of a nation's economy is demanded, as it is so frequently, in the name of justice. There is here no real protection whatever, analogous, for instance, to the protection afforded by the judge, but a favor which can be accorded to no one without injuring some one else.

SECTION II.

EFFECT OF EXPORT DUTIES, etc., ON RAW MATERIAL.—EXPORT PREMIUMS.

B. Export duties on raw material, and prohibitions of the exportation of raw material, lower the price of such articles, by preventing the competition of foreign buyers. To this loss of the producers of raw material, there is, in the long run, no corresponding gain to the manufacturers. Rather will there be, when freedom of competition prevails at home, an increased flow of the forces of production to the favored branch, because of its rate of profit, which is greater than that usual in the country, and a corresponding flow from the injured branch, until such time as the level of profit usual in the country is restored. Hence here, also, the final result is only a change of the direction, not a direct increase of the productive forces.

C. In the case of export-premiums, it is necessary to distinguish between the mere refunding back of the taxes which have been paid on the assumption of a home consumption which has not taken place (drawbacks), and the actual making of donations because of the exportation of goods (bounties). The former produces no result except to maintain the possibility of a production which would otherwise have been prevented by the tax. The latter, on the contrary, compels all those who are subject to taxation to make a donation to one particular class of persons engaged in industry. Moreover, all consumers are compelled to pay a higher price for the commodity to the extent that the market price, inclusive of the premium to be obtained abroad, is higher than the home market price hitherto usual. But, as the cost of production has not increased, this profit of the producers, which is greater than that usual in the country, must induce other productive forces to enter into the favored branch; so that here, also, the lasting result is not a higher rate of profit of the individuals engaged in the industry, but an extension of the industry itself. Foreign countries chiefly reap the greatest advantage from this course, since they obtain the commodities at gift-prices. The premiums paid, not for exportation, but for the production of a commodity, have a meaning akin to this. Either the industry could not maintain itself without premiums, in which case the state encourages a losing production,—and the more there is produced the greater is the loss to the national economy;—or the industry might exist without the payment of premiums, and then the newly increased profit would lead to an extension of the industry. Exportation would follow, and all the effects of export-premiums appear.

SECTION III.

THE FREE-TRADE SCHOOL.

From what has been said, we may understand why the so-called free-trade school, with its atomistic over-valuation of the individual and the moment, rejects all those measures of the industrial protective system. As such measures really injure the oppressed portions of the people more than they help the favored classes, their introduction, it is said, uniformly depends on this, that single classes of producers understand their private interests better than others, and are better organized than other producers and especially better than consumers, to take care of their interests. Adam Smith approves import hindrances for the purpose of artificially promoting an industry only in two cases:

A. When military safety demands it. Hence he calls the English navigation act, that great prohibitive and protective law intended to advance the merchant marine, the wisest perhaps of all English commercial regulations, although he clearly saw that it compelled England to sell her own commodities cheaper and buy foreign commodities dearer.

B. When the import duty is no more than sufficient to balance the tax imposed on the corresponding home product. Smith rightly remarks that a universally heavier taxation by the home country, but which affected all branches of its production equally, operated like diminished natural fertility, and hence does not make any equalizing tax for foreign trade necessary.

The person who has only a modest opinion of the power of his own reason, and therefore a just one of the reason of other men and other times, will not believe that a system like the industrial protective system which the greatest theorizers and practitioners favored for centuries, and which governed all highly developed countries in certain periods of their national life, proceeded entirely from error and deception. It really served, in its own time, a great and regularly occurring want; and the error consisted only in this, that, partly through improper generalization by doctrinarians and partly by the avarice of the privileged classes and the inertia of statesmen, the conditioned and transitory was looked upon as something absolute.

SECTION IV.

FURTHER EDUCATIONAL EFFECTS OF THE INDUSTRIAL PROTECTIVE SYSTEM.

The sacrifices which the protective system directly imposes on the national wealth consist in products, fewer of which with an equal straining (Anstrengung) of the productive forces of the country, are produced and enjoyed, than free trade would procure. But it is possible by its means to build up (bilden) new productive forces, to awaken slumbering ones from their sleep, which, in the long run, may be of much greater value than those sacrifices. Who would say that the cheapest education is always the most advantageous? Only by the development of industry also, does the nation's economy become mature. The merely agricultural state can attain neither to the same population nor the same energy of capital, to say nothing of the same skillfulness of labor, as the mixed agricultural and industrial state; nor can it employ its natural forces so completely to advantage. How many beds of coal, waterfalls, hours of leisure, and how much aptitude for the arts of industry, can be turned to scarcely any account in a merely agricultural state? If, therefore, the protective system could materially promote a national industry, or if it made such industry possible, for the first time, the sacrifice connected therewith, in the beginning, should be considered like the sacrifice of seed made by the sower; but this can be justified only on the three following conditions: that the seed is capable of germination; that the soil be fertile and properly cultivated, and the season favorable.

SECTION V.

PROTECTION AS A POLICY.

A. So long as a nation is, indeed, politically independent, but economically in a very low stage, it is best served by entire freedom of trade with the outside world; because such freedom causes the influences of the incentives, wants, and the means of satisfaction of a higher civilization to be soonest felt in the country.

B. The further advance which consists in the development of home industries by the country itself, may, indeed, be rendered exceedingly difficult by the unrestricted competition of foreign industries, which are already developed. The carriers on of industry in an old industrial country have a superiority over those in the new, in the amount of capital, the lowness of the rate of interest, the skill of undertakers (Unternehmer) and workmen, generally, also in the consideration in which the whole country hold industry, and the interest they take in it; while in the country which has hitherto been merely agricultural, it happens only too frequently that industry is undervalued, and that young industrial talent is, as a consequence, forced to emigrate. How frequently it has happened that England by keeping down her prices for a time has strangled her foreign rivals. Even on the supposition of equal natural capacity, the struggle between the two industries would come to a close similar to that between a boy of buoyant spirits and an athletically developed man. What then is to be said of the cases in which the more highly developed nation is at the same time possessed of the more favorable natural advantages, such, for instance, as England possesses over Russia in her incomparable situation in relation to the trade of the world, and which gives her for all distant countries, without any active commerce, a monopoly-like advantage; farther, her magnificent harbors, streams, her well-situated wealth in iron and coal, etc. The advantages of mere priority weigh most heavily, when the great development of all means of transportation almost does away with the natural protection afforded by remoteness; and when, at the same time, a certain universality of fashion, which, as a rule, is governed by the most highly developed nations, causes national and local differences of taste, which could be satisfied only by national or local production, to become obsolete. Under such circumstances, it would be possible, that a whole nation might be made continually to act the part of an agricultural district (plattes Land), to one earlier developed, leaving to the latter, almost exclusively, the life of the city and of industry. A wisely conducted protective system might act as a preventive against this evil, the temporary sacrifices which such a system necessitates being justifiable where some of the factors of industrial production unquestionably exist but remain unused, because others, on account of the mere posteriority of the nation, cannot be built up. The abusive term "hot-house plant" should not be used where there is question only of transitory protection, and where there is the full intention to surrender the grown tree to all the wind, rain and sunshine of free competition, and where it is foreseen that it shall be so surrendered. The want of a certain economic many-sidedness which must be given to a nation manifests itself in a particularly urgent manner in times of protracted war. Here the error of so many free-traders, that different states should comport themselves towards one another as the different provinces of the same state do, is most clearly refuted.

C. No less important is the political side of the question. Since the protective system forces capital and labor away from the production of raw material and into industry, it exerts a great influence on the relations of the classes or estates of a country to one another. The immense preponderance possessed in medieval times by the nobility, agriculture, the country in general as contradistinguished from the city, by the aristocratic and conservative elements, is curtailed in favor of the bourgeoisie, of industry, of the cities generally, and of the democratic and progressive elements. If when the history of a nation is at its highest point, there is supposed a certain equilibrium of the different elements, all of which are equally necessary to the prime of a nation's life, this height is now attained sooner than it would otherwise be. It is no mere accident that in almost every instance, those monarchs who humbled the medieval nobility and introduced the modern era, also established a protective system.

D. However, such an education of industry can be attempted with proper success only on a large scale, that is, on a national basis. The least hazardous (unbedenklich) measure of the system, import-duties supposes a relatively short boundary line, such as only a great country, even where its formation is the most favorable imaginable, can possess. The greater the tariff territory (Zollgebiet), the less one-sided is its natural capacity wont to be, the sooner may an active competition in its interior be built up, while the foreign market always suffers from uncertainty. Hence all tariff-unions (Zollverein) between related states are to be recommended not only as financially but also as economically advantageous. Between states not related and of equal power, so far-reaching a reciprocity, embracing nearly the whole of economic policy, can scarcely be established; and it would be still harder for it to continue long. If the states not related are of very unequal power, the probable consequence would be the early absorption of the weaker by the stronger.

SECTION VI.

WHY THE PROTECTIVE SYSTEM WAS ADOPTED.

This explains why so many nations in the periods of transition between their medieval age and their higher stages of civilization, adopted the industrial protective system.

SECTION VII.

HOW LONG IS PROTECTION JUSTIFIABLE?

All rational education keeps in view as its object, the subsequent independence of the pupil. If it desired to continue its guardianship, the payment of fees, etc., until an advanced age, it would thereby demonstrate either the pupil's want of capacity or the absurdity of its methods. The industrial protective system also can be justified as an educational measure only on the assumption that it may be gradually dispensed with; that is, that, by its means, there may be a prospect of attaining to freedom of trade. In the case of all highly civilized nations, the presumption is in favor of freedom of trade, both at home and abroad, and in such nations, the desire for a protective system must be looked upon as a symptom of disease. It is true, that recently the inferiority of young countries, even when inhabited by a very active and highly educated people, is greatly enhanced by the improvement of the means of communication. But this is richly compensated for by the simultaneous instinct towards emigration, both of capital and workmen from over-full, highly industrial countries; whereas, the prohibitions by the state, that extreme of exportation embargoes, formerly so frequently resorted to, it is no longer possible to carry out. Now the young country has the advantage of being able immediately to use the newest processes of labor, etc., without being hindered by the existence there of earlier imperfect apparatus. It is certain that international freedom of trade must be of advantage to a people's nationality the moment they have attained to the maturity of manhood, for the reason that they are thereby forced to make the most of that which is peculiar to them. Care must be taken not to confound many-sidedness with all-sidedness. The best "protection of national labor" might consist in this, that all products should be really individually characteristic (artistic), all individuals really national, and national also in their tastes as consumers. This ideal has been pretty closely approximated to by the French in respect to fashionable commodities, so that they will hardly purchase such from abroad, even without a protective tariff; and the cultured of most nations in respect to works of art. Here, too, it is worth considering, that even the most national of poets, when they are great enough to rise to the height of the universally human, possess the greatest universality.

SECTION VIII.

INDUSTRIAL-PROTECTIVE POLICY IN PARTICULAR.

If it be once established generally that an industry is to be artificially promoted, and if there be question only of a choice between the different measures to be adopted to thus promote it, moderate import duties are not only the most equable, least subject to abuse, but also attended by the greatest number of secondary advantages. Here the sacrifice is imposed on all the consumers of the "protected" commodity, that is, on the entire people, to the extent that they come in contact with the commodity in question. Export duties on raw materials, on the other hand, compel one single class of the people to make sacrifices in order to advance the favored industry. Export premiums for commodities on which labor has been expended are distinguished from import duties as the offensive from the defensive: the former promote the artificial trade, the trade which has gone beyond its natural basis, the latter curtail it.

Premiums, advances without interest, gifts of machinery etc., to persons engaged in industry would operate very usefully under an omniscient government. But they generally fall to the lot not of the most skillful manufacturers, but of the most acceptable supplicants, who now are doubly dangerous to the former as competitors. The same is true to a still greater extent of monopolies granted to undertakings which it is intended to promote. They require, at least, to be vigilantly superintended in case of sale from one person to another; otherwise the individual to whom they were first granted is very apt to withdraw with the capitalized value of the privilege accorded, and his successors, loaded with a heavy debt in the nature of a mortgage, to derive no advantage from it.

Further, import duties, besides the fiscal advantage which they afford, have the police advantage that they may, like quarantine provisions, prevent somewhat the inroads of many economic diseases: thus, for instance, gluts of the market, and still more, the severe chronic disease of ruinously low wages. But only very moderate hopes from protective duties should be entertained in all such respects as these.

Prohibition proper operates, as a rule, very disastrously. It spoils those engaged in industry by a feeling of too great security (mortals' chiefest enemy: Shakespeare). It may even lead to complete monopoly, when the industry requires very large means and the country is small. The inducement to smuggling is peculiarly great here. But even duties, so high that they far exceed the insurance premium of smuggling, can be of very little advantage either to industry or to the exchequer. They can only promote the smuggling trade. However, the repeal of an import prohibition or the abolition of a tariff approaching to a prohibition should be announced long enough in advance to enable the capital invested in the protected industry to be withdrawn without too heavy a loss.

SECTION IX.

WHAT INDUSTRIES ONLY SHOULD BE FAVORED.

That as a rule only such industries should be favored which, by reason of the natural capacities of the country and of the people, have a good prospect of being able soon to dispense with the favors accorded, would be self-evident were it not for the fact that it has been ignored a thousand times in practice. It is especially necessary to take the natural station (Standort) as well as the natural succession of the different branches of industry into consideration. Half manufactured articles of foreign raw material should not be protected until the entire manufactured article has completely outgrown protection; which condition manifests itself most clearly by a strong, independent exportation of the article. The celebrated tariff controversy between the cotton spinners and the weavers in the Zollverein was probably without any conscious plan, but certainly to the well-being of German industry, settled essentially in accordance with these principles. In such struggles of the different stages of a branch of production with one another, it is necessary not only mechanically to weigh the number of workmen, the amount of capital, etc., on both sides, but also organically the capacity for development and the influence of both sides on the entire national life. Half-manufactured articles of a very superior quality should not be kept away, since by promoting commodities of the first quality they have an educational influence on the whole industry. Thus, in the case of the duties on iron, it should not be forgotten, that they enhance the price of all instruments of industry. Just as objectionable are protective duties for machines or for intellectual elements of training.