a ton, wherein does the home manufacturer profit?
He is no better off than before. Obviously, therefore,
the purpose of the duty is to enable the home producer
to charge a higher price for his goods.
It would seem from the above argument that the
imposition of a duty which was so high that it pre-
vented any importation of the taxed commodity,
would raise the price of the home product by exactly
the amount of the duty, any further rise, of course,
making it again worth while for the foreigner to enter
the market. This is not necessarily the case, however.
We may distinguish three cases. The first is that
in which the duty has no effect whatever. If we con-
sider the case of a commodity which is produced as
cheaply at home as abroad (allowing for the cost of
transportation of the foreign goods) and in sufficient
quantities to satisfy the home market, there will be
no reason for the importation of that commodity.
The price will be decided entirely by the conditions
of the home market. Any duty imposed on importa-
tion, therefore, will have no effect whatever on the
price. This case is not so impossible as it might
appear. "American duties have been demanded and
secured against the importation of foreign wheat
and meat products. But as these goods have been
produced in ample quantities for the home market
PROTECTION AND FREE TRADE 291
and just as. cheaply as abroad, the imposition of the
duties has been without effect upon prices.
The second case is that in which the imposition of
the duty has not succeeded in preventing importation
of the foreign product. In this case, the consumer
necessarily pays the foreign price plus the exact amount
of the duty for any foreign product he may buy.
That is to say, the difference between the price of the
home product and the net price received by the for-
eigner is exactly the amount of the duty. This does
not necessarily mean that the price to the consumer
has been increased by the amount of the duty. It
may be that the cost of production of the foreign
commodity is such that the producer can reduce his
price and still make an adequate profit. To illustrate
this let us return to the case of the commodity sold
at $5 a ton before the imposition of the duty. If
a specific duty of $1 a ton is imposed upon importa-
tions, and the foreigner cannot reduce his own price,
the new price to the consumer will be $6 a ton. The
foreign goods which are actually imported will pay
$1 a ton to the government. But suppose that
the foreigner can sell at $4.50 a ton and still make
a satisfactory profit? In that case he may reduce
his net price to $4.50 and send in the goods. The
price to the consumer will, therefore, be $5.50 and
the home producer cannot exceed that price. Hence,
while the difference between the net price of the
foreigner and the price charged by the home manu-
facturer still amounts exactly to the $1 of duty im-
posed, the actual increase in price to the consumer is
only 50 cents.
292 AN INTRODUCTION TO ECONOMICS
The third case to be considered is that in which the
importations are absolutely prohibited. Here the
probability is that the consumer pays an additional
price amounting practically to the whole of the duty.
There are various considerations which affect the
question of the continuance of exports after an import
duty has been charged. Matters of freight, for
instance, may have considerable importance. It some-
times happens that the freight charged on commodities
imported from a foreign country is considerably less
than the amount charged for transportation within
the country. Water carriage is invariably cheaper
than rail, and sometimes special considerations allow
of a great reduction even in water carriage rates.
When Great Britain imports cotton from Galveston,
the steamers are often glad to get a return freight even
at very low rates in order to prevent the necessity of
having to return in ballast. Hence a rate for steel
rails to Galveston may be less than the cost of carriage,
and, therefore, considerably less than the cost of rail
carriage from the North. This difference in cost
will amount, in effect, to a comparative advantage
in production and hence may prevent the rise in
price of the commodity up to the full amount of the
duty.
Protection of Young Industries The greatest
strength of the arguments in favor of the retention
or development of the protective system lies in the
appeal for the protection of young industries. But
before we can discuss this we must analyze the reasons
upon which the demand is based.
In the first place it may be claimed that there is a
PROTECTION AND FREE TRADE 293
comparative advantage in the production of a certain
commodity, when the manufacture or production is
at maturity, but that in the early stages of production
the industry could not compete with the already ma-
tured foreign competitor. Hence it is claimed that
if this industry is protected in its early growth it will
have a chance to develop into a strong position and
ultimately hold its own on even terms with the foreign
industry, and even to defeat such competition in
foreign markets.
In the second place, it may be admitted at the
outset that the question of comparative advantage
does not arise at all ; that the industry under con-
sideration does not and cannot possess a comparative
advantage. The basis of the argument for protection,
however, does not lie so much in economic considera-
tions as in political. It is believed that, in order to
be prepared for emergencies, such as war, for instance,
a country should be as nearly as possible self-support-
ing, and particularly so in the case of production of
means of warfare. It is obvious, in this case, that the
argument based on the possibility or otherwise of
producing at a comparative advantage is beside the
point. The main idea is based on the possibility of
production at all, no matter at what cost.
A further argument affecting the question of pro-
tecting industries is the " foreign cheap labor "
argument. It is claimed that,' as the average rate
of wages in America is higher than in the older coun-
tries, the industry which is just commencing and
even the mature industry is at a disadvantage in that
its wages cost is so much higher than abroad.
294 AN INTRODUCTION TO ECONOMICS
These three arguments are the chief support of the
protectionist case for the protection of industry. We
shall now consider them carefully and attempt to de-
termine the extent of their validity.
The first case divides itself into two main sections.
First, the case of young industries commencing in a
young country, and second, the case of young indus-
tries in a country already well established in pro-
duction. The first case is well illustrated by countries
such as the United States in its early days, and by
the more important of the British colonies.
In those industries in which the initial cost of estab-
lishment is small, the question of long establishment
is not important. If fixed capital bears a small ratio
to the total capital involved and if the labor facilities
are ample, there is no reason for protection. The
industries will commence at the outset in as good
a position as those of established foreign countries.
This is provided, of course, that the comparative
advantage of production, if any, is in favor of the
new country. Of course, the case is different if the
comparative advantage lies with the old country.
But in this case, the question of protection comes
under the discussion of our second main heading, and
so may be ignored here.
In other cases, where the initial cost of establish-
ment is heavy, and where the labor skill has to be
gradually acquired, there is a very much stronger
case for protection. In the establishment of any
industry which requires a heavy expenditure for
fixed capital there is usually a considerable lapse of
time before returns for that expenditure are received.
PROTECTION AND FREE TRADE 295
This is true, even where the labor skill is already exist-
ent and available. A manufacturer who starts such
an industry, in the face of efficient competition, is
at a disadvantage. This is so, even if he has not to
consider competition from other firms who are already
well established.
The object of protection is to eliminate competition
and so permit the manufacturer to commence work
with only the ordinary disadvantage of having to
wait a certain time for returns on his investment.
Even this is sometimes made more easy for him by
the offer of bounties on the export or production of
the new goods. This, of course, is merely another
form of protection. It is assumed, however, by the
very nature of the claim itself, that when the industry
is mature and well established, the initial difficulties
will be overcome the infant industry will have
gained its majority and will no longer require pro-
tection. Indeed the industry ought to be able to
produce at a cheaper rate than that charged for the
foreign goods and thus reimburse the country for the
original expenditure in protecting its young growth.
In this case it is necessary to assume that the indus-
try only requires temporary protection. The object
of the protection is to permit the industry to be estab-
lished on a sound footing and then let it take its own
place in the competitive system. The question then
arises : When is it clear that the industry no longer
needs the protection? In other words, when does an
industry reach maturity? Herein lies the objection
urged even against such protection as we have outlined.
Industries which orginally demanded protection on
296 AN INTRODUCTION TO ECONOMICS
account of their infancy insist on the retention of
the protective duties when they have reached a lusty
maturity. When it is clear that an industry can obtain
its product at a cost as low as that of foreign countries
and can, therefore, compete on satisfactory terms with
any foreign goods that may be imported, it has
obviously reached maturity. If the industry goes on
from decade to decade and still the cost of produc-
tion is greater than that of foreign countries, it is
clear that the comparative advantage lies with the
latter, and hence the justification of the continuance
of protective duties lies outside the consideration of
our present argument. It is not sufficient that the
industry should show merely a reduction in the cost
of production and a consequent reduction in price
to consumers. For it may be that a similar reduction
can be shown in regard to foreign-produced goods.
The reduction must eventually be down to that of
the foreign goods. If this equality in cost of produc-
tion is never reached, then the continuance of pro-
tection constitutes a tax on the consumers which
may or may not be justified by other considerations.
At any rate it no longer rests upon the necessity of
protecting a young industry.
Even admitting the validity of the argument, there-
fore, the difficulty of ceasing to protect an industry
when it has reached maturity constitutes an argument
against such protection. It must be understood, of
course, that a sudden cessation of protection may be
extremely unwise, but even the ardent free-trader
seldom demands that an industry which has been
protected for many years should, at a single stroke,
PROTECTION AND FREE TRADE 297
be deprived of all protection. But in actual practice,
every suggestion for a diminution of the duties is
bitterly fought, the grounds in favor of the retention
of the duties being changed to suit the new circum-
stances. Even in the same breath that the manu-
facturer boasts of the superiority of his goods to those
of the foreigner, he declares that, without protection,
his industry must fail.
From being asked as an encouragement to commence
a new industry, protection comes to be demanded as
a right, and is regarded as a permanent institution.
It is because of this tendency for the protection to
be afforded long after the original necessity has ceased,
that the free-trader regards even " young industry "
protection as poor policy.
The same arguments apply equally to protection of
new industries in a country already well established.
But in addition it may be said that the more one
admits of protection to new industries in such a country
the more one arouses a general demand for protection
on the part of other industries. Industries may be
new, but it does not necessarily follow that their
establishment is a matter of difficulty on account of
existing foreign competition. If the new industries
are simply further developments of existing industries,
there is hardly a case for protection on the grounds
of newness. If, on the other hand, they are not con-
nected with any existing industry and have to be
built up from the ground, their case comes under the
same general arguments as those which support pro-
tection to infant industries in a new country.
On the whole, we may sum up the argument in favor
298 AN INTRODUCTION TO ECONOMICS
of protecting infant industries by admitting that
there is a great justification for protection, but that
a considerable difficulty is caused later by the fact
that it is next to impossible to persuade those in con-
trol of an industry that the period of infancy has
passed, and a further difficulty is the creation of a
feeling that protection is a natural state of industry.
It is noticeable that when industries cease to be infants,
those in control demand the continuance and even
the increase of protection on quite different grounds,
and we shall now, therefore, proceed to the discussion
of some of those additional arguments.
The National System The discussion of this
second basis of protectionist arguments really belongs
to the field of political science. If we assume that
the true purpose of economics is to show under what
conditions the world may make the best use of its
economic possibilities, we are inevitably led to the
conclusion that the doctrine of comparative advantage,
or, as we have previously called it, the law of compara-
tive cost, must have the freest possible play. The
law of comparative cost is only the application of
the principle of division of labor on a wide scale,
a division according to territories instead of accord-
ing to individuals. Anything which hinders this
free play is, therefore, a hindrance to the fullest eco-
nomic development, and consequently a protective
system, which is designed as a hindrance to such free
play, helps to prevent that full economic develop-
ment.
The free economic development of the world, how-
ever, takes no regard of national aims. It is dis-
PROTECTION AND FREE TRADE 299
tinctly international in its character. National aims
presuppose the possibility and indeed the probability
of mutual antagonism between nations. Hence it
is not considered an unmixed blessing that the whole
of the world's development should be in strict accord
with its economic possibilities. Each nation, accord-
ing to the supporters of the national point of view,
must regard itself as complete, a separate and well-
defined entity. Within the nation the greatest possible
economic development may take place. But that a
nation should be dependent upon another for any
commodity or service which it could provide itself,
would be a reduction of the national strength.
The strongest case is made out in times of war.
At such a time it may be essential that each country
should be as self-supporting as possible. The more
a country approaches to the state of a complete eco-
nomic unit, the less the danger of its being starved
through a blockade, or forced to surrender through a
lack of means to produce munitions of war.
Granting the importance of securing this economic
unity, how does the protective principle affect the
solution of the difficulty? Purely by preventing
the operation of the law of comparative costs. If the
desires of a people remain constant, the prevention
of the satisfaction of these desires through foreign
commerce leads to the demand for domestic production,
and hence industries which, in a state of free compe-
tition with foreign countries would not stand a chance
of existence, are brought into being and may flourish.
Obviously this is not done without a loss to the
community. Whether the loss is commensurate with
300 AN INTRODUCTION TO ECONOMICS
the gain secured by reason of the attempted economic
independence in time of war, is indefinite. Granted
that a war takes place, it does not necessarily follow
that the countries involved will be compelled to depend
upon internal resources for all economic needs. A first-
class war, in these days, seldom confines itself to two
nations. The late war is an illustration of the position.
It is extremely doubtful whether the war would have
been more satisfactorily conducted, from the point
of view of either side, had the countries concerned
been individually economic units, or had they even
approached this state.
On the other hand, in order to secure this problem-
atical advantage in the case of war, the community
is undoubtedly saddled with a very considerable
addition to the cost of its necessities, which means a
corresponding decrease in the possibilities of internal
development.
The foregoing argument is based on the assumption
that a protective system would be successful in securing
a comparative economic unity. It is not possible,
however, for any system to do more than limit a
country's dependence upon external supplies. Many
of the necessities of our present life are capable of
being produced only in limited areas of the world's
surface, and as these products must be paid for by
the exchange of goods a certain amount of interna-
tional trade is essential.
From the point of view of the nationalist argument,
therefore, the protectionist method results in the
payment of a very heavy price, increasing with the
success of the method, for a problematical advantage.
PROTECTION AND FREE TRADE 301
The Mercantilist Argument We now turn to
another protectionist argument which has enjoyed
a great deal of support from protectionists of earlier
days and, indeed, through some of its terminology,
remains popular to the present time. The school of
economists who preceded Adam Smith in the middle
of the eighteenth century were known as mercan-
tilists. It is not necessary to discuss the whole body
of their economic doctrines, but we must take notice
of the chief, or one of the chief ideas that they pro-
mulgated. The mercantilists laid stress on money
as an indication of national wealth. They were
inclined to believe that the wealth of a country varied
directly with the amount of gold and silver that it
possessed. Hence they urged that such measures
should be adopted by government, in its regulations
of commerce, as would secure the greatest influx of
the precious metals into the country, and at the same
time prevent their export.
They argued that if the amount of exported mer-
chandise exceed the value of the imported, the dif-
ference must be paid in coin, and hence the excess of
exports over imports necessarily resulted in an influx
of gold to pay for the difference. This difference
they spoke of as the " balance of trade." When
exports exceeded imports the balance was said to
be in favor of the exporting country, and vice versa.
We still hear these terms used in discussion of tariff
problems and indeed other economic problems, but
we already know from our discussion of the principles
of international trade, that the term balance of trade,
as used by the mercantilists, was meaningless.
302 AN INTRODUCTION TO ECONOMICS
Where these thinkers were at fault was in their
consideration of visible exports and imports alone.
They were not aware of the now well-recognized fact
that the invisible exports and imports account for a
great deal, if not all of the so-called balance. Even
if we suppose it to be true that the best index to a
country's wealth consists in the amount of gold within
the country, the actual facts do not show that an
excess of visible exports over visible imports leads
to an influx of gold. As we have already seen, the
movements of gold are controlled by totally different
factors.
But it is surely obvious that the possession of gold
is not an indication of national wealth. The point
is so trite that it is not worth considering. Indeed
it is surprising that the mercantilists themselves did
not realize the full extent of their fallacy with the
amount of historical refutation available to them.
At any rate, such a belief is inexcusable nowadays.
Cheap Labor Another argument which is fre-
quently used in support of the continuance of pro-
tection is what is known as the " cheap labor " ar-
gument. It is pointed out that American labor is
comparatively highly paid and hence the labor cost
of the American product is high in proportion. The
American manufacturer is, therefore, handicapped in
competing with the foreigner who uses cheap labor.
It is made a strong point that the protection is required
not so much for the manufacturer as for the workmen
themselves.
Investigation of this argument, however, shows that
it is not so strong as appears at first sight. In the
PROTECTION AND FREE TRADE 303
first place there is a distinct fallacy in the statement
that high wages mean high labor cost. This by no
means follows ; in fact, it is usually the reverse. High
wages are apt to coincide with a high degree of machine
work and efficiency and as a consequence, it often
follows that high wages lead to reduced labor cost.
If this is the case, and it is demonstrably true in a
great many instances, the argument that protection
is required to prevent the evils of competition from
cheap labor, falls to the ground. The inefficiency
of cheap labor is notorious, or should be to any one
who has spent a short time in studying the working
cost of Asiatic productions and the labor cost of cheap
labor products in Europe. The yellow peril need
not cause much fear if the true facts of labor cost are
understood.
Dumping One final argument we shall notice.
It is claimed that a country should protect its producers
from the competition of " dumped " foreign goods.
What is meant by dumping? Cheap production
may often best be secured through large-scale opera-
tions, but the highest returns may be obtained by a
comparatively small home sale at a relatively high
price. If this idea is followed out a manufacturer
may sell part of his product in the home market,
carefully restricting the supply available for that
market in order to reap the high price. What is
left of his stock he can afford to dispose of at a reduced
price in some other market. Hence he sells the
remainder to a foreign buyer at a low price, possibly
covering cost, possibly even at a loss, for anything
received for this amount which he definitely with-
304 AN INTRODUCTION TO ECONOMICS
holds from the home market is so much profit. This
cheap disposal to a foreign country is known as "dump-
ing." A careful study of the process, however, will
show that dumping is only possible under certain
conditions. The product must be in the nature of
a monopoly ; otherwise the market could not be held
up to the high price at home. Even then the production
must be operated under the law of increasing returns.
For if this is not the case there will be no profit in
producing the extra quantity of goods which are
dumped. This extra amount would increase the
relative cost, or cost per unit, and therefore reduce
the home profits instead of adding to them.
Dumping at a price less than cost, or even at cost,
is only possible for a certain length of time. The
prevailing high prices in the home country, which
provide the means of sustaining the dumping process,
are sure, sooner or later, to arouse competition. This
will reduce prices and so prevent the continuance of
dumping without the serious risk of bankruptcy. As
a temporary expedient many firms who have tried it
have found dumping to be unsatisfactory. 1
In this discussion of the protectionist and free trade
doctrines we have carefully refrained from the use of
statistics. There is no greater danger to the satis-
factory discussion of economic problems than the
use of statistics by those who are untrained. It has
1 This spasmodic dumping has been criticized as causing irregular work,
tending to spoil reputation because quality and costs are cut keenly. The
president of the United States Steel Corporation spoke of this sort of