Chapter 7 — Tariffs for Protection

Protective tariffs 
differ from revenue tariffs in their object, which is not so much that of obtaining revenue as that of protecting home producers from the competition of imported commodities.

The two objects, revenue and protection, are not merely distinct, but antagonistic. The same duty may raise some revenue and give some protection, but in proportion as one object is secured the other is sacrificed, since revenue depends on the bringing in of commodities; protection on keeping them out. The duties of a purely revenue tariff should fall only on commodities not produced in the country; or, if levied on commodities partly produced at home should be balanced by equivalent internal taxes to prevent incidental protection. In a purely protective tariff, on the other hand, commodities not produced in the country should be free and duties should be levied on commodities that are or may be produced in the country. And, just in proportion as it accomplishes its object, the less revenue will it yield.

As we have already considered the revenue functions of tariffs, let us now consider their protective functions.

Protection, as the word has come to be used to denote a scheme of national policy, signifies the levying of duties on the importation of commodities (as a means) in order (as an end) to encourage domestic industry.

It is sometimes said that protection does not increase prices. It is sufficient answer to ask, how then can it encourage? To say that a protective duty encourages the home producer without raising prices, is to say that it encourages him without doing anything for him. Wherever beneath this assertion, as regardless of fact as it is of theory, there is any glimmering of reason, it is either in the notion that protective duties do not permanently add to prices, because they bring about such a competition between home producers as finally carries prices down to the previous level; or else in a confused idea that it would be an advantage to home producers to be secured the whole home market, even if at no higher prices.

But as to the first, the only way in which a protective duty can increase home competition in the production of any commodity is by so increasing prices as to attract producers to the industry by the superior profits to be obtained. This competition, when free to operate, ultimately reduces profits to the general level. But this is not to say that it reduces prices to what they would be without the duty. And even where there is no reason in natural or social conditions why a commodity should not be produced as cheaply as in any foreign country, the effect of the network of duties, of which the particular duty is but a part, is to increase the cost of production, and thus, though profits may fall, to keep prices above the point of free importation. If the price of a protected article were to fall to the point at which the foreign product could not be imported were there no duty, the duty would cease to protect, since the foreign product would not be imported it if were abolished, and the producers for whose production it was imposed would cease to care for its retention. In what instance has this been the case? Are any protected industries less clamorous for protection now than they were when protection was first given to them?

As to the second notion, it is to be observed that the only way in which a protective duty can give the home market to home producers is by increasing the price at which foreign products can be sold in it. Not merely does this increase in the price of foreign products compel an increase in the price of domestic products into which they enter, but the shutting out of foreign products must increase the price of similar domestic products.

In short, the protective system is simply a system of encouraging certain industries by enabling those carrying them on to obtain higher prices for the goods they produce. It is a clumsy and extravagant mode of giving encouragement that could be given much better and at much less cost by bounties or subsidies. If it be wise to "encourage" industries, and this we have yet to examine, the best way of doing so would be to abolish our tariff entirely and to pay bounties from funds obtained by direct taxation. In this way the cost could be distributed with some approach to fairness, and the citizen who is worth a million times more than another could have the satisfaction of contributing a million times as much to the encouragement of industry.

I do not forget that experience has shown that the bounty system inevitably leads to fraud and begets corruption, while but poorly accomplishing the ends sought by it. But these evils attach to the protective more than to the bounty system, because its operations are not so clear. Although the people have in some cases been willing to pay bounties to a small extent and for a short time, in no case have they consented to regard them as a settled thing, and to keep on paying them year after year. But protective duties once imposed, the protected industry has always been as clamorous for the continuance of protection as it was in the beginning for the grant of it. And the people, not being so conscious of the payment, have permitted it to go on.

When we encourage an industry by a bounty we do not discourage any other industry, except as the necessary increase in general taxation may have a discouraging effect. But when to encourage one industry we raise the price of its products by a protective duty, we at the same time produce a directly injurious effect upon other industries that use those products. So complicated has production become, so intimate are the relations between industries, and in so many forms do the products of one industry enter into the materials or processes of others, that it is hard for an expert to say what will be the effect of a single protective duty. But when it comes to encouraging not one nor a dozen, but a thousand different industries, it is impossible for human intelligence to trace the multifarious effects of raising the prices of so many products. The people cannot tell what such a system costs them, nor in most cases can even those who are supposed to be its beneficiaries really tell how their gains under it compare with their losses from it.

It is often said by protectionists that free trade is right in theory but wrong in practice. Whatever may be meant by such phrases they involve a contradiction in terms, since a theory that will not agree with facts must be false. But without inquiring into the validity of the protective theory it is clear that no such tariff as it proposes ever has been or ever can be made.

The theory of free trade may be carried into practice to the point of ideal perfection. For to secure free trade we have only to abolish restrictions. But to carry the theory of protection into practice some articles must be taxed and others left untaxed, and, as to the articles taxed, different rates of duty must be imposed. And as the protection given to any industry may be neutralized by protection that enhances the price of its materials, careful discrimination is required, for there are very few articles that can be deemed finished products in relation to all their uses. The finished products of some industries are the materials or tools of other industries.

To make a protective tariff that would even roughly accord with the protective theory would require in the first place a minute knowledge of all trade and industry, and of the manner in which an effect produced on one industry would act and react on others. The making of a tariff, instead of being, as the protective theory requires, a careful consideration of the circumstances and needs of each industry, is in practice simply a great "grab" in which the retained advocates of selfish interests bully and beg, bribe and log-roll, in the endeavor to get the largest possible protection for themselves without regard for other interests or for the general good. The result is, and always must be, the enactment of a tariff which resembles the theoretical protectionist's idea of what a protective tariff should be about as closely as a bucketful of paint thrown against a wall resembles the fresco of a Raphael.

*The effect of protection upon profits in the protected industries will be more fully examined in Chapter 13.