§ 11. Protection as a monoply measure. It has rightly been observed that a new country has a limited potential monopoly in certain kinds of products and that a tariff may make it effective. The rapid opening up of America with its rich natural resources greatly benefited the average consumer in western Europe, although it caused a loss to a special class of landowners.11 Whether the citizens of the older or of the newer country shall reap the greater benefit in the trade depends on the reciprocal demand for the two classes of goods, as was seen in discussing the equation of international demand. A wide margin of advantage may go to one party and a narrow margin to the citizen of the more favored land. To put it concretely: America, having great natural resources for agriculture, might continue to trade food for manufactured goods even though England reaped most of the benefits of the trade. An American tariff on manufactures from England would, under such conditions, check the demand for English products and compel some Americans to leave farming. This reduction of the American supply of wheat or corn and of the American demand for English manufactures compels a new ratio of trade (expressed in prices). It is conceivable that trading fewer goods with a larger gain on each trade would give a larger total of gain to the favored nation. Thus, foreigners may conceivably be compelled to pay a part of the tariff duties to enjoy the favored market. This is but a special case of the monopoly principle; the government by law artificially limits the supply of goods offered by its citizens.

10 See ch. 25.

11 See Vol. I, pp. 361 and 443.

This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed conditions seldom occur in a marked measure, but they may exist, and probably have existed in America. When the great system of internal transportation was developed in the United States before that of the other new countries (say from 1840 to 1894), this country had such peculiar advantages for the production of food that the quantity was enormously increased and agricultural prices fell.12 At such a time the tariff may have worked toward checking the fall and earlier reestablishing a more favorable ratio. It did this by making prices of manufactured goods in this country artificially higher and thus tempting men from rural to urban callings. But the limited application of the principle must be recognized. The potential competition of undeveloped countries on all sides, seeking to develop their resources, and profiting by the higher prices of food in the world-market caused by our tariff, threatens the peculiar advantages of the favored land. Russia, Argentine, and Australia have rapidly taken the place of America in supplying food to western Europe, in part, no doubt, because we refused to take Europe's goods in trade. A great nation with its manifold interests is not eminently fitted to practise the gentle art of monopoly.

12 See Vol. I, p. 436. for average wheat prices in England, practically in the world-market.

The period in America from about 1840 to 1890 shows certain absurd contradictions in economic policy. By governmental action, national, state, and municipal, enormous grants of money and lands were made in aid of transportation. Canals, roads, and railways were built into new agricultural territory far faster than was healthy and normal. A prodigal land policy put a premium upon a wastefully rapid extension of the farming area. These things were done to favor the agricultural states; but agricultural prices fell so greatly that our farmers for a long period were nowhere prosperous, and great numbers of them, both in the East and in the West, were ruined. At the same time a high tariff on nearly everything the farmers needed to buy was the political spoil obtained by the eastern and middle states. This further depressed the condition of the farmers and forced them or their sons into urban industries. A slower development would have occurred without the waste of national resources in such conflicting policies of artificial stimulation.

§12. Equalizing "costs of production." An idea advanced incessantly by American advocates of a protective tariff is that the tariff on every article imported ought always be high enough to equal the difference between the higher costs here and the lower costs abroad. The equalizing-cost rule was laid down in different words by each of the two leading political parties in the campaign of 1912. The Republican platform set forth what it called the "true principle."13 The fallacy of this rule appears, however, in the study of the confusion connected with the idea of monetary costs.14

"Costs of production" in the "true principle" means the monetary costs of the enterpriser. Now a first difficulty is that costs are not uniform for all establishments in any one industry, and a tariff high enough to protect some is entirely too low to protect others. As long as a tariff rate is too low to exclude every unit of the foreign product, its importation is conclusive proof that for some home producers the tariff rates fall short of the "true principle" (better proof, indeed, than the most elaborate investigation by any tariff board could be). The indubitable truth is that no trade ever can take place (in a monetary regime) unless the monetary price is lower in the exporting than it is in the importing country. This virtually means that the product cannot be profitably exported unless the monetary costs of production ("together with a fair profit") of the article exported are for each party less than those of the other party in the other country. The so-called "true principle" would lead thus to absolutely prohibiting the importation of every article to which it was applied.

In the enactment of the Underwood tariff, the Democratic party, traditionally committed to a tariff for revenue, applied what was called the "competitive principle." This "competitive principle" is essentially the same as the Republican so-called "true principle" of equalizing the cost of production. It is a prohibitive, not a free-trade, principle. Strictly applied, it would cause complete exclusion of imports. But, as applied to selected articles which it is desired to exclude in order to "protect" the domestic producer, this principle would simply prevent the rate being placed appreciably higher than was needed to exclude them. Anything beyond that point but offers temptation and opportunity for the formation of a monopoly by domestic producers. Then, too, the rate may intentionally be fixed so as to make just possible the survival of the most favorably located or most efficiently operated establishments, while compelling the abandonment of other establishments.

13 See ch. 14, §12

14 See ch. 15, § 5 and § 6.

It will be seen that the rule of equalizing the cost of production is really not an additional argument for protection, but rather is a rule for fixing the proper rate, on the assumption that "protection" is desirable on grounds of any or all of the staple arguments offered in its support. Just how high ought and must the rate on a particular article be to start an infant industry, to preserve the home market for any group of producers, to retain both profits, to give a "favorable balance of trade," to raise wages, and to prevent unemployment? The answer given by the rule is: high enough to prohibit the importation of goods. Either the rule of equalizing monetary costs, or the competitive principle, if strictly applied in favor of all producers, would prohibit all imports. If applied in varying measure in favor of the more favorably situated producers (as regards location, transportation, natural resources, skill, capital, etc.), the rule would protect some and eliminate other home producers. Here again is seen the truth that protection, if it protects, is prohibition of imports.