Freeman

ARTICLE

The Topsy-Turvy Tariff Tangle

NOVEMBER 01, 1955 by W. M. CURTISS

Filed Under : Protectionism, Free Trade

Dr. Curtiss is a member of the staff of the Foundation for Economic Educate.

Had William Mckinley been a visitor at the 84th Congress of the United States in 1955, and listened to the arguments for and against protective tariffs, he would have felt right at home. Sixty years ago, McKinley was a leading proponent of high protective tariffs. He had served as a congressman for nearly 20 years before he was elected President in 1896. The high tariff bill of 1890 bore his name.

In the campaign of 1896, McKinley had hoped to make his high tariff plank the main issue. However, William Jennings Bryan, with his “free silver” and “cross of gold” approach, forced the issue elsewhere.

McKinley’s stock in trade in advocating high tariffs was the “infant industry” argument and still today, he would find the pleaders for the “infants” as voluble as they were in his time. But something new has been added—not really new—but of considerably more importance now to the arguments for high tariffs. That is the “national defense” argument, and it has assumed colossal proportions in the debates.

More perplexing to McKinley would have been an analysis of who, among the tariff debaters in the 84th Congress, were advocating what. In his day you could count on the South to be for free trade. Hadn’t the late war been fought over that issue? New England and the industrial areas could be counted on to defend protectionism.

The political parties of the “gay nineties” were clearly split on the question. The Republicans were for high tariffs and the Democrats for free trade. But now, McKinley would find prominent southern politicians lining up against free trade. Could it be because New England textiles and other industries have moved into the South?

Time was when farmers could be counted as free traders. A large part of their production was exported. Also, they were interested in buying what manufactured goods they needed as cheaply as possible. But now, with huge stocks built up by government loans and purchases at prices above world markets, free trade has lost some of its appeal to the agricultural interests.

Where once you might assume the protectionists were by and large Republicans and the free-traders were Democrats, now one must look further. The party label means little except as a particular vote may be along party lines.

While the tariff issue is being debated much as it was sixty years ago, it wouldn’t take McKinley long to discover that this really isn’t the major issue at all in a discussion of international trade. Many new devices have been invented to restrict trade. Then, trade was carried on chiefly between individuals in the various countries. Now, much of the trading is done by governments. Now, governments manipulate trade with give-away schemes, exchange controls, quotas, import and export licenses, subsidies, most-favored-nation agreements, and other restrictive measures.

It does seem a bit futile to argue over tariffs when these other measures are the controlling factors. However, if the effects of tariffs were clearly understood, a better understanding of the various other trade restrictions might evolve because the same basic fallacies seem to underlie them all.

McKinley would have discovered that human nature hadn’t changed much in the sixty years. The advocates of high tariffs generally are those who think that they or their constituents will benefit by protection. The freetraders think they will benefit from low tariffs or none at all. Only rarely is a voice heard defending the principles of individual property rights and the interests of the consumer.

When the Detroit Board of Commerce made its notable statement in defense of free trade late in 1952, it was immediately charged with having a bias in favor of the automobile industry which depends in substantial part on foreign trade. Henry Ford II won considerable attention with an address, “The Free World Can’t Trade on a One Way Street.” However logical his arguments may have been, there were those who said: “But of course. What would you expect from a motor car manufacturer?”

The bias was by no means all on one side of the tariff issue. In October, 1953, a top executive of a large chemical company spoke on “Let’s Not Import Depression.” So it progressed through chemicals, watches, pottery, glass, optical instruments, cameras, textiles, gloves, and all the other industries which believe they have benefited or will benefit by protection against competition from foreign manufacturers.

As our government has grown larger and larger, it has become more and more run by pressure groups, each seeking legislation for its own special interest. The lawmakers, anxious to remain in office, keep their ears to the ground to make certain they act in such a way as to corral a majority of the votes. We rarely stop to think any more that there are some questions of such vital importance to the individual that they should never be put to the majority test.

The discussions about tariffs in the 84th Congress centered around H. R. 1, the Trade Agreements Extension Act of 1955. Testimony was taken by the Ways and Means Committee of the House of Representatives and some very interesting documents resulted.

A most amazing testimony was given on January 24 by Charles H. Percy, the able young president of the Bell & Howell Company of Chicago. The Bell & Howell Company manufactures photographic products. This industry competes with skilled German workers who are paid 37 cents an hour, Italian workers who are paid 34 cents, and Japanese workers who receive only 27 cents. In contrast, American workers are paid better than $2.00 an hour in the industry. More than twice as many cheap cameras came into the United States last year (over a tariff wall) as were produced here.

Mr. Percy said that the photographic industry is essential to national defense and that in World War II his Company converted 100 per cent to war work, manufacturing 90 million dollars of defense products. Percy admitted at the outset that he did not represent the photographic industry—far from it. “No one desires more than I the health, vigor, and growth of the photographic industry. Yet I do not believe we must gain these things through artificial trade restrictions. I think we can, and we will, win them for ourselves in a freer and, therefore, more competitive market.”

Truly, this is a man-bites-dog story—free trade testimony from a man whose natural business bias would lead him to cry out for protection.

A typical argument in defense of protection is that it keeps our standard of living at the $2.00 level and prevents it from going to the 27 cent level of some foreign workers. It keeps wages high and prevents unemployment. Listen to Mr. Percy:

“It must be recognized that where we still use handicraft methods, we do have difficulty in competing . . . . But our present foreign trade policy cannot be tailored to meet the needs of a handicraft industry any more than can our national economy.

“Years ago we sold a movie camera for $49.95, the lowest priced camera we had ever made. At that time we paid our workers an average of 40 cents an hour . . . . Yet today, with our average labor cost in excess of $2.00 an hour, we are again selling a movie camera for $49.95 . . . . The highly paid American worker has become the most efficient in the world—two to ten times as productive as his European counterpart . . . . In the final analysis, the combined effect of foreign competition and high American wage rates has been fortunate—it has forced us to find new and better ways of doing things . . . . Without the spur of foreign competition, it is doubtful whether these techniques would ever have been developed.

“My own company recognizes that foreign competition in the years ahead will become an increasingly important factor. We intend to fight it with as strong an organization as we can possibly build—with the most brilliant research and development, the most ingenious manufacturing and vigorous merchandising and service organizations we can possibly command. But we will adjust ourselves to the tariff policy that is best for our country . . . . I am confident that we can adjust to increased foreign competition as effectively as we have adjusted to domestic competition throughout the years.

“If every company and industry were to request that our national policy be molded to fit its own interests, such action would spell ruin to our country and its citizens. We must never forget that in addition to being producers with ‘special interests,’ we are also consumers and taxpayers. To gradually lose our allies because they find it necessary to turn eastward to keep open their own trade lanes, to become an isolated island in a sea of communism, to find our economy crushed under an intolerable national defense burden, would serve the interests of neither group.

“America’s industry did not become great by being sheltered. It achieved greatness because of the intelligence and pioneering spirit of its people. It became great through huge expenditures for research and development, new ideas in manufacturing and merchandising. It is great because it firmly believes that there is one way to succeed—to give the consumer the best possible product for best possible value. This, and this alone, will keep American industry vigorous and healthy in the years to come.

“I believe—and I believe it with the utmost conviction, that a gradual liberalization of our foreign trade policy will help to further improve the efficiency of American industry, will increase our productivity, lower our unit costs of production and increase our standard of living. It will increase wholesale and retail trade in this country and inure to the ultimate benefit of consumers. At the same time, it will strengthen our allies, weaken our enemies and provide a greater measure of security to our country. Against the national interest what citizen can in good conscience set his special interest?

“I do believe this: there is a fallacy in saying we are competing with cheap foreign labor. Really, what we are doing is competing with the efficiency of the automotive industry and this holds true for the watch industry as well. They are really competing with Detroit and not Switzerland, because Detroit uses American labor relatively more efficiently than Elgin does, and the people of Elgin and Hamilton are good friends of mine.”

Many businessmen have expressed concern over their inability to compete with foreign manufacturers because of “cheap foreign labor.” And well they might be concerned, but not entirely because of wages. It is well known that low unit costs and not wages make for competitive advantage.

If “cheap foreign labor” were the cause of their troubles, American manufacturers wouldn’t have a ghost of a chance—and this has been the case for 150 years or more. The scales have been tipped toward our producers because of high savings resulting in high capital investment per worker, good managerial ability, and strong incentives for workers, management, and the suppliers of capital.

But is there something new in the picture that should cause concern to American industrialists? Are we losing ground in productivity or unit costs to foreign producers? And, if so, is there anything businessmen can do about it, besides clamoring for more protection?

One culprit could be high taxes. Taxes enter into unit costs just as surely as wages and raw materials. Textile, watch, and bicycle makers would find it much easier to withstand foreign competition if their unit costs were not raised by a heavy tax burden.

Another culprit could be abnormally high labor costs for whatever reasons. It may be restricted output—featherbedding—slowdown, strikes, or government-sponsored welfare programs. Whatever the reasons—and there are many possibilities—American workers can quickly lose much of the comparative advantage they have had in high productivity compared with other nations.

To make matters worse, not only are high taxes a problem; but also a portion of these taxes has been used, through outright gifts, to make our foreign competitors better able to compete in our own markets. The old principle of comparative advantage thus becomes less important through a leveling-down process.

To say that this is a government problem and not one that businessmen can do anything about is merely evading the issues. Businessmen can do something about taxes and labor and give-away programs. If the United States is to maintain or regain its exalted position in productivity and trade—without fear of tariffs here or abroad—it must avoid the present trend toward artificially rising costs due to high taxes and abnormal labor costs. And incentives to efficient production must be restored.

The “infant industry” argument is not used by protectionists as widely as it was in McKinley’s time. Some would say this is because our economy has matured. Actually it always was a specious argument. Mr. Percy says: “How does one tell in advance which infant industry will grow to self-reliant maturity? Many are given protection and grow up, but few are weaned as the theoretical argument would require.”

In any industry, protected or not, there are firms that are barely able to stay in business—even though other firms in the same industry are operated profitably. If the crutch of tariffs is removed, these marginal producers must either improve their efficiency, turn to something else, or go out of business. Is an “infant industry” any different in principle from a new firm coming into a field already established? Suppose a new firm is formed to produce automobiles. The “infant industry” argument would demand that such a firm be subsidized with the taxpayers’ money until it reaches adolescence. How much progress would our country have made under such a policy?

The favorite modern argument of the protectionists is that an adequate national defense demands the protection of home industries. We cannot afford to be dependent on foreign countries in times of war. Such are the arguments for isolationism and national self-sufficiency.

Mr. Percy had something to say in this regard:

“Recently, in a meeting called by the Department of Commerce, I heard the head of one of our photographic optical manufacturing companies speak with a conviction that could only come from belief. He said that it takes ten years to train an optical worker and that for this reason the industry requires special tariff protection. If this is true of his company, I can only say that it is not true of all optical manufacturers. It is true that at the outbreak of World War II, we were vulnerable because of our dependence upon German optics. Bell & Howell, along with other firms, was asked by the War Production Board to produce lenses. We started with two optical workers in 1941, and by 1943 we had five hundred. We took housewives and insurance salesmen and bank clerks—and within six months we made trained optical workers of them. If we had to do it again, we think we could do it in three months.

“Our industry points with alarm to the fact that because of foreign competition there are perhaps no more than two thousand optical workers in the United States. This may be true; but the industry fails to mention the fact that in the process of learning the optical grinding business, we have radically changed and improved the methods used in Germany and other countries for hundreds of years. As a result the present unit productivity of our two thousand workers is probably greater than the productivity of our optical grinding industry during the war.

“In Bell & Howell’s rough grinding department alone, we now turn out ten times as many lens surfaces with eleven workers using automatic diamond grinders, than we did in 1943 with one hundred workers using the traditional ‘thumb and finger’ technique.

“No matter how you look at it, a tariff is a form of taxation on a consumer product. Yet the consumer never sees it, or knows how much it is. By protecting ‘national defense industries’ through high tariffs, we are giving the Defense Department a ‘free ride.’ We are assuming an additional burden of national defense without being able to appraise its cost or its need.”

Writing to this point more than 100 years ago, the French economist, Frédéric Bastiat, said:

“The kind of dependence which results from exchange, from commercial transactions, is a reciprocal dependence. We cannot be dependent on the foreigner without the foreigner being dependent on us . . . . A nation isolates itself looking forward to the possibility of war; but is not this very act of isolating itself the beginning of war? . . . Let countries be permanent markets for each other’s produce; let their reciprocal relations be such that they cannot be broken without inflicting on each other the double suffering of privation and a glut of commodities; and they will no longer stand in need of naval armaments, which ruin them, and overgrown armies, which crush them . . . and war will disappear for want of what supports it, for want of resources, inducements, pretexts, and popular sympathy.”

Throughout his testimony, Mr. Percy indicated that trading, whether locally or on an international scale, is basically a peaceful, friendly project. He said: “For our part, to refuse to trade with the world—and tariff and customs barriers are in practice a refusal in no way serves our own self-interest. Ultimately the refusal will isolate us from the free world and the friendship of free nations, as it will surely aid the cause of world communism.

“The risks of refusing to trade are terribly real. But on the positive side, the benefits of expanding our world trade are two-fold. History has proved that friendships follow the trade lanes. Our nation is possessed of a tremendous capacity for production, a capacity which is expected to increase a minimum of two per cent each year. In seeking new markets for our products we will at the same time find ourselves in the happy position of winning friends. In considering world trade, we are apt to let our fears obscure our vision, forgetting that it can mean business gained rather than business lost.”

Trade restrictions lead to hatreds, conniving, jealousy—incidents which in turn lead to conflict. Furthermore, trade restrictions weaken a nation’s economy and make it less able to withstand attacks, should they come.

The testimony of Mr. Percy was remarkable because it came from a leader of an industry which is commonly thought of as needing protection. Bell & Howell exported only about six per cent of its total production in 1954. It faces terrific competition from foreign producers.

The day following Mr. Percy’s testimony, Mr. A. T. Brown, executive vice-president of the Caterpillar Tractor Company, offered testimony on H. R. 1 before the Ways and Means Committee in defense of fewer restrictions in international trade. Caterpillar’s principal products are crawler tractors, engines, motor graders, and earth-moving equipment. Approximately one-third of its sales goes to foreign countries. Their worries are chiefly from domestic rather than foreign competitors.

Protectionists will argue that Caterpillar, like the automobile makers, are naturally in favor of free trade because it helps their foreign sales. But the arguments which Mr. Brown advanced tie in logically with Mr. Percy’s and help round out the picture of foreign trade.

Mr. Brown pointed out that because of its capital resources, the United States has a comparative advantage in the production of heavy equipment. Without its foreign markets, Caterpillar would have employed about 10,000 fewer persons with a pay roll decrease of about $45 million. He said: “The American farmer is able to buy our tractors at lower relative prices because our export business has permitted greater mass economies than would otherwise have been possible.” The same, of course, could be said for the automobile industry.

Mr. Brown knows that in order for foreigners to buy his tractors, they must somehow get hold of dollars; and that means selling something to us. “Every time people of other countries are denied the opportunity to earn dollars, United States exporters are deprived of opportunity to export.”

Mr. Brown said further:

“Another suggestion which I would offer is that international trade be viewed first and foremost as a means of developing our own economic growth. By the example of one concern, I have attempted to show what export business can mean to the thousands of lives touched by its activities. Without exception we claim the results to have been good for all concerned—with harm to none.

“Competition to us is a creative force, not a destructive one, and if it truly is a principle, then it surely should be world-wide in its application. Let us not, therefore, defeat the good work of American precept by advocating our way of life as an example of what others should do, and then restrict their freedom to do it.

“If I were to try to leave one guiding thought, it would be that rather than devote our time to seeking and creating new plans, new rules, new laws, we set about wiping out the artificial restrictions which throughout the world are presently impeding trade. What is needed more than any one other single ingredient is more FREEDOM—and this country is in a good position to set an effective example.”

The passing of H. R. 1 by the 84th Congress will by no means put an end to the debates on trade restrictions—tariffs, exchange controls, quotas, GATT, subsidies, licenses, and the like. As long as government has unlimited powers, thus making possible its response to group pressures, the debates and the tangles will continue. The solution lies in limiting government to the suppression of all fraud, all violence, all misrepresentation, and all predatory practices. Then and only then can the free, competitive market exist. []


The Seen And The Unseen

Economics, as we have now seen again and again, is a science of recognizing secondary consequences. It is also a science of seeing general consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run.

Now few people recognize the necessary implications of the economic statements they are constantly making. When they say that the way to economic salvation is to increase “credit,” it is just as if they said that the way to economic salvation is to increase debt: these are different names for the same thing seen from opposite sides. When they say that the way to prosperity is to increase farm prices, it is like saying that the way to prosperity is to make food dearer for the city worker. When they say that the way to national wealth is to pay out governmental subsidies, they are in effect saying that the way to national wealth is to increase taxes. When they make it a main objective to increase exports, most of them do not realize that they necessarily make it a main objective ultimately to increase imports. When they say, under nearly all conditions, that the way to recovery is to increase wage rates, they have found only another way of saying that the way to recovery is to increase costs of production.

I do not make all the things I consume but, perhaps, only one of them. With the income I derive from making this one commodity, or rendering this one service, I buy all the rest. I wish the price of everything I buy to be low, but it is in my interest for the price of the commodity or services that I have to sell to be high. Therefore, though I wish to see abundance in everything else, it is in my interest for scarcity to exist in the very thing that it is my business to supply.

But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value. Yet this is what the world has repeatedly sought to do by protective tariffs, by the destruction of machinery, by the burning of coffee, by a thousand restriction schemes. This is the insane doctrine of wealth through scarcity.

Extracted from HENRY HAZLITT’S
“Economics in One Lesson”

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November 1955

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