BIBLIOGRAPHY BASTABLE, C. F., The Commerce of Nations. Theory of International Trade. BISHOP, A. L., Outlines of American Foreign Commerce. GARVIN, T. L., The Economic Foundations of Peace. GRUNZEL, J., Economic Protectionism. LITMAN, SIMON, Essentials of International Trade. MILL, JOHN S., Principles of Political Economy (1848), Book III, Chapters 17-18. RICARDO, DAVID, 'Principles of Political Economy and Taxation (1817). TAUSSIG, F. W., Principles of Economics, Volume I, 3rd edition, Chapters 34-37. CHAPTER XXXIII THE INTERNATIONAL ORGANIZATION OF PRODUCTION Economic relations between countries have come to be much more than a trade convenience; they have come to be a production necessity. Formerly, the nation was the unit of production, and international trade was something superimposed upon it. Now, the continent or the geographic region is the real unit of production, and trade between its parts is the groundwork of the whole structure of production. Commerce between nations is not carried on merely for the immediate gains of commerce itself, but because it sustains the constant flow of raw and finished materials between non-political geographic regions, from farm and mine to mill and factory and consumer. The organization of production has come more and more to defy old political boundaries, and to operate on a continental scale. The Principle of Pecuniary Advantage.-The basic principles of advantage in trade have already been stated under the head of comparative advantage and mutual advantage. In the statement of these principles, a distinction was drawn between advantage to the country as a whole and advantage to the individual business man who must make business earnings here and now. When we observe the actual field of modern trade, we discover a very wide gap between the basic economic laws of advantage and the methods by which business men and governments in practice attempt to gain advantage. The essence of these methods is to surround basic trade advantage with a mass of acquisitive advantages. These advantages consist of tariff restrictions, discriminations, selling tactics, political pressure, nationalistic use of banking and transportation facilities, concessions, and strategy of trade promotion. Such advantages are largely superficial, because their aim and intent is to restrict the tendency of each country to produce those goods for which it is best fitted and to sell in foreign markets those goods which it can make cheaper than other nations. The real objective is to protect home producers whether they are best fitted for their lines of industry or not, and to dominate foreign markets whether their goods can be sold there cheaper than goods of other nations or not. Almost everywhere in business circles, the law of mutual trade advantage is denied a chance to work itself out. The tendency is to act on the assumption that imports are an evil to the receiver, and that only exports are an unalloyed good. Strong endeavor is therefore put forth to promote exports by a wide variety of methods, but to discourage and depress imports. The artificial interferences with the principle of mutual advantage are many and powerful. They permeate every phase of foreign trade, and in the actual market appear to be the uppermost thought of merchants and producers. But in spite of their power and influence, trade between nations still retains the substance of mutuality. The reciprocal necessities of the nations override the host of artificial restrictions that are built up, and even though individual gain and nationalistic gain are the paramount conscious motives in trade, nevertheless mutual gain weaves itself into the great bulk of the trade carried on. mutual gain which thus persists, and which underlies the currents of trade no matter how many artificial dams are built to halt them, gives health, growth, development, permanence, to the whole phenomenon. The Protection and the Tariff.-A protective tariff is a tax levied upon imports as a means of preventing foreign goods from competing with the home product. The tax may be either ad valorem or specific. The ad valorem duty is levied on the basis of a per cent of the value of the goods. The specific duty is levied on the basis of so many cents per bushel, or pound, or other physical unit. The purpose of a tariff is to affect prices. It aims either to increase prices, or to keep them from falling, as the situation may require. The means of accomplishing this purpose is the means commonly characteristic of monopoly control of prices, namely, the artificial limitation of supply. The tariff therefore operates to create a special type of monopoly. Many different arguments have been advanced in favor of the principle of protection. One of these arguments maintains that a tariff, particularly on manufactures, will develop the home market for agricultural products. The American farmer has often been taught that the greater the scope of home manufactures stimulated by the tariff the greater the domestic market for farm raw materials. This argument is perhaps true in the strict sense that the domestic market will be greater, but it must not be taken to mean that the total market will be greater. The total market will doubtless be less, since the country is being led by the tariff to carry on manufactures for which it is not best fitted. If the argument is construed to mean that a restricted home market is better than an unrestricted world market, simply because the home market is more subject to control, the theory is still weak, because the price of most farm products is set by world supply and demand. The home market for wheat and cotton does not escape the force of world supply and demand as long as the American farmer produces an exportable surplus of these crops. A second argument holds that a tariff is needed to develop industries in their infancy. It is a commonplace fact that a country may be fitted by all natural conditions to take up a certain branch of. manufacturing, but may be unable to make the start because foreign competitors already established would be in a position to crush the newcomer. The experience of the foreigner, his knowledge of the field, his possession of patents and of engineering skill, his good will reputation, the sheer momentum of his industrial power, may be sufficient to destroy any mere novice in the field. Under such conditions, it is argued that the tariff will protect the novice while he is getting on his feet. Once he is established as a full-fledged going concern, he will be able to defend himself against all comers, and the tariff will be no longer necessary. This argument appeals especially to a country at that stage of its history where it is making a transition from an agricultural system to an industrial system of production. It acquired a great vogue in the United States during the formative period of our manufacturing industries in the nineteenth century. Friedrich List applied it to Germany while that country was going through the initial stages of the industrial revolution. As it is stated, the argument sees in the tariff an aid in the growth of a nation's industrial life. Nations at unequal stages of the industrial revolution have unequal advantages in trade competition. The tariff makes it impossible for advanced industrial nations to use their vested power to stunt the life and growth of the young industrial nations. The difficulty with the argument has been that in putting it into practice, it has been used as a cover for all sorts of extravagant rates of protection. Industries which were able perfectly well to compete often sought super-advantages by pretending to need infant-industry protection. The United States can no longer claim to need this form of protection for most of her industries, since they are now firmly established. Certain individual industries appear, however, from time to time which claim the protection due to infancy. A conspicuous recent illustration is the claim of protection for the dyestuffs and chemical industries until they shall be able to defend themselves from German competition. We may concede that the infant industries argument is sound enough when applied within reason, but that what it tends to mean in application is too often an exaggerated protection and an excessive tariff wall. An argument closely related to the infant industry one is the vested industries argument. After an industry has once been established, it puts up the claim that since it has been encouraged to establish itself, the only fair treatment from the government is a continuance of tariff protection to guarantee its existence. An industry which claimed protection at the start as an infant, will, when it reaches adulthood, claim protection as a vested interest. A vested interest is a right to continue in business with the privileges and aids necessary for that continuance. It is not a moral right nor a legal right, but a business right, and if a proposed cut in the tariff threatens to encroach upon it, the business so menaced claims that it is being discriminated against, weakened, confiscated. If this argument is used, as it often is, to defend an industry which is not well fitted to the country, it simply means that the country as a whole loses in order that certain individual producers may gain. If the argument is used, as it may well be, to maintain a reasonable amount of stability in production and to prevent violent transitions from one line of production to another, it has much to be said in its favor Two arguments have been used to prove that the tariff is a good thing for labor. The first of these runs to the effect that the tariff will guarantee employment for labor. If unemployment exists, the claim is made that the cure lies in a protective tariff. Superficially regarded, the contention is plausible. If cheap imports of cutlery are allowed, the workmen in American cutlery factories will be forced out of employment. Given time to make the adjustment, these same workmen might find employment in other lines of manufacture where the American product is cheaper than the product of the foreigner. The transition in that case would be from an industry where Americans were not fitted to compete with foreigners to an industry where Americans could compete. But this transition would take time, and during the interim, the workmen would be unemployed. Hence, we must analyze the argument as to creating employment by drawing two broad distinctions. First, the tariff would keep the cutlery labor employed in the cutlery business, but it would give rise to a smaller total employment because the labor would be employed in a trade where its efficiency was low. The total of employment would be greater if the cutlery laborers transferred to a trade where their efficiency was superior to that of the foreigner. The first distinction is between diverting labor to a line of work for which it is poorly fitted and transferring labor to a line of work for which it is best fitted, thereby increasing the total of employment. The second distinction is between immediate employment and long run employment. The tariff may often help to give more immediate work to labor, but in the long run it is calculated to have the opposite effect. It is the central motive of protection to make individual business gain by contracting and restricting the total business done. The tariff method is in essence the monopoly method of an artificial limitation of supply and production. Surely we cannot restrict production and increase employment at the same time. Every bit of employment that is created in some favored industry is more than offset in the long run by the greater employment that might have been created by developing an industry where the country enjoys a genuine comparative advantage. The argument of creating employment is in the long run simply one form of the "make work" fallacy, with the difference that in this case it is used by business men to justify their tariff restriction of production instead of by workingmen to justify their union restriction of production. The second form of tariff argument for the good of labor is that the tariff keeps wages high. It is claimed that if American labor were not protected by a tariff wall, it would be forced down to a wage level corresponding with that of the Italian or the German, or even with that of the Japanese or Chinese. It is argued that the tariff equalizes the differences in money wages, and therefore saves the laborer of the United States from the devastating competition of the European and the Asiatic. The argument appears to be sound in the strict sense that the tariff keeps wages high in the particular industries that are protected. But it is unsound when it is used to imply that the tariff keeps wage incomes for |