1. Military and political motives for inteference with trade. § 2. Revenue and protective tariffs. § 3. Growth of a protective system. § 4. The infant-industry argument. § 5. The home-market argument. § 6. The "two-profits" argument. § 7. The balance-of-trade argument. § 8. The claim that protection raises wages. § 9. Tariffs and unemployment. § 10. Exports and exhaustion of the soil. § 11. Protection as a monopoly measure. § 12. Equalizing "costs of production." § 13. Tariff legislation and business depressions. § 14 Harm of sudden tariff reductions. § 15. Some lessons from our tariff history.

§ 1. Military and political motives for interference with trade. The considerations set forth in the last chapter raise a strong presumption in favor of the sovereign state permitting its citizens to trade freely across its boundaries, as the best way to further their own prosperity and, on the whole and in the long run, that of the nation. Indeed, this presumption and belief has been held by nearly all serious students of the question, with more or less of modifications and qualifications, ever since Adam Smith published his work on the "Wealth of Nations" in 1776.1 But in conflict with this belief has been the all but unanimous policy of nations from early times, throughout the Middle Ages, and down to this day, of interposing some special hindrances (of varying degrees and kinds) to this kind of trade. Sometimes this has been done by prohibitions, but more often by taxes imposed upon either imports or exports. Sometimes the attempt is made to justify the policy of governmental interference with foreign trade by arguments which crumble before the slightest examination, and again it is admitted that free trade is true in theory, but it is declared to be false in practice. The latter view is not to be entertained for a moment. If free trade in theory (as an explanation) is complete and true, it will in practice (as a plan of action) be sound and workable. In truth, however, the practical policy of governmental interference with foreign trade has always in part rested on other than simple economic grounds.

1 See ch. 3, § 12 and § 13.

Interference with free trade with the foreigner has always been in large measure due to political motives. In every petty medieval state or self-governing city, the aim was to make the economic boundaries coincide as nearly as possible with the political boundaries. Except for the trade in a few articles of comparative luxury, this aim was at that time nearly attainable. The peasantry surrounding a fortified town and enjoying its protection were compelled to trade there. Down to our own time it has seemed to statesmen expedient to forbid or discourage trade that might nourish the economic power of future enemies. Sometimes governments have used embargoes, bounties, or tariffs as weapons to injure the trade of other nations and to secure diplomatic or commercial concessions. Often they have sought by tariffs to encourage the building of ships and the manufacture of armaments and of all kinds of munitions by private enterprise within their own borders, even when the immediate cost of these products was greater than if they were purchased abroad. In such cases it is always a question whether an outright expenditure would not be better, whether the government could not build its own arsenals and shipyards more economically than it can foster private enterprise by means of a protective tariff. However, the political (or military) argument for protection recognizes that it is in itself a costly (not a profitable) policy, and that the cost is justified only on the grounds that military necessity warrants the outlay.

The military argument as applied to the preparation of ships and munitions has no application to a tariff on those articles that have no bearing upon military power. But the most recent application of chemistry, physics, and the mechanical arts to the uses of war has given new significance to a larger policy of industrial preparedness for military purposes. The year 1914 probably ushered in for the world a new epoch of protective and discriminatory tariff legislation determined by political rather than by direct economic considerations. Yet it is possible that if the nations agree to limit armaments they will, at the same time, move toward freer trade and the open-door policy.

§ 2. Revenue and protective tariffs. An important distinction in principle is to be made between a tariff for revenue and a tariff for protection. A revenue tariff is a. schedule of duties on goods entering or leaving a country, so arranged that the collection of taxes may cause the least possible disturbance to domestic industry. Speaking generally, the duties may be on either imports or exports; but, as export duties are unconstitutional in the United States, our tariff discussions are concerned only with import duties. The purest type of revenue tariff is one touching only articles that, even at the higher prices, are not in the least to be produced profitably in the home country. A good example is that of England with most of the duties levied on tropical products.

A protective tariff is a schedule of import duties so arranged as to give appreciably higher prices to some domestic enterprises than they could obtain with free trade. It shuts out some foreign goods that would otherwise enter, and in so far it "protects" the domestic producer from the foreign competitors who would sell at lower prices than those at which he can or will sell. In other words, "protection" means governmental interference with the freedom of trade.

The distinction between revenue and protective tariffs, thus clear in principle, is not always easy to make in practice. It does not lie in the intention of the taxing power, but in the actual effects produced. Most tariffs combine the characteristics both of revenue and of protective measures.

A tariff that reduces imports but does not cut them off entirely may be called either a revenue tariff with incidental protection or a protective tariff with incidental revenue. The difference is one of degree. But notice particularly that the two features of protection and of revenue are mutually exclusive. To the extent that one is present the other is impossible. A tariff rate that in whole or in part excludes the foreign article to that extent affords "protection" but does not yield revenue. "Whenever the government collects a cent of tariff taxes, the domestic producer in so far and as respects that unit of goods is "unprotected." Likewise, whenever a tariff gives to the domestic producer "protection" in respect to any unit of goods, it does so by prohibiting the importation of the goods, and the government is deprived of any revenue whatever derived from the importation and sale of that unit of goods. In short " protection," just in so far as it "protects," is prohibition of imports. Non-importation and revenue are mutually contradictory.