The Principles of Political Economy

Henry Sidgwick

Book III

Chapter V


§3. It will be seen that the argument for temporary protection,---in both the cases above stated,---is theoretically valid from what I have called a ``cosmopolitan'' point of view;---that is, if we consider the interests of the two districts taken together, and not merely that of the district whose industry is protected. But the theoretical possibility that Laisser Faire may not lead to the most economical local distribution of labour and capital of practical importance at present solely from the division of the civilized world into separate nations, whose commercial policy is understood to be framed with a view to their respective sectional interests: since the arguments for protecting a nascent industry are much stronger when we consider the interests of the protecting nation alone. For not only in the case supposed would this nation receive the gain of the industrial improvement realized, while the other would bear the (smaller) loss inseparable from such gain: but it is further possible for the former in certain cases to throw a portion of the expense of protection on the foreigners whose manufactures it partially excludes. This latter result would generally be possible for a time, if the protecting country supplied a considerable part of the whole demand for the foreign products against which the protective duty was directed: since the sudden and extensive reduction in the demand for these products which the duty would cause must tend to lower their price at least temporarily. Free Traders are of course right in pointing out that, so far as this is the actual effect of import duties, such duties tend to miss their primary end of protecting native industry; since to whatever extent the foreign products thus lowered in price are still purchased, to that extent the native products are not encouraged. But this in no way proves the inexpediency of the duties in question, since they may very well give adequate encouragement to native industry without completely excluding foreign products: and it cannot be an objection to them from a purely national point of view that a part of their effect is merely to levy a tribute on foreigners for the national exchequer. Of course in most cases this tribute will be merely temporary; since the reduction in the foreign producers' profits which must occur in the case supposed will drive them from the industry in question, until either the price rises again or the protecting country obtains its whole supply from native sources. But, firstly, the protection that we are considering is supposed to be merely temporary: so that even a temporary sharing of the expense of it by foreign producers may reduce the burden of it to an important extent. And, secondly, if the industry happens to be one in which a large amount of capital is so firmly invested that it cannot be withdrawn from it without great loss, except very gradually, the period during which the producers will submit to lowered profits will be correspondingly prolonged. And, thirdly, the foreign producers---or some of them---may be in a varying degree exempt from the equalizing effects of competition, either generally, or in the markets of the protecting country: in consequence of which they may have been making extra profits by their transactions in those markets; so that even a considerable and permanent reduction of profits may not lead them to abandon their business. This may happen in various ways---thus (e.g.) single producers, or combinations, in a country (A) may monopolize the manufacture of certain commodities sold in another country (B); and may be thereby enabled to sell their products, if untaxed, for a price so high that even when reduced by the whole amount of a protective duty imposed in B it would still remain fairly remunerative. Under these circumstances there is no theoretical means of determining generally how far the imposition of the duty will tend, even ultimately, to raise the price of the taxed commodities in B. Again, some among the producers in question may have special advantages as compared with the rest, in producing for the foreign markets. One obvious advantage of this kind is that of situation. Thus, suppose that A has been supplied with coal from two groups of coal-mines in B, one of which is situated on the side adjoining A and the other on the side remote from it: and suppose for simplicity that the mines yield coal of the same quality at the same cost of extraction. Then if a protective duty of 4s. a ton is laid by A on imported coal, raising the price of coal in A 2s. a ton, the result may be that after a time it ceases to be profitable to send coal into A from the remoter mines of B, while it still remains profitable to send it from the nearer ones, though to a diminished extent, and for a diminished profit.

In short: unless foreign products are completely excluded by import duties, such duties may partly have the effect of levying a tribute on foreign producers, the amount and duration of which may in certain special cases be considerable. Of course such tribute-levying will generally be a game that both countries can play at to a certain extent: hence the danger of suffering from retaliatory imposts may render protective duties inexpedient even when, apart from this danger, they would be economically advantageous on the whole. On the other hand, if the broad safe rule of `taxation for revenue only' were once abandoned, it might be expedient for a country injured by the import duties of another to impose similar duties in the way of retaliation even when they are in themselves economically disadvantageous,---just as it may be expedient to incur a greater cost in actual warfare, in order to prevent or punish more violent injuries to commerce. But, in any case, to consider more particularly the conditions under which such retaliatory measures are to be recommended belongs rather to the practice of state-craft than to the Art of Political Economy.

We have, however, in estimating the economic loss and gain of protection, to take into account certain secondary effects of protective duties, which are of a somewhat mixed kind. Supposing trade to be in equilibrium at the time that the demand in A for B's commodities is artificially restricted by import duties raising their price, and supposing that other things---including the demand in B for A's commodities---remain unchanged, one obvious result will be that B will import more than she exports; hence in order to restore the balance of trade, a certain readjustment of prices will be necessary by which B will in most cases tend to obtain a somewhat smaller aggregate of imports on somewhat less advantageous terms. This restriction on B's import trade may possibly not reduce materially the amount of her imports from A, if the commodities supplied by A are strongly demanded in B; since the price of such imports may be paid for indirectly by transferring to the merchants of A the debts of other countries who import from B. In this case the secondary effects of A's protection on the trade between A and B will be on the whole favourable to A. On the other hand the merchants of B will tend ceteris paribus to buy from a country to which they also sell: and therefore if the products of A are closely pressed in the markets of B by the competition of other countries, the protection given by A to one branch of her industry may very likely have the secondary effect of inflicting a blow upon another branch---viz. that which previously supplied the exports from A to B.

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