Problems in American Democracy

by Thames Williamson

CHAPTER XXIX

THE TARIFF

355. THE PRINCIPLE OF EXCHANGE.—In Chapters VII and VIII it was pointed out that when individuals divide up their labor so that each becomes a highly specialized workman there is a resultant increase in the community's productivity. Similarly, when one section of the country is adapted primarily to manufacturing, while another section is peculiarly suited to farming, there is a gain in national productivity when each of these areas specializes in those activities which it can carry on most effectively, and is content to resort to trade in order to secure the benefit of industries specialized in elsewhere. So far as the economic principle is concerned, there is likewise a gain when different countries specialize in those forms of production at which their citizens are most effective, and are content to secure through international trade the products of specialization in other countries.

356. NATURE OF THE TARIFF.—But though all civilized nations allow and even encourage the division of labor among their individual citizens and among the various areas within their own boundaries, many countries restrict the degree to which their citizens may exchange their surplus products for the surplus products of foreign producers. In the United States, for example, Congress has the power to levy a duty or tariff on foreign-made goods which are brought into this country for sale.

This tariff may be levied primarily to increase national revenue, in which case the rate of duty is generally too low to keep foreign goods out of our markets. When the tariff is purely a revenue measure, "free trade" is said to exist. On the other hand, a tariff may be so high that domestic goods will be protected in our markets against competition from foreign-made goods of a similar grade. In this case a protective tariff is said to exist, though such a measure also brings in revenue. Most tariff measures, indeed, contain both "revenue" and "protective" elements, and it is only when a tariff act is primarily a protective measure that we speak of it as a protective tariff.

357. THE MEANING OF "PROTECTION."—Let us be sure that we understand exactly what is meant by "protection." Suppose that in the absence of a protective tariff an English-made shoe can be produced and brought to this country at a total cost of $3.00. Let us assume that this shoe competes in the American market with an American-made shoe which is of similar grade, but which, for various reasons, it costs $3.50 to produce. Suppose, further, that both English and American producer must make a profit of $0.50 per pair of shoes, or go out of business. In the resulting rivalry, the English shoe can sell for $3.50 and make a profit. Competition would force the American producer to sell his shoe for $3.50 also, but since this would give him no profit, he would be forced out of business. In such a case the American manufacturer might secure the passage of a protective tariff on this type of shoe, so that the English shoe would be charged $0.75 to enter this country for sale here. This would bring the total cost of the English shoe up to $3.75, and to make a profit the shoe would have to sell for $4.25. But since the American shoe can be sold for $4.00, the English shoe is forced out of the market. [Footnote: If, in this example, the duty were, say, $.25, the foreign shoe could continue to enter our markets and compete with the American shoe. In this case the tariff would be a revenue, and not a protective measure.]

The tariff question arises primarily in connection with the matter of protection, and may be stated as follows: Ought Congress to interfere with international trade by levying protective duties on imports; and, if so, just how and to what extent should such duties be levied?

358. TARIFF HISTORY OF THE UNITED STATES.—The first tariff measure in our national history was the Act of 1789. This was a revenue measure, though it gave some degree of protection to American industries. Down to the close of the War of 1812 our tariff was mainly for revenue purposes. After the close of that war a heavy duty on foreign iron and textile products was imposed for the purpose of protecting domestic producers against the cheaply-selling English goods which were flooding our markets. After 1816 it became our policy to combine in the same tariff act high protective duties with revenue duties. In 1824 the general level of duties was raised. In 1828 Congress endeavored to lay a tariff which would suit all sections of the country, but the attempt failed.

Between 1828 and 1842 the tariff was gradually lowered. Between 1842 and 1861 our tariff policy was unsettled, but in the latter year the domestic disturbances brought on by the Civil War resulted in the passage of a tariff which turned out to be highly protective. In the period immediately following the Civil War the tariff continued to be very high, due chiefly to pressure from industrial interests which had secured protection from the war rates. In spite of attempted reform in 1870, 1873, and 1883, the tariff continued to be highly protective.

In 1894 the Democrats reduced the tariff somewhat, and in 1909 the Republicans attempted to satisfy a popular demand for lower rates by the passage of the Payne-Aldrich Act. This measure reduced some rates, but not enough to satisfy the popular mind. In 1912 the Democrats returned to power, and the following year passed the Underwood-Simmons Act, lowering the rates on many classes of commodities, and placing a number of important articles on the free list. In 1920 the Republican party again secured control of the government, and the tariff was raised. At present our tariff is highly protective.