Chapter XIV. Trade Between Countries

CHAPTER XIV TRADE BETWEEN COUNTRIES § I. The False Ideal of a Favourable Balance of Trade. AT one time it was almost universally believed that the great object of national economy should be, as it is of individual economy, the acquisition of money, and the fact that the individual gets his money not to keep, but to part with, either in satisfying immediate needs or in increasing his property, was overlooked, so that it was supposed that the wealth of a country depended on its getting and retaining, or even continually increasing, a stock of gold and silver. It is easy for a person with any modem economic training to see that a number of individuals living together in one terri tory do not want an unlimited amount of money to keep and not to spend, any more than a single individual does; and experience has gradually taught us that a sufficiency of money will always be found where a sound currency is established. But even at the present time children and uninstructed adults confound money and wealth, so that we need not be much surprised that even the well educated of past generations did so. Still less need we try to prove that no such confusion existed in their minds. Is it likely that economics 234 BALANCE OF TRADE 235 is the one science in which no progress has been made?

Impressed with the belief that II something must be done" to secure money, the statesmen of each country at first attempted to tum their country into a kind of beetle-trap for the reception and retention of precious metal. The metals were allowed to come in freely, but laws 'were made against their being carried out of the realm. Then this method was attacked by people who could not carry on theit trade easily without exporting bullion. These said that export of bullion ought to be allowed, because it would eventually lead to the importation of a larger quantity. All that was necessary, 'according to them, was to watch the II balance of trade," as they called it, very carefully, and regulate the whole trade in such a way as to make sure that a balance of bullion should come in. They called the balance of trade II favourable" when the exports, valued at the frontier, exceeded the imports, also valued at the frontier: for then, they supposed, the balance would be imported in the form of bullion.

The first thing to notice about this balance of trade doctrine is that it was never true without considerable qualification that a (C favourable balance of trade" must mean an equivalent importation of bullion. It is quite possible for a country to have an export of,bullion along with a favourable balance of trade, and an import of bullion along with an unfavourable balance. There are disturbing factors, the chief of which may be classified as follows :I. The cost of the carriage of the imported and 236 TRADE BETWEEN COUNTRIES exported goods across the intervening distance which often separates countries is a disturbing factor when the values of imports and exports are both taken on the coast or frontier of the country con sidered. If there is no such intervening distance, there will, of course, be no disturbance from this cause. We can imagine Dutch merchants standing on one side of an imaginary line selling to Belgian merchan ts standing on the other side a thousand francs' worth of goods, and then, having got the thousand francs, promptly laying it out in the purchase of a thousand francs' worth of goods from the Belgians. In such a case it is obvious that all that \vould have happened would be an exchange of Dutch goods worth a thousand francs for a thousand francs' worth of Belgian goods, and imports and exports, valued at the frontier, would appear equal, both in Holland and Belgium.

But when there is an intervening distance between the two countries the case is different. In the trade bet\veen Portugal and Brazil, for example, Portu guese ships do not carry the Portuguese goods to the middle of the Atlantic and exchange them there for Brazilian goods brought by Brazilian ships to the same point. If they did, and the values of imports and exports were set down at that point, again the values-of imports and exports would exactly balance. The prices of the exports from Portugal would of course be lower on the coast of Portugal than in mid-Atlantic, and lower in mid Atlantic than on the coast of Brazil, or it would not be worth while to carry them, and for the same COST OF CARRIAGE 237 reason the exports from Brazil would be lower priced on the coast of Brazil than in mid-Atlantic, and lower in mid-Atlantic than on the coast of Portugal: so that, for example, wine worth £1 in mid-Atlantic might be worth only 195. on the coast of Portugal and be worth £1 IS. on arrival in Brazil, while coffee whi$ was worth 195. when it left Brazil might similarly rise to £t in mid-Atlantic and to £1 IS. on arrival in Portugal.

This would not destroy the equality of values. But what actually happens is that instead of one set of values taken in the middle of the transit of the goods, we have two sets of values, the one calculated on the coast or frontier of the one country, and the other calculated on the coast or frontier of the other country: the Portuguese say they have exported I9s. worth of wine and imported 21S. worth of coffee, while the Brazilians say they have exported Igs. worth of coffee and imported 21S. worth of wine. There is clearly no ground for concluding from this apparent inequality that either or both countries have lost 2S. in cash, and we must beware of rushing to the opposite and equally fallacious conclusion that each of them has made a " profit" of 25. The2s. is nothing more or less than the money valu~ of the labour and property used by each country in carry ing away the exports and bringing back the imports.

The supposition just made of the ships of two countries exchanging goods in mid-ocean is, of course, an extravagant one. It is easier to suppose the ships of each country going right across the inter ... vening distance and yet dividing the whol~ of the 238 TRADE BETWEEN COUNTRIES work equally between them. This change of sup position would make no difference whatever: the values of imports and exports would still differ in each country by half the whole cost of the carriage of both imports and exports. But now let us suppose that the Portuguese ships provisioned in Portugal do the whole of the work, carrying the wine all the way to Brazil and bringing back the coffee. Then the Brazilians escape the labour and expense of manning and fitting out a fleet of merchant ships themselves, but naturally have to pay the Portuguese, who now do that work for them. The amount may be imagined as first paid to the Portu guese shipowners in money, just as it would have been paid to the Brazilian shipowners when they did the work. But as the Portuguese do not want Brazilian currency to keep, we may be sure that the money paid will very soon be repaid to Brazilians in exchange for exports to Portugal, so that the result of Portuguese ships and men doing the work is sooner or later to increase the quantity of Brazilian exports and the quantity of imports into Portugal.

Consequently, when a' country does none of the work of carrying its imports and exports outside its own boundaries, there will be no difference in the values of its imports and exports due to cost of carriage, but when, on the other hand, a country does the whole of the work, then, other things being of course supposed equal, its imports will exceed Its exports by the whole of the cost of carriage of both imports and exports. It is this fact which accounts for the general tendency of imports to exceed exports: INTEREST AND RENT 239 if the imports into all the countries of the world are calculated in this way and added together they will exceed the value of all the exports calculated in the same way. Sometimes the carrying trade between two countries is not in the hands of either country but in that of a third country. Then both of the first tWD cou~tries are in the position of Brazil in our last example. Exports will go from them to the third country to pay its denizens for the work done.

2. Other services besides those involved in carry ing goods are ,often performed for people living in one country by persons who have their home in another country and wish their earnings to be remitted home. This leads to exports from the first country to the second without any corresponding import from the second country to the first. Thus an Englishman working in India for the Government or any other body will be likely to transmit part .of his earnings to England to support his wife and children there, and that will mean exports from India and imports into the United Kingdom, unbalanced by any corresponding imports into India or exports from the United Kingdom. When he retires from work in India and lives at home on his pension, the effect of the transmission of'the pension is the same. 3. Persons living in -one country often own pro perty in other countries and have the interest, dividends, or rents of that property remitted to them. This leads to unbalanced exports from the country where the property is to the country where the owner is. It is the chief cause of the large 240 TRADE BETWEEN COUNTRIES excess of imports into the United Kingdom, France, and Germany, countries whose inhabitants own large amounts of property in " new" countries. It is said to account for a quite considerable amount of imports into Italy, a country which attracts rich people from America and elsewhere for temporary residence.

4. Much of the property yielding income to persons inhabiting other countries than that in which it is situated owes its origin to what is called " foreign investment," that is, to investment, whether by way of loans, subscriptions to issues of new shares and stock, or purchases of property made by persons in other countries than their own. This is another disturbing factor, which works, of course, in the opposite direction to the third factor. It causes exports from the investing country, which are, no doubt, in time usually more than counterbalanced by the imports resulting from the receipt of income from the property, but which are not immediately balanced at all. The export of capital, as it is usually called, may take place in the form of the actual additions to the valuable property in the country in which the investment takes place, as, for instance, when in consequence of British investment in an Argentine railway a British-built locomotive is bought by the railway company. But this is by no means necessary: French investors in the Argen tine railway might very probably cause an export of lace or wine, from the sale .of which funds would be obtained which would be applied to secure the requirements of the railway company, either in Argentina or somewhere else.

NON-COMMERCIAL PAYMENTS 241 This disturbing cause is an important cause of violent fluctuations in the trade between the old countries and the new countries. The amount of foreign investment made by the old countries is apt to fluctuate considerably owing to variations in the prevailing estimate of the security of investments in the new countries, and the demand for capital from abroad in each particular new country is apt to fluctuate largely with the policy of its government and other local causes. Repayment of foreign loans is, of course, merely the same thing as foreign investment, the investment now being, however, in the direction opposite to that of the original investment. 5. There are various paynlents of a non-commer cial character made by people living in one country to people living in another country. The stock case is that of a political tribute paid, not for any services rendered, but simply because the country paying it has at some time or other been conquered by the country to which it is paid. Whether the tribute is a sum of money or an amount of com, like the Egyptian and Sicilian tributes to Rome, it must lead to unbalanced exports from the tribute-paying country and unbalanced imports into the tribute receiving country. Political tributes are not of much importance in the modem world, unless " reparations" be included under that head.

Older but minor examples of non-commercial inter national payments are the remittances made by Irish emigrants to their relations \vho have remained in Ireland, subscriptions made in this country for 242 TRADE BETWEEN COUNTRIES sufferers by an Indian famine or a Sicilian earth quake, and such part of the dowries of American heiresses married to Europeans as is (or is popularly supposed to be) actually paid to their European husbands instead of,remaining invested in America. 1 The more intelligent of the early balance of trade theorists were aware that these allowances, or rather such of them as were of any appreciable importance in their time, must be made before any inference can be drawn about the country's gain or loss of bullion from statistics of the imports and exports of goods other than bullion, even if those statistics are perfectly accurate. They knew also that they had no means of estimating the exact amount of the allowances which ought to be made, and that their statistics of imports and exports were very inaccurate.

Consequently they admitted that exact knowledge of the actual balance of trade as between their own and other countries could not be obtained from the statistics which were available, and they were driven to seek indications of a favourable or adverse balance in the state of the It exchanges." These were, how ever, very difficult to interpret, owing to the multi tude of currencies and the bad state of most of the coinages. Modern inquirers in regard to the present would naturally endeavour to solve the question 1 Some time ago it was usual to endeavour to prove that an excess of imports of goods did not necessarily mean an exporta tion of bullion by alleging that the excess was balanced by the "invisible exports." This was a clumsy and confusing way of treating the matter. It is tolerable in regard to the first two disturbing factors, since services can be conceived as " invisible exports," but it fails entirely in regard to the other three factors.

PROTECTION 243 whether the bullion of a country was increasing or decreasing by referring to statistics of its production within the country, if any, and of its importation and exportation. But such statistics were not to be had in the seventeenth century, and the· con sequence was that anyone who wished to terrify his fellow-countrymen with the bogey of losing their money to the foreigner had a very excellent chance of doing so. § 2. The Policy of Indiscriminate Protection. Intelligent or unintelligent, well-or ill-informed,. the people of the seventeenth century were unanimous in being anxious about the national stock of precious metals and in thinking that in order to secure a sufficient stock it was desirable to encourage exports and discourage imports of other goods taken as a whole. Hence, besides a comparatively unimport ant system of bounties to exports, a vast system of intentionally highly restrictive import duties ham pered trade inwards across national boundaries.

For the purpose of acquiring or retaining bullion the whole of this (( mercantile system," as Adam Smith called it, was perfectly futile, and this became gradually obvious during the eighteenth century .. But when a particular trade in a country had once been (( encouraged" by an export bounty, or when its II discouragement" had been prevented by the imposition of duties upon imported articles com peting with it, those who were interested in it were not likely to give up their advantage without protest. They desired to retain it, and their bias naturally 244 TRADE BETWEEN COUNTRIES led them to believe that it was for the national good that they should do so. The balance of trade doctrine was replaced by the doctrine of tt protection," the theory that home industries should be it protected from foreign competition" either by prohibition of competing imports or by " protective" duties. 1 1 A duty which" protects" and consequently may be described as H protective" is one which puts upon an imported article a charge from which a similar article produced within the country is exempt, and to advocate such duties is to be a Protectionist or supporter of Protection. It should be noticed that not every duty on imported articles is protective, because (I) some import duties are" countervailed" by equivalent duties on home products, as is, for example, the British customs duty on beer, and (2) because some import duties are levied on articles which do not compete with similar things produced within the country: either because they cannot be produced there at all by any amount of expense, or because they cannot be produced there at such an expense as would make it worth anyone's while to compete with the imported product even when the imported product is subject to the duty. E.g., the British duty on tea is not protective, because it is not worth anyone's while to grow tea here in hot-houses and with made-up soil when the duty is only a few pence per lb., but the duty might be protective if it were raised to 405. per lb. or if some cheaper method of growing tea here were discovered. It is, of course, the fact of protection, not the intention of the imposers of the duty, which matters.

When we describe a duty as " protective," we are not to be taken as deciding the often difficult question whether the duty was originally intended to be protective when it was first put on, perhaps two centuries ago. The policy which rejects Protection has for many years commonly been called Free Trade. A Free Trade country is one which refuses to impose protective duties, and takes them ·off if they come into existence by accident. It is sometimes said in a challenging tone that there is not Free Trade between the United Kingdom and countries which have adopted Pro tection. Did anyone ever say there was? What is said is that the United Kingdom has adopted a Free Trade policy. Some times, too, Protectionists say that the British customs duties on tea and beer are negations of Free Trade. This is merely to quarrel with the established and convenient usage of words, and it would be just as reasonable to refuse to call some Mr. White head by his surname because he had brown hair.

PROTECTION AND EMPLOYMENT 245 In the absence of definite argument public sym pathy is apt to go with ~ claim for protection partly because of the common dislike of change, and partly because of a feeling like. that which induces juries to give extravagant compensation to persons who have had railway or tramway accidents or have had their property taken for a public purpose, the feeling that it will not hurt the numerous shareholders in a company or the still more numerous ratepayers in a country or town to pay a few pence each as much as it will please the poor sufferer to receive a few hundred or a few thousand pounds. Besides, it is natural to suppose that any industry or trade is a' good thing, and therefore that it must be bad to allow an existing one to be diminished and good to increase it or to cause a new one to be set up. The underlying assumption is that the preserved or the added industry will be a clear addition to what would otherwise exist in the country.

This assumption that an industry gained by Protection will be a net 'gain, uncounterbalanced by a loss of some other industry, is usually based merely upon the simple suggestion that if the importation of an article is stopped, there will ee obviously" be an addition to the population of the country of.a number of persons equal to that formerly employed in producing the article elsewhere. Suppose, for example, that typewriters are at present made in America and imported into the United Kingdom: it is then obvious, say the supporters of this doctrine, that, if the importation, of typewriters into the United Kingdom is stopped,. there will have to be w. s 246 TRADE BETWEEN COUNTRIES a number of persons producing typewriters in the United Kingdom instead of in America, and there is no reason to suppose that there will be any fewer people producing other things, so that the type writer-makers will be a net addition. The answer very often given to this is, H What will become of the people, perhaps the printers of Bibles, whose products were before exported to pay for the type writers?" To that the modern Protectionist has a ready answer, H They will continue to print Bibles for export, since though American typewriters are no longer required for the British market, the additional population in England will want wheat, tobacco, and other things from America." That opens the way for a reductio ad absurdum. H Then, I suppose, you will proceed to exclude those imports also, in order to add to the British population all the people who produce them, and so on ad infinitum, or at any rate until the whole American population is transferred to the United Kingdom?" But the reductio ad absurdum is seldom a very satisfactory form of exposition. It is better, instead of asking what will become of the Bible-makers if the type writer-makers come to live in England, to challenge at once the implied proposition that keeping imports out of a country is likely to tend to increase its population. It is not in the least likely to increase births or immigration nor to decrease deaths or emigration. If it had any such tendency, that tendency obviously could not be confined to the country of the Protectionist who happens at the moment to be speaking, and we should have the PROTECTION AND POPULATION 241 curious result that the population of all countries, and therefore of t~e world as a whole, could be raised by the abolition of international trade.

The truth is that the population of a country is likely to be increased by circumstances which make it a better country to live in, and there is no reason to suppose that restrictions on importation generally form such a circumstance, but rather the contrary. Any argument which goes to prove that every kind of protection everywhere tends to increase the population of the protected area must be wrong. It does not, however, follow that it may not be possible in some circumstances to devise a scheme of particular protection for particular products which might tend to keep the population of some particular country higher than it otherwise would be. It is clearly possible for a State to pay people to come and live in a country or to continue to live in it by offering them inducements. For example, if the State in the United Kingdom or the Union of South Africa were to appropriate all the mineral property in the country and pay every one who chose to reside in it a small pension from the proceeds, this would be a clear inducement to live in those countries un counterbalanced by taxation of residents as such.

It is, I think, possible that in certain situations a scheme of restrictions on particular imports might be devised which would have, in a roundabout way, the same effect. The scheme would, however, involve a reduction of average income, since it would cause an increase of numbers without a correspond248 TRADE BETWEEN COUNTRIES ing increase of aggregate income. 1 The subject is full of difficulties, and it is clear that nothing of this refined character is intended by the protectionist who argues that Protection will increase the industry of the country. He will, indeed, very probably deny that he ever thought of increasing the population at all. He meant, he may explain, only that his scheme would cause the existing population to be more fully employed by doing away with those great fluctua tions of trade which seem to have much to do with the existence of the unemployed. There is some truth in the idea that reduction of foreign trade as a general rule should tend to diminish fluctuations in employment: on the whole, the smaller a trading community is, the less likely is it to suffer from such fluctuations, since miscalculations with regard to demand and supply are less likely and the effects of changes due to invention and alteration of taste are more easily seen and are consequently more easily met. There is no limit to this advantage, so that we should find it greatest when we have reduced the trading community to the smallest possible size, and then it will strike us that Isolated Man possesses the advantage in the highest possible degree: he has never to fear unemployment. But we do not think it worth while to become isolated men in order to be wholly free from unemployment, and there is no reason to think that it is worth while to reduce 1 Unless, in consequence of very peculiar circumstances and extraordinary ingenuity, the whole cost could be thrown on absentee owners of property.

CHOICE OF INDUSTRIES 249 international trade by a trifling amount in order to secure a trifling reduction in unemployment. § 3. The Policy of Discriminating Protection. The whole of the ordinary crude doctrine that Protection gives employment is usually thrown over by the more cultivated Protectionist. He has no expectation of giving employment by cutting down imports, and generally he disclaims any desire to cut down imports. He does not advocate indis criminate Protection, but a discriminating Protec tion which will, he thinks, bring about a better selection of trades and industries by the people of his country than. the selection which their self interest will induce them to make in the absence of the duties which he proposes. There are two possibilities: (I) the country may specialize in the directions in which self-interest leads in the absence of protective duties, and (2) it may specialize in the directions in which self-interest leads when influenced by the existence of protective duties.

Which is likely to be best ? In answer to this question it is sometimes said that the principle of laisser-faire or letting people do what they want to do " has been abandoned," or II is dead," and therefore we must not suppose that there is any presumption in favour of a particular territorial specialization being good merely because it is profitable for individuals to adopt it. But this is clearly an error, and a bad error. The whole of civilized society is based on the principle that people should be allowed to do what they like until 250 TRADE BETWEEN COUNTRIES good reason is shown to the contrary, and this implies a presumption that profitable specialization is good. To justify interference with it some positive argument must be brought forward, showing that it, or the part of it which is attacked, is bad. A bare proof that complete laisser-faire is bad, impos sible, and inconceivable does not carry with it a corollary that every proposal for preventing people from doing what they want to do is righ~.

To examine here all the thousands of positive arguments which have been brought forward in favour of discriminating Protection at different times and in different countries is of course impos sible. All that can be done with advantage is to draw attention to their great variety and inconsist ency. In each country at any particular time the arguments accepted by protectionists are just those which appear to show that the particular form of specialization to which the country is at that time tending to devote itself is bad for that country if not for every country. Thus in a country of which the inhabitants, when uninfluenced by protective duties, on balance export agricultural products and import manufactured produce, the reigning school of Protectionism is always found asserting that it is obviously ruinous to specialize in this way on agriculture; while in a country of which the inhabitants, also uninfluenced by protective duties, on balance export manufactures and import agricultural produce, the assertion is that it is disastrous to specialize on manufactures and II neglect agriculture" or II allow it to fall INFANT INDUSTRIES 251 into decay," .since it is obviously necessary for national security and the physique of the people.

The fact that arguments in favour of discriminating Protection are found in every country, whatever its circumstances, is suspicious, the more so when we reflect on the support they get from the self-interest of those sections of the people whic.h would gain by them either for a time or permanently. There is a presumption in favour of people being allowed to do what they wish, but this does not extend to allowing some people to pass legislation to prevent others from doing what they wish. There is, however, one general argument in favour of a particular sort of discriminating Protection which has obtained such wide acceptance that it is worth while to examine it shortly. This is the argument in favour of "protection to infant indus tries." It has been said by J. S. Milland others that an industry may be very suitable for a country and yet unable to start there because imports of the commodity which it produces come in from other countries in which it has become well established, and in such circumstances it may be proper to restrict imports for a time, until the II infant" can stand competition.

Economists who would call themselves free-traders have often admitted this as an exception to their general rejection of Protection. Very little, if any, force really resides in it. So far as it goes, it justifies local just as much as national protection to infant industries: an infant industry may find it difficult to establish itself in Yorkshire because the products 252 TRADE BETWEEN COUNTRIES of that industry come in from Lancashire or in California because they come in from Massachusetts. Secondly, it is wrong to assume that the mere fact of the advantage of the country from which the pro duct is exported being an acquired rather than a natural advantage is a reason for endeavouring to counteract it. A great deal of territorial division of labour inside national areas now rests only on the acquired characteristics of places and their inhabitants, and nobody thinks any the worse of it for that. For example, if some place in England just as well adapted by nature as Lancashire for the seat of the cotton manufacture were now discovered, no one would think that a good reason for moving that manufacture. There is just as much reason for allowing acquired advantages to count when the question is one of the specialization between nations.

'i'hirdly, it is doubtful whether the supposed diffi culty of starting an industry really exists, and whether, if it does, Protection is the best way of reducing it. When a good deal of a thing is imported into a country, it is easier for a home manufacturer to slip in \vith an article slightly better adapted for use in the country than it is for him to devise the article and" create a market" for it where imports are kept out. If the need of encouragement were clearly proved, it would seem better to give the encouragement by way of bounty or other direct assistance, as this is more likely to be withdrawn when the assistance has done its work or is proved to be useless. The most plausible of all general protectionist WELL-PAID INDUSTRIES 253 arguments is one which is seldom put forward. This is that it must be a good plan to protect those industries in which labour is best paid, so that the country will specialize in the best paid occupations: products of coarse, rough labour will be imported free, while the products of highly skilled, well-paid labour which are imported will be heavily taxed.

So the labour of the people of the country will be confined to the highly paid work as much as possible, a highly desirable consummation. Now, no doubt, every well-disposed parent wishes his children to be engaged in well-paid occupations, and we may agree that the State should wish the same for the inhabitants of its territory. But would it be reason able for a parent who had taken no trouble and incurred no expense in the education of his children to assemble them and say, H My sons, on no account employ a dentist or a lawyer. Be your own dentists and lawyers: let Jack attend to your teeth and Tom -to your legal business. The work is much better paid than the unskilled work which you usually work at. It is true that you will not get anyone outside the family to employ you as dentists or lawyers, as you will be rather unskilful, but you can at any rate keep your own work inside the family." It is clearly better to be a competent riveter or even a competent jam-maker than a quite incompetent dentist or lawyer, at any rate when the interest of the customer as well as that of the worker is taken into account. A people that is competent to follow the better paid trades is sure to do so: the only way to secure that the people of a particular country 254 TRADE BETWEEN COUNTRIES shall do the best paid work of the world is to give them the highest intelligence and the best possible special training.

§ 4. The Attempt to Tax the Foreigner. C<?nsiderablesupport is obtained for Protection in consequence of the existence of a belief tha t export and import duties afford each country the means of taxing all the others or "taxing the foreigner" as it is commonly expressed, this belief being combined with a somewhat confused impres sion of the connection between such duties in general and protective duties in particular. A dispassionate outside observer might suppose that considerations of justice would deter people from discussing the question of the practicability of taxing the foreigner. As I have already remarked, it has long, -except in a few isolated parts of the world, been considered wrong to eat the foreigner: almost everywhere it is now thought wrong to reduce him to slavery; if he is of the same colour, it is even thought wrong to deprive him of his land or other property. But as yet, scarcely anyone is ashamed to say that he would be delighted to tax the foreigner if only he could discover a way of doing it. I suppose the defence of this attitude which would be put forward, if any one thought defence was necessary, would be that the foreigner's wicked aggressive designs put the country of the speaker to an expense far greater than could be met by anything likely to be got out of him by this method: but the defence is quite insufficient, as the readiness to tax the foreigner is TAXING THE FOREIGmR 255 I found almost as much when the foreigner is obviously unaggressive, and even when he is an ally or even a member of the same federation flying the same flag in war.

In considering the practicability of taxing the foreigner by duties on foreign trade, every one must recognize that money cannot be directly collected from people living outside the jurisdiction of the State imposing the duties. The hope is simply that the duties will make the terms of the trade more favourable to the people of the country, or in other words, that they will make the foreigners take less for the goods which are imported into the country and give more for the goods which are exported from it. I t is easy to conceive circumstances in which a number of persons, small or large, owning the re·sources of a particular area, may sell their products dearer when they act in combination than when they compete. Suppose these people have a number of springs of some mineral water of highly curative properties which is not found and cannot be manu factured anywhere else. If the springs belong to a number of competitors, the whole of the water produced will be sold, say, at 6d. a gallon: but the demand may be of such a character that if the price at which the water were offered to the buyers was raised to IS. a gallon,three-quartersof the whole could still be sold: it will then pay the owners to combine and raise the price of IS., although they have to let 25 per cent. of the water run to waste or drink it themselves. Now this is just the principle 256 TRADE BETWEEN COUNTRIES of the plan of II taxing the foreigner II by means of an export duty: instead of assembling all the producers of a particular commodity in a country and persuading them to enter into some complicated agreement for restricting exports, the government of the country takes the simpler and more effectual course of restricting exports by imposing the pay ment of a duty (proportioned to the amount exported) on every one who chooses to export the commodity; it is hoped that the foreigners will be forced by the reduction of quantity exported to give a higher price per unit.

So, for example, if the character of the foreign demand were as just supposed, and the export duty caused a reduction of 25 per cent. in the quantity exported, so that the foreigners gave IS. a gallon instead of 6d.) the " foreigner would be taxed " to the extent of 6d. a gallon. The country as a whole, i.e., the people in their individual and their corporate capacity, would trade on better terms, since it would be better for the owners of the springs and the government together to receive IS. per gallon for 75 than 6d. per gallon for 100 gallons of the water: the total received would be 50 per cent. greater than before, and the people inside the country could, if they chose, drink the quantity now cut off from the exports. l Thus an export duty may tax 1 In order to sell within the country the 25 per cent. cut off the exports, the owners of the springs will have to sell at less than 6d. a gallon, and consequently the duty required to raise the :price to the foreigner by 6d., as supposed in the text, will have to be more than 6d.: how much more, will depend on the elasticity of the home demand.

TAXING THE FOREIGNER 257 the foreigner, and it may be profitable to impose one. But the example just given is clearly an excep tional one. Few commodities are like rare natural mineral waters. Take instead the case of a number of persons living together on a certain area and pro ducing potatoes. ,Would it be likely to pay these persons to combine together and try to raise the price to their outside customers? Clearly not. They would not expect to be able to get a halfpenny a sack more for their potatoes, however much they restricted the quantity they sold. This is what happens with export duties on ordinary commodi ties: whether they restrict the exports from the particular country litt,le or much, they fail to raise appreciably the price at whicp the foreigner pur chases, because they only touch a trifling fraction of the whole supply to the world outside the country imposing the duty, and this trifling fraction can be made up from some other source without appre ciable increase of cost and consequently of price.

Circumstances, again, are conceivable, though extremely unlikely, in which a number of persons living on an area could buy some commodity cheaper if they acted in combination than if they competed. They might be the' only people in the world who wanted that commodity, and it might be one of the numerous commodities whichwould be cheaper, even in the long run, 'ifless were bought of Lit. Sup pose, then, that tea is such a commodity, that the tea-consumers left to their individual volition would buy 7 lb. per h~ per annum at 28. per pound, and 258 TRADE BETWEEN COUNTRIES further, that if they resolved to buy only 5 lb. per head the price would fall to IS. 6d. It follows that if they made and carried out this resolution, they might fairly say they had H taxed the foreigner" to the extent of 6d. per pound, and as they would have to spend 6s. 6d. less on tea while only forgoing 2 lb. in their consumption, they would probably be gainers on the whole transaction.

Now this is precisely the principle of the proposal to tax the foreigner by imposing an import duty. The duty is intended to check the demand, and it is supposed that the foreign producers will be obliged by the reduction of demand to sell the reduced quantity at a lower price per unit, being thus H taxed" to the extent of the difference in price, and that the fall of price on the reduced quantity taken will be more than sufficient to counterbalance the privation caused by the reduction of quantity. Suppose, as before, that the commodity is tea, and the consumption 7 lb. per head when there is no duty, and the price inside the country 2S. A duty of IS. is then put on imports: the price at home rises to 2S. 6d., of which the foreigner only gets IS. 6d. in consequence of the reduction of consumption from 7 lb. to 5 lb. per head. Then the foreigner may be said to be taxed to the extent of 6d. per pound: the tea-consumers have lost 2 lb. of tea and only spend IS. 6d. less upon tea, so that they are certainly worse off, but as the State gets 5s. out of what they now pay for tea, the change is probably a profitable one to tea-consumers and taxpayers considered as one body.

TAXING THE FOREIGNER 259 The trouble, however, from the point of view of anyone who desires to ,( tax the foreigner" in this way is to find a commodity and conditions such as those described. A much more likely result of the shilling tax on tea, even if it were imposed by the country which consumes most tea, would be that the price outside the country would only fall per manently by id. a pound, while the price inside the country rose IIid. with a fall of consumption to 5 lb. per head, in which case the foreigner might still be said to be taxed id. per pound, but the gain at his expense would probably not be worth making, as it would probably be more than counterbalanced by the disagreeableness to the people of having a particular branch of their consumption so sharply attacked by the tax instead of being allowed to spread the burden of taxation as they pleased. In the usual conditions, the imposition of an import duty by anyone country will make no appreciable difference to the outside or (l world" price of the article taxed, and, of course, in some conditions the imposition of such a duty might absolutely raise the world price.

I have for simplicity taken in the first place an example in which the import duty is not protective. Where it is protective it is no more likely to be beneficial in the manner supposed than when it is not. About one-fifthof the wheat consumedin the United Kingdom' is grown within the country, because that amount, and no more, can be grown there profitably (or so as (( to pay" all the factors concerned more or at least as much as they could 260 TRADE BETWEEN COUNTRIES get in other employment) at the price which can be obtained. Suppose it pays to produce seven million quarters at 31S. and that it would pay to produce eight at 32S., and so on, till at 80S. a quarter it would pay to produce all demanded at that price and make the country independent of importation. It is evident that if the elasticities of demand inside the country and the conditions of supply outside it were the same for tea and wheat, any given percent age of ad valorem duty would diminish the British importation of wheat more than that of tea, since the home production would increase and to some extent supply the void. The greater reduction of British demand would cause a greater, though pro bably still almost· inappreciable, fall in the outside price, but it must be remembered that the less taken of the commodity, the less the aggregate amount which the foreigner can be said to be It taxed."

On the whole, it may be said that the possibilities of getting anything out of the foreigner by import duties are so small that they are not worth setting against the usual fiscal considerations, with regard to the distribution of taxation between different classes of consumers and persons of different wealth. § 5. Actual Results of Foreign Trade Policies. The conclusion is that Government manipulation of foreign trade, whether in order to give employ ment, to select the best industries for the country, or to tax the foreigner, is not likely to have good results, however excellent the legislature of the POLICIES INEFFECTIVE 26I country; and we shall feel even less confidence in the probability of good results when we reflect upon the imperfections and fallibility of the actual legis latures of the different countries of the world. We must beware, however, of exaggerating the evil effects which have actually resulted. A great deal of the trade which is prevented from taking place by Protection is not very important; it consists of the exchange of commodities.-such as different kinds of thread-in regard to which international localization is advantageous indeed, but not enor mously advantageous. When Protection stands in the way of something more important, such as the urbanization of England in the nineteenth century, it breaks down.

Moreover, under modern conditions in which extensive migration and conscious regulation of births are both possible, no State can by erroneous foreign trade policy, whatever its folly, permanently make the condition of its working-classes-that is, the mass of its population-seriously worse than that of the working-classes of other countries. They leave or refuse to multiply till their condition is brought up by the want of competition to the level prevailing in the other countries. The inquiries which were carried on at the beginning of the twen tieth century by the British Government and other persons, with the idea of finding out by observation and statistical examination of the condition of the working-classes in England, France, Germany and the United States which country had the best fiscal policy, were ridiculous in the extreme. The effect w. T 262 TRADE BETWEEN COUNTRIES of long-continued superior fiscal policy in any of these countries would only be to make its population and the value of its land somewhat greater than they otherwise would be-not, of course, necessarily to make them increase more rapidly than those of the other countries-and this effect could not be proved by statistics.