Essays on some unsettled Questions of Political Economy
Nevertheless, this latter kind of taxes are in principle as ineligible as the former, although not precisely on the same ground. A protecting duty can never be a cause of gain, but always and necessarily of loss, to the country imposing it, just so far as it is efficacious to its end. A non-protecting duty on the contrary would, in most cases, be a source of gain to the country imposing it, in so far as throwing part of the weight of its taxes upon other people is a gain; but it would be a means of gain which it could seldom be advisable to adopt, being so easily counteracted by a precisely similar proceeding on the other side.
If England, in the case already supposed, sought to obtain for herself more than her natural share of the advantage of the trade with Germany, by imposing a duty upon cloth, Germany would only have to impose a duty upon linen, sufficient to diminish the demand for that article about as much as the demand for cloth had been diminished in England by the tax. Things would then be as before, and each country would pay its own tax. Unless, indeed, the sum of the two duties exceeded the entire advantage of the trade; for in that case the trade, and its advantage, would cease entirely.
There would be no advantage, therefore, in imposing duties of this kind, with a view to gain by them, in the manner which has been pointed out. But so long as any other kind of taxes on commodities are retained, as a source of revenue, these may often be as unobjectionable as the rest. It is evident, moreover, that considerations of reciprocity, which are quite unessential when the matter in debate is a protecting duty, are of material importance when the repeal of duties of this other description is discussed. A country cannot be expected to renounce the power of taxing foreigners, unless foreigners will in return practise towards itself the same forbearance. The only mode in which a country can save itself from being a loser by the duties imposed by other countries on its commodities, is to impose corresponding duties on theirs. Only it must take care that these duties be not so high as to exceed all that remains of the advantage of the trade, and put an end to importation altogether; causing the article to be either produced at home, or imported from another and a dearer market.
It is not necessary to apply the principles which we have stated to the case of bounties on exportation or importation. The application is easy, and the conclusions present nothing of particular interest or importance.
6. Any cause which alters the exports or imports from one country into another, alters the division of the advantage of interchange between those two countries. Suppose the discovery of a new process, by which some article of export, or some article not previously exported, can be produced so cheap as to occasion a great demand for it in other countries. This of course produces a great influx of money from other countries, and lowers the prices of all articles imported from them, until the increase of importation produced by this cause has restored the equilibrium. Thus, the country which acquires a new article of export gets its imports cheaper. This is not a case of mere alteration in the division of the advantage; it is a new advantage created by the discovery.
But suppose that the invention, to which the nation is indebted for this increase of the return to its industry, comes into use also in the other country, and that the process is one which can be as perfectly and as cheaply performed in the one country as in the other. The new exportation will cease; trade will revert to its old channels, the money which flowed in will again flow out, and the country which invented the process will lose that increase of its gain by trade, which it had derived from the discovery.
Now the exportation of machinery comes within the case which we have just described.
If the fact be, that by allowing to foreigners a participation in our machinery, we enable them to produce any of our leading articles of export, at a lower money price than we can sell those articles, it is certain that unless we possess as great an advantage in the production of the machinery itself as we have in the production of other articles by means of machinery, the permitting of its exportation would alter to our disadvantage the division of the benefit of trade. Our exports being diminished, we should have to pay a balance in money. This would raise, in foreign countries, the price of everything which we import from thence: while our incomes, being reduced in money value, would render us less able to buy those articles even if they had not risen. The equilibrium of exports and imports would only be restored, when either some of the latter became so dear that we could produce them cheaper at home, or some articles not previously exported became exportable from the fall of prices. In the one case, we lose the benefit of importation altogether, and are obliged to produce at home, at a greater cost. In the other case, we continue to import, but pay dearer for our imports.
Notwithstanding what has now been observed, restrictions on the exportation of machinery are not, in our opinion, justifiable, either on the score of international morality or of sound policy. It is evidently the common interest of all nations that each of them should abstain from every measure by which the aggregate wealth of the commercial world would be diminished, although of this smaller sum total it might thereby be enabled to attract to itself a larger share. And the time will certainly come when nations in general will feel the importance of this rule, and will so direct their approbation and disapprobation as to enforce observance of it. Moreover, a country possessing machines should consider that if a similar advantage were extended to other countries, they would employ it above all in the production of those articles, in which they had already the greatest natural advantages; and if the former country would be a loser by their improvements in the production of articles which it sells, it would gain by their improvements in those which it buys. The exportation of machinery may, however, be a proper subject for adjustment with other nations, on the principle of reciprocity. Until, by the common consent of nations, all restrictions upon trade are done away, a nation cannot be required to abolish those from which she derives a real advantage, without stipulating for an equivalent.
7. The case which we have just examined, is an example in how remarkable a manner every cause which materially influences exports, operates upon the prices of imports. According to the ancient theory of the balance of trade, and to the associations of the generality of what are termed practical men to this day, the sole benefit derived from commerce consists in the exports, and imports are rather an evil than otherwise. Political economists, seeing the folly of these views, and clearly perceiving that the advantage of commerce consists and must consist solely of the imports, have occasionally suffered themselves to employ language evincing inattention to the fact, that exports, though unimportant in themselves, are important by their influence on imports. So real and extensive is this influence, that every new market which is opened for any of our goods, and every increase in the demand for our commodities in foreign countries, enables us to supply ourselves with foreign commodities at a smaller cost.
Let us revert to our earliest and simplest example, but which displays the real law of interchange more luminously than any formula into which money enters; the case of simple barter. We showed, that if at the rate of 10 yards of cloth for 17 of linen, the demand of Germany amounted to 1000 times 10 yards of cloth, the two nations will trade together at that rate of interchange, provided that the linen required in England be exactly 1000 times 17 yards, neither more nor less. For the cloth and the linen will then exactly pay for one another, and nobody on either side will be obliged to offer what he has to sell at a lower rate, in order to procure what he wants to buy.
Now if the increase of wealth and population in Germany should greatly increase the demand in that country for cloth, the demand for linen in England not increasing in the same ratio, – if, for instance, Germany became willing, at the above rate, to take 1500 times 10 yards; is it not evident, that to induce England to take in exchange for this the only article which Germany by supposition has to give, the latter must offer it at a rate more advantageous to England – at 18, or perhaps 19 yards, for 10 of cloth? So that the division of the advantage becomes more and more favourable to a country, in proportion as the demand for its commodities increases in foreign countries.
It is not even necessary that the country which takes its goods, should supply it with any commodity whatever. Suppose that a country should be opened to our merchants, disposed to buy from us in abundance, but which can sell to us scarcely anything, as every commodity which it affords could be got cheaper by us from some other quarter. Nevertheless, our trade with this country will enable us to obtain from all other countries their commodities at a lower price. At the first opening of this commerce of mere exportation, we must have received in payment a large quantity of money; for which our customer will have been indemnified by other countries, in exchange for her commodities. Prices must consequently be lower in all other countries, and higher with us, than before the opening of the new branch of trade; and we therefore obtain the commodities of other countries at a less cost, both as we pay less money for them, and as that money is lower in value.
8. Another obvious application of the same principle will enable us to explain, and to bring within the dominion of strict science, the rivality of one exporting nation and another, or what is called, in the language of the mercantile system, underselling: a subject which political economists have taken little trouble to elucidate, from the habit before alluded to of disregarding almost entirely, in their purely scientific inquiries, those circumstances which affect the trade of a country by operating immediately upon the exports.
Let us revert to our old example, and to our old figures. Suppose that the trade between England and Germany in cloth and linen is established, and that the rate of interchange is 10 yards of cloth for 17 of linen. Now suppose that there arises in another country, in Flanders, for example, a linen manufacture; and that the same causes, the working of which in England and Germany has made 10 yards exchange for 17, would in England and Flanders, putting Germany out of the question, have made the rate of interchange 10 for 18. It is evident that Germany also must give 18 yards of linen for 10 of cloth, and so carry on the trade with a diminished share of the advantage, or lose it altogether. If the play of demand in England and Flanders had made the rate of interchange not 10 for 18 but 10 for 21, (10 to 20 being in Germany the comparative cost of production,) it is evident that Germany could not have maintained the competition, and would have lost, not part of her share of the advantage, but all advantage, and the trade itself.
It would be no answer to say, that Germany could probably still have found the means of importing cloth from England, by exporting something else. If she had purchased cloth with anything else, she would have purchased it dearer: as is proved by the fact, that having free choice, she found it most advantageous to purchase it with linen. When she could get 10 yards of cloth for 17 of linen, that was the mode in which she could get it with least labour. Being pressed by competition, she gave successively 17, 18, 18; but rather than give 19 yards of linen, she perhaps would prefer to give, as costing her rather less labour, 10 yards of silk, (which we will suppose to be the quantity which in England will purchase 10 yards of cloth.) It is obvious that, although Germany has found the means of supplying herself with cloth, by exporting a different article from that in which she was undersold, yet the advantage of the trade between her and England is now shared in a proportion much less favourable to Germany.
There is no difficulty in showing that the same series of consequences takes place in exactly the same manner through the agency of money. The trade in cloth and linen between England and Germany being supposed to exist as before, Flanders produces linen at a lower price than that at which Germany has hitherto afforded it. The exportation from Germany is suspended; and Germany, continuing to import cloth, pays for it in money. By so doing she lowers her own prices, and raises those in England: she has to pay more money for cloth, and to pay it in a currency of higher value. She thus suffers more and more as a consumer of cloth, until by the fall of her prices she can either afford to sell linen as cheap as Flanders, or to export some other commodity which she could not export before. In either case, her trade resumes its course, but with diminished advantage on her side. 4
It is in the mode just described, that those countries which formerly supplied Europe with manufactures, but which owed their power of doing so not to any natural and permanent advantages, but to their more advanced state of civilization as compared with other countries, have lost their pre-eminence as other countries successively attained an equal degree of civilization. Lombardy and Flanders, in the middle ages, produced some descriptions of clothing and ornament for all Europe: Holland, at a much later period, supplied ships, and almost all articles which came in ships, to most other parts of the world. All these countries have probably at this moment a much larger amount of capital than ever they had, but having been undersold by other countries, they have lost by far the greater part of the share which they had engrossed to themselves of the benefit which the world derives from commerce; and their capital yields to them in consequence a smaller proportional return. We are aware that other causes have contributed to the same effect, but we cannot doubt that this is a principal one.
As much as is really true of the great returns alleged to have been made to capital during the last war, must have arisen from a similar cause. Our exclusive command of the sea excluded from the market all by whom we should have been undersold.
The adoption by France, Russia, the Netherlands, and the United States, of a more severely restrictive commercial policy, subsequently to 1815, has done great injury undoubtedly to those countries; for the duties which they have established are intended to be, and really are, of the class termed protecting; that is to say, such as force the production of commodities by more costly processes at home, instead of suffering them to be imported from abroad. But these duties, though chiefly injurious to the countries imposing them, have also been highly injurious to England. By diminishing her exportation, or preventing it from increasing as it would otherwise have done, they have kept up the prices of all imported commodities in England, above what those prices would have fallen to if trade had been left free.
By another obvious application of the same reasoning, it will be seen, that there is a real foundation for the notion, that a country may be benefited by receiving from another country the concession of what used to be termed commercial advantages, or by restraining its colonies from purchasing goods of any country except itself. In the figured illustration last used (p. 34) [not available, M.D.], it is evident, that if England had been bound by a treaty with Germany to buy linen exclusively from her, Germany would have retained the trade which we supposed her to lose, and would have continued to purchase cloth at a comparatively cheap rate from England, instead of producing it by a more costly process at home. Suppose that England had been a colony of Germany, and we see that by compelling colonies to deal at her shop, she may obtain a real advantage, though of a nature which we may hazard the assertion that the founders of our colonial policy little dreamt of.
Such an advantage, however, being gained at the expense of another country, is, at the least, simply equivalent to a tax, or tribute. Now, if a country has just grounds, or deems superiority of power a sufficient ground, for exacting a tribute from another country, the most direct mode is the best. First, because it is the most intelligible, and has least of trick or disguise. Secondly, because it allows the people of the country paying the tribute, to raise the money in whatever way they consider least oppressive to themselves. Thirdly, because the indirect mode of taxing a country, by restrictions on its commerce, disturbs the distribution of industry most advantageous to the world at large, and occasions a greater loss to the restricted country, and to the other countries with which that country would have traded, than gain to the country in whose favour the restrictions are imposed. And lastly, because a country never could obtain such privileges from an independent nation, and has seldom been so undisguised an oppressor as to demand them even from its colonies, without subjecting itself to restrictions in some degree equivalent, for the benefit of those whom it has thus taxed. Each country, therefore, usually pays tribute to the other; and to produce this fruitless reciprocity of exaction, the industry and trade of both countries are diverted from the most advantageous channels, and the return to the labour and capital of both is diminished, in pure loss.
9. The same principles which have led to the above conclusions, also suggest a remark of some importance with respect to the probable effect of a change from a restricted to a comparatively free trade.
There is no doubt that our prohibiting the importation of a particular article, which, but for the prohibition, would have been imported, enables us to obtain our other imports at smaller cost. The article for which we have the greatest demand, and for which our demand is most increased by cheapness, is that which we should naturally import preferably to any other; now of this article we should import the quantity necessary to pay for our exports, on terms of interchange less advantageous to us than in the case of any other commodity. If our legislature prohibits this commodity, the other country will be obliged to offer any other article on easier terms, in order to force a sufficient demand for it to be an equivalent to what she purchases from us.
The steps of the process, money being used, would be these: – We prohibit the importation of linen. The exportation of cloth continues, but is paid for in money. Our prices rise, those in Germany fall, until silk, or some other article, can be imported from Germany cheaper than it can be produced at home, and in sufficient abundance to balance the export of cloth. Thus by sacrificing the cheapness of one commodity, we gain the cheapness of another: but we sacrifice a greater cheapness to gain a less, and we sacrifice cheapness in the article which we most want, and would import by preference, while our compensation is cheapness in an article which we either could produce more advantageously at home, or which we have so little desire for, that it requires a species of bounty on the article to create a demand.
Restrictions on importation do, however, tend to keep down the value and price of our remaining imports, and to keep up the nominal or money prices of all our other commodities, by retaining a greater quantity of money in the country than would otherwise be there. From this it obviously follows, that if the restrictions were removed, we should have to pay rather more for some of the articles which we now import, while those which we are now prevented from importing would cost us more than might be inferred from their present price in the foreign market. And general prices would fall; to the benefit of those who have fixed sums to receive; to the disadvantage of those who have fixed sums to pay; and giving rise, as a general fall of prices always does, to an appearance, though a temporary and fallacious one, of general distress 5.
It is right to observe that the measures of the British Legislature which have been falsely characterised as measures of free trade, must, from their extremely insignificant extent, have produced far too little effect in increasing our importation, to have actually led, in any degree worth mentioning, to the results specified above.
It is of greater importance to take notice, that these effects may be entirely obviated, if foreign countries can be prevailed upon simultaneously to relax their restrictive systems, so as to create an immediate increase of demand for our exports at the present prices. It is true that exports and imports must, in the end, balance one another, and if we increase our imports, our exports will of necessity increase too. But it is a forced increase, produced by an efflux of money and fall of prices; and this fall of prices being permanent, although it would be no evil at all in a country where credit is unknown, it may be a very serious one where large classes of persons, and the nation itself, are under engagements to pay fixed sums of money of large amount.
10. The only remaining application of the principle set forth in this essay, which we think it of importance to notice specially, is the effect produced upon a country by the annual payment of a tribute or subsidy to a foreign power, or by the annual remittance of rents to absentee landlords, or of any other kind of income to its absent owners. Remittances to absentees are often very incorrectly likened in their general character to the payment of a tribute; from which they differ in this very material circumstance, that tribute, if not paid to a foreign country, is not paid at all, whereas rents are paid to the landlord, and consumed by him, even if he resides at home. The two kinds of payment, however, have a perfect resemblance to each other in such parts of their effects as we are about to point out.
The tribute, subsidy, or remittance, is always in goods; for, unless the country possesses mines of the precious metals, and numbers those metals among its regular articles of export, it cannot go on, year after year, parting with them, and never receiving them back. When a nation has regular payments to make in a foreign country, for which it is not to receive any return, its exports must annually exceed its imports by the amount of the payments which it is bound so to make. In order to force a demand for its exports greater than its imports will suffice to pay for, it must offer them at a rate of interchange more favourable to the foreign country, and less so to itself, than if it had no payments to make beyond the value of its imports. It therefore carries on the trade with less advantage, in consequence of the obligations to which it is subject towards persons resident in foreign countries.
The steps of the process are these. The exports and imports being in equilibrium, suppose a treaty to be concluded, by which the country binds itself to pay in tribute to another country, a certain sum annually. It makes, perhaps, the first payment by a remittance of money. This lowers prices in the paying country, and raises them in the receiving one: the exports of the tributary country increase, its imports diminish. When the efflux of money has altered prices in the requisite degree, the exports exceed the imports annually, by the amount of the tribute; and the latter, being added to the sum of the payments due, restores the balance of payments between the two countries. The result to the tributary country is a diminution of her share in the advantage of foreign trade. She pays dearer for her imports, in two ways, because she pays more money, and because that money is of higher value, the money incomes of her inhabitants being of smaller amount.
Thus the imposition of a tribute is a double burthen to the country paying it, and a double gain to that which receives it. The tributary country pays to the other, first, the tax, whatever be its amount, and next, something more, which the one country loses in the increased cost of its imports, the other gains in the diminished cost of its own.
Absenteeism, moreover, though not burthensome in the former of these ways, since the money is paid whether the receiver be an absentee or not, is yet disadvantageous in the second of the two modes which have been mentioned. Ireland pays dearer for her imports in consequence of her absentees; a circumstance which the assailants of Mr. M'Culloch, whether political economists or not, have not, we believe, hitherto thought of producing against him.
