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A discussion as to why a country should develop its own manufactures will be superfluous. If a country has the necessary raw materials, a favourable climate, the necessary intellect and skill, and everything seems to point to a comparative advantage in some industry, then there is no reason why it should not develop that industry. To try to naturalize a foreign industry for which there is no hope of its ever being worked under conditions of a comparative advantage, will be sheer waste of energy and capital. However, when conditions are favourable, a country might sacrifice a good deal in order to get an industry naturalized.
However, to start an industry means capital investment, and hence there is risk involved if such an infant industry is open to the competition of the same industry in older countries and where the industry has obtained a thorough foothold, for then there is little chance for it ever becoming a success. Foreign manufacturers may take to sporadic dumping in order to prevent the new industry from getting a foothold in the new country. Against this danger legislative measures are required, and as a justification for this step we have the famous “infant-industry” argument. The idea is : protect the young industry and after it has been firmly established and it can meet foreign competition without any further protection, that is, when it becomes indifferent to protection and can sell its product as cheap as the foreign article, then we have a successful application of this argument. If the industry lingers and cannot get along without protection, but constantly clamours for more and more protection, then it will be just as well, and perhaps much better to be without the industry altogether.
John Stuart Mill has left us a classical statement of the infant-industry argument. It is as follows:—“The only case in which on mere principle of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalising a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production often arises only from
having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the production than those which were earlier in the field; besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production, than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burden of carrying it on, until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reasonable time, will sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should the domestic producers ever be allowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing.” (1).
Unfortunately many infant industries, after once having received protection, never seem to outgrow that stage, and clamour for more protection. The only grounds for granting indefinite protection to an industry will be along social, political, or military lines. In other words, although the protected article never becomes as cheap as the imported article, nevertheless a consideration of the home market, home labour, and so forth, will be involved in the argument in favour of this continuation of the protective duty. Before we leave this subject of the infant industry argument, it should be stated that it is not meant to apply to the extractive industries where one has to deal with unalterable physical factors.
As regards the time which might be allowed for protecting young industries, that is hard to say. The American textile, furniture, tool, clothing and metal manufactures were fostered by rigid protective tariffs and shot up from infancy to full maturity in one generation. (2). If conditions are favourable, as for example in the case of the development of the tin-plate industry in the United States during the decade 1890 – 1900, when the high state of development of the steel industry car
1. J. S. Mill: Principles of Political Economy, Book v, Chapter ix.
2. J. A. Hobson: Imperialism: A Study, p. 79.
ried along with it the tin-plate industry, then a rigid protective tariff might produce the desired result quickly. It is likewise possible that some industries will take a much longer time. The only test is whether the industry becomes indifferent to the tariff in a reasonable time. In Germany the tariff encouraged the growth of manufactures which, before 1879, were either in their infancy, or unknown. (1).
There are circumstances under which a nation might protect its industries. There are, for example, certain “keyîndustries” — industries on which other industries of a country depend — which are deemed important enough to get protection, a matter which is brought home to us in the Final Report of the Committee on [British] Commercial and Industrial Policy after the War and in the British Safe-guarding of Industries Act. Secondly, it seems that there is a real necessity for a diversification of industries within a country. There is a cultural aspect to the industrialization of a country, which really cannot be ignored, as well as the fact that it works for economic stability and perhaps makes possible an improvement in the scale of living. (2). Care should, however, be taken as to how far this diversification should be extended. Thus Adam Smith tells us in a classic example that “by means of glassés, hot-beds, and hot walls,' very good grapes can be grown in Scotland, and very good wine can be made of them at about thirty times the expense for which at least equally good wine can be brought from foreign countries." (3).
Thirdly, it should always be remembered, that the real object of tariff-making should be to promote the nation's welfare. When there are in a country industries in which huge amounts of capital are invested and on the life of which industries multitudes of workers depend for their daily bread, then, under certain conditions, it will be rash policy to leave such an industry to its fate. Under a system of protection such industries will at least be sure of the home market in which to dispose of their products, and so keep going.
Protection should, however, be very carefully applied. It very often fattens the manufacturing classes at the expense of the consumer. It has also frequently happened in the industrial history of other nations that protection retards improvements in industrial methods. One should, moreover, remember, as Professor Taussig points out, that the obstacles to new ventures were greater during the first half of the nineteenth
ar should be rememberontries. "se equally
1. J. H. Higginson: Tariffs at Work, p. 11. 2. Cf. J. Grunzel: Economic Protectionism, pp. 340 and 341. 3. Wealth of Nations, Book IV, Ch. II.
century than in the modern period. “The general diffusion of technical knowledge and technical training, the lessening of secrecy in trade processes which is the inevitable result of large-scale operations, the cessation of regulations like the early British prohibitions of the export of machinery, the greater plenty of expert mechanics and machinists, all these factors tend to facilitate the establishment of industries whose difficulties are no more than temporary and transitional:”? (1).
As to the incidence of protective duties there are several distinct cases. Generally it may be said that: ..
a. If an article is imported altogether, if there is no domestic production, the consumers pay the taxes to the Treasury.
b. If there is an inadequate domestic production, so that an important part of the necessaries must be imported, then the import duty will enable the price of the commodity to be enhanced by approximately the amount of the duty, and the consumer will pay the tax partly to the Treasury and partly to the domestic producers in the form of higher prices. ,
c. When domestic competition forces prices down to the level of the prices actually prevailing in the world markets, and goods are then imported, the foreign producer will pay the duty. However, it depends upon the elasticity of consumption of the commodity as to who is going to pay the greater part of the tax. If the demand for the commodity is very inelastic - as, for example, the demand of the rich in pre-prohibition days in the United States of America, for French champagne — then it is possible that the importing country pays the tax; when the demand is elastic, however, then the foreign producer will have to shoulder part of the tax at least in order to sell his product.
d. Sometimes prices are manipulated by trusts. Domestic competition is reduced to a minimum, and the trust will try to get the domestic price slightly lower than the price of the same article in the world market plus the amount of the import duty. Here the consumers pay the tax to the trust. It should, however, be borne in mind, that trusts are not always free to shift a tax in any way they please, especially in the case of an article for which the demand is elastic, and in the case of an
Some Aspects of the Tariff Question,
1. F. W. Taussig: pp. 4— 12.