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. ^^. 
 
 ECONOMIC NOTES 
 
 ON 
 
 NSULAR FEEE TEADE 
 
 BY 
 THE RIGHT HON. 
 
 AETHUK JAMES BALFOUR, M.P. 
 
 RKi- 
 
 SIXTH IMPRESSION 
 
 LONGMANS, GREEN, AND CO. 
 
 ■6d PATEENOSTER ROW, LONDON 
 
 NEW YORK AND BOMBAY 
 
 1903 
 
ECONOMIC NOTES 
 
 ON 
 
 mSULAE FREE TRADE 
 
 BY 
 THE RIGHT HON. 
 
 ARTHUR JAMES BALFOUR, M.P, 
 
 SIXTH IMPRESSION 
 
 LONGMANS, GREEN, AND CO 
 
 39 PATERNOSTER ROW, LONDON, 
 
 NEW YORK AND BOMBAY 
 
 1903 
 
-^^^tl- 
 
 
 
 PREFACE 
 
 These Economic Notes were circulated to my colleagues 
 in the first days of August substantially as they are now 
 reprinted. A few alterations have been made, chiefly 
 for the sake of clearness ; and two brief illustrative tables 
 have been added in an Appendix (p. 32). Though the 
 argument is occasionally somewhat abstract, and occasion- 
 ally somewhat compressed, I think that perhaps a larger 
 circle than that for which the paper was originally written 
 may like to have an opportunity of reading it. Hence its 
 publication. 
 
 It is one of the difficulties inherent in the present con- 
 troversy that some important points can hardly be made 
 interesting, or even intelligible, on the platform without 
 an amount of expansion and illustration which would 
 render it impossible to put them in their proper setting 
 within the limits of a single speech. The more general, 
 and in some respects more theoretical, treatment of the 
 problem attempted in this essay may, therefore, be a 
 fitting preliminary to the statement which it will be the 
 duty of the writer in a few days to make before a public 
 audience. 
 
 A. J. B. 
 
 Downing Street, September 1903. 
 
ECONOMIC NOTES 
 
 ON 
 
 INSULAR FREE TRADE 
 
 Ix the following Paper I propose to discuss some of the more 
 fundamental economic questions which (as I think) require 
 consideration on the part of those who desire to arrive at a 
 sober and unprejudiced estimate of our fiscal policy. The 
 present controversy has brought into existence, or at least into 
 notice, masses of statistical information, official and unofficial ; 
 the documentary flood is rising, and for some time to come is 
 not likelv to diminish. But in order that the volume of facts 
 thus provided should instruct and not merely overwhelm us, it 
 is necessary to consider it in the light of theories and principles, 
 always, of course, open to revision in the light of experience, 
 but without the provisional use of which experience itself can 
 utter no intelligible oracles. 
 
 It may be as well to premise that I approach the subject 
 from the free trade point of view : though the free trade is 
 perhaps not always that which passes for orthodox in the House 
 of Commons or on the platform. There is indeed a real danger 
 of the controversy degenerating into an unprofitable battle of 
 watch-words, behind which there is nothing deserving to be 
 called independent reflection at all. Popular disputation insists 
 on labels ; and likes its labels old. It therefore divides the 
 world, for purposes of fiscal controversy, into protectionists and 
 free traders. Those who are protectionists are assumed to be 
 protectionists after the manner of Lord George Bentinck. 
 Those who are free traders are assumed to be free traders after 
 the manner of Mr. Cobden. Does a man question the dogma 
 that taxation must always be for revenue ? Then evidently he 
 
4 ECONOMIC NOTES ON 
 
 hankers after the fiscal system of 1841 and a twenty-shilling duty 
 on corn. Does he admire the tariff reforms of sixty years ago ? 
 Then evidently he regards the simple and unqualified doctrine 
 of " free trade '"* as so fundamental in its character, so universal 
 in its application, so capable of exact expression, that every 
 conclusion to M'hich it logically leads must be accepted without 
 hesitation or reserve. 
 
 I am a " free trader," but not, it must be acknowledged, 
 precisely after this pattern. 
 
 I. 
 
 1. That there may indeed be a collision between free trade 
 and greater issues is easily seen if we reflect that an ideal 
 world, from a narrowly economic point of view, would be 
 one in which capital and labour w^ould flow without hindrance 
 to the places where profits were greatest and wages highest. 
 Under the stress of economic forces they would immediately 
 adjust themselves to a position of temporary equilibrium, as 
 the ocean adjusts its level under the force of gravity. Such 
 a system, were it possible, would certainly be one of " free 
 trade" in the fullest sense of that much abused term, and 
 under it the wealth-producing capacities of mankind would be 
 all that free trade can make them. 
 
 2. But this perfect fluidity of capital and labour, however 
 excellent its other consequences, would evidently be inconsis- 
 tent with national life as we understand it. Nations could 
 not be maintained, at least in their present shape, except 
 through the accumulated effect of the various causes which 
 in their sum total make up what may be called " economic 
 friction,'' just as the continents on which they live are 
 only prevented by cohesion and mechanical friction from 
 merging in the ocean by which they are surrounded. It 
 is because mankind are largely ruled by custom, are fond of 
 home and country, cannot easily acquire new aptitudes and new 
 languages, cannot migrate without cost and risk, that labour is 
 not "fluid." And though certain kinds of capital are really 
 
INSULAR FREE TRADE 5 
 
 fluid, yet as a ^^hole capital also is '' viscous " ; and partly 
 because much of it is in a shape which cannot easily be moved 
 or cannot be mo^•ed at all ; partly because business channels are 
 chancred slowly and with difficulty ; partly because, when the 
 owner of the capital has to superintend its employment, he 
 may, like other workers, be reluctant to change his home and 
 his' country, it also flows but gradually to the places where, 
 under a system of " free trade" as above described, it would find 
 its most profitable employment. 
 
 3. Nations, as we know them, are therefore economically 
 possible only because, for various reasons, mankind are both 
 unable and unwilling to turn the natural resources of the world 
 to the best economic account. It is the partial immobility of 
 capital and labour to which this result is due, which makes it 
 necessary for economists to distinguish between the theory of 
 international, and the theory of internal trade. And though 
 the '• countries"'^ which figure in economic treatises as the units 
 between which international trade takes place, are not necessarily 
 identical with the " countries " which are the subject of inter- 
 national law, the fact remains that these last,— the actual nations 
 into which the world is parcelled out,— would never have come 
 into being, and could never be maintained as they are, but 
 at the cost of something which, from the point of view of 
 pure free trade theory, must be regarded as economic waste. 
 And inasmuch as they are thus a standing violation ^ of 
 cosmopolitan free trade (as above defined) it is not surprising 
 that in their efforts at self-preservation they have not felt 
 themselves bound to consider only arguments drawn from 
 cosmopolitan economics. They have taken into account, not 
 always wisely, something more than the present pecuniary 
 interest of individual consumers and producers, they have 
 recognised that the state is something more than the indi- 
 viduals composing it at any one time, and that not only is 
 it irrational to suppose that what is good for the wealth- 
 producing capacity of the world must necessarily be good 
 for each particular state ; but that cpiite certainly it is not. 
 
 4. This last^ proposition would have been accepted by 
 
6 ECONOMIC NOTES ON 
 
 Adam Smith ; and so far as I know would be denied by 
 no economist of repute. But there is nevertheless a wide- 
 spread idea that what is economically " natural " as opposed 
 to what is artificial or state contrived, is probably expedient, and 
 that at least the burden of jiroof lies with those who take a 
 different view. This theory, which belongs to a somewhat 
 antiquated mode of thought, is I think incorrect. Each 
 suggested example of state interference, in this or any other 
 sphere of activity, has of course to make good its claim to 
 acceptance. But it would be a most singular coincidence if 
 (for example) every " natural "" cause which promoted the easy 
 flow of capital and labour from area to area, should also 
 promote the interests of particular nations, the number of 
 whose population and the character of whose commerce 
 are largely founded upon the partial immobility of these very 
 partners in production. 
 
 5. There is no doubt a better argument against state 
 intervention in matters of trade than any to be extracted 
 from the a priori social theories so fashionable in the eighteenth 
 century — an argument based on a deep-seated distrust of 
 the competence of Legislatures. Adam Smith, for example, 
 held much the same opinion of Kings and Parliaments as 
 some persons do of doctors. He did not doubt that tonics 
 might be found to invigorate national commerce, but he did 
 most gravely doubt whether the authorised practitioners 
 would find them. This however is hardly an assumption on 
 which we can proceed in these days of Factory legislation, 
 Housing legislation, compulsory Education, inspection of 
 Mines, and Mercantile Marine Acts. Parliament can hardly 
 assume its own incompetence as a fundamental axiom, however 
 plausible this may appear as a working hypothesis. Having 
 recognised the general truth that there is no pre-established 
 harmony between economic world interests and national 
 well-being, we seem required to abandon the '' la'isscr faire^'' 
 position as absolute dogma, and to accept provisionally the 
 view that the character of our fiscal policy should vary with 
 varying circumstances, and that we have no right whatever to 
 
INSULAR FREE TRADE 7 
 
 regard any plan as perfect, merely because it is simple, 
 unartificial, and, above all, familiar. 
 
 II. 
 
 6. The plan we should adopt must evidently depend upon 
 the end we wish to secure, upon the kind of state we desire 
 to create or to maintain. Without considering the motives 
 which have from time to time dominated the fiscal policy of 
 other countries, it is only necessary here to say that so far as 
 Great Britain is concerned, the contest which came to an end 
 in 1846 was, in its inner reality, not a fight over an economic 
 theory, but a struggle between two opposing ideals supported 
 by two rival interests. Was the countiy to become more and 
 more a manufacturing community ? or was agriculture to be 
 maintained, at whatever cost, in its ancient predominance, with 
 all the social and economic consequences which were, or were 
 thought to be, involved in such an attempt ? 
 
 7. The country decided (in my opinion rightly) in favour 
 of the first of these alternatives. Its benefits, to be sure, have 
 not been unmixed ; but it has this conclusive argument in its 
 favour, — that a predominantly agricultural Britain could never 
 have supported the men or furnished the money required for her 
 imperial mission. 
 
 It must, however, be remembered that this " manufacturing 
 ideal ^ can only be made tolerable, indeed can only be realised, 
 if two conditions are satisfied : — (a) that inasmuch as conditions 
 of climate render it obligatory to import many of our luxuries, 
 and conditions of population and manufacture render it 
 obligatory to import many of our necessaries, a large export 
 trade is necessary in order that these things shall be paid for ; 
 (b) that sufficient capital shall always be forthcoming for 
 home investment in order that this end may be attained, and 
 employment provided for our growing urban population. J 
 
 8. These corollaries which flow from the adoption of the 
 manufacturing ideal in a country situated like Great Britain, 
 suggested no anxious thought to fiscal reformers fifty or 
 
 ^ 
 
8 ECONOMIC NOTES ON 
 
 sixty years ago. They made, indeed, two mistakes, neither 
 of which (as I shall show more in detail presently) would, 
 perhaps, have greatly mattered without the other. They failed i 
 to foresee that the world would reject free trade, and they | 
 failed to take full account of the commercial possibilities of I 
 the British Empire. If they had been right on the first 
 point, if free trade had indeed become a universal creed, no 
 controversy about our commercial relations with any fiscally 
 independent community could possibly have arisen. If, on the 
 other hand, they had succeeded in giving us Imperial free trade, 
 the protective tendencies of foreign nations would in the long 
 run have been but of secondary importance. The double error 
 has established insular free trade with its inevitable limitations, 
 and left us bearing all the burden, but enjoying only half the 
 advantages, which should attach to Empire. 
 
 9. It must, I think, be accounted a misfortune that the 
 views of the great tariff reformers were thus restricted. The 
 most momentous, perhaps the most permanent, victory for 
 Free Trade was won when, rather on national than on 
 economic grounds, inter-state tariffs were forbidden in the 
 United States. I know not whether sixty years since a like 
 victory might have been won for the same cause within the 
 limits of the British Empire. In any case, the attempt 
 was neither made nor dreamed of, and future efforts in that 
 direction can, under altered conditions, be only gradual and 
 tentative. 
 
 10. However this may be, we must now accept the fact that 
 while our own free trade is rather insular than imperial, the 
 most advanced of our commercial rivals are not only protec- 
 tionist now, but in varying measure are going to remain so. 
 Other nations have in the past accepted the principle of free 
 trade ; none have consistently adhered to it. Irrespective of 
 race, of polity, and of material circXimstances, every other fiscally 
 independent community whose civilisation is of the western type 
 has deliberately embraced, in theory if not in practice, the 
 protectionist system. Young countries and old countries, rich 
 countries and poor countries, large countries and small countries, 
 
INSULAR FREE TRADE 9 
 
 free countries and absolutist countries, all have been moved 
 by the same arguments to adopt the same economic ideal. In 
 circumstances so little foreseen we are driven to ask whether 
 a fiscal system suited to a free trade nation in a world of free 
 traders^ remains suited in every detail to a free trade nation in 
 a woi'ld of protectionists. 
 
 III. 
 
 11. As already stated, I approach this question as a free 
 trader, i.f., with the desire to promote free trade as far as 
 contemporary circumstances permit. I throw no doubt on the 
 free trade theory when expressed with due limitations. It 
 tells us that international free trade promotes wealth, because 
 it conduces to an international division of labour. Each country 
 is enabled to turn its industrial ca})abilities to the best account ; 
 to purchase what it wants but cannot produce, or wants but 
 cannot produce except at a relative disadvantage, by the export 
 of those commodities for the production of which it is in a 
 position of relative advantage. This system, therefore, tends 
 to secure that each country does most what it does best, and 
 buys what it needs at the least possible cost. 
 
 12. There can, I think, be no question that, speaking broadly, 
 this is the best way of securing for the world the largest imme- 
 diate results for international commerce and industry. It is by 
 no means equally certain that it secures for each separate nation 
 the maximum of well-being ; nor even (under conceivable con- 
 ditions respecting the flow of capital and labour) the maximum 
 of wealth. Moreover, the majority of economists hold (I think 
 rightly) that it may sometimes sacrifice the future to the present, 
 and delay what might ultimately have proved to be the most 
 productive distribution of capital and labour. 
 
 13. It is not, however, with these qualifications of the 
 doctrine of universal free trade that we are now principally 
 concerned. Our business is with the only free trade which we 
 are ever likely to see; namely, free trade in some nations 
 limited by protection in others. Of this partial free trade we 
 
 a2 
 
10 ECONOMIC NOTES ON 
 
 may say in general, that its merits must be accepted with all 
 the reserves ah'eady mentioned, and with this one in addition — 
 that under conceivable circumstances free trade may not save a 
 nation from suffering more by the adoption of a protective policy 
 by its neighbours than do those neighbours themselves, nor even 
 from being worse off than it would have been had it never 
 pursued a free trade policy at all. 
 
 IV. 
 
 14. In what way then can this take place, — what is the 
 precise nature of the injury done to a free trade country by the 
 adoption of protection by its neighbours ? Presumably such 
 a country bears its share in the general economic loss which the 
 widespread adoption of a bad fiscal system inflicts on the world 
 at large. Does it in addition suffer any special loss ? 
 
 This is in other words to ask what is the special value to a 
 free trade country of open markets. That our whole national 
 policy impHes their value is plain enough. We negotiate 
 strenuously to maintain those that exist ; there arc some for 
 which we should assuredly fight. It would be commonly 
 admitted that the absorption by a protective nation of any 
 rich non-protective area with which we had commercial dealings 
 would produce not merely a temporary disturbance of our 
 trade, but a sensible diminution of our permanent gains. 
 
 J 5. If this be true, it is of course because any check to 
 our ^export trade is injurious. But why is it injurious.? 
 From the consumer's point of view, at least, it would seem 
 that it is only what we import that matters. And in a 
 sense that is so. But since the fortunes of the import trade 
 are indissolubly united with those of the export, it may well 
 happen that though the exporting manufacturer is the first 
 to feel the pinch of hostile tariffs, it is the importing consumer 
 who ultimately suffers. 
 
 16. Consider, for example, a simple case. Suppose that an 
 island, which had shaped its industrial system on the Cobdenite 
 
INSULAR FREE TRADE 11 
 
 model, found itself confronted by a world in which every other 
 state adopted an extreme form of protection. What would be 
 the consequence of such a situation to the island itself, and in a 
 less deo-ree to other countries? The answer to this question 
 
 o ... 
 
 must, I conceive, vary according to the economic characteristics 
 which we choose to attribute to our imaginary example. 
 
 17. Take for consideration three variations of the problem. 
 Let us assume, in the first place, that the productive capacity 
 of our imaginary island is small in amount, and restricted in 
 range ; and further, that it can neither grow nor manufacture 
 anything which cannot, with the help of protection, be gi'own 
 or manufactured at a profit in the protective countries. In 
 such circumstances I conceive that the fiscal policy of these 
 countries would completely ruin it ; and that they would suffer 
 but little in the process. This case I may parenthetically 
 observe is not unlike that of our own colony of St. Vincent 
 where, according to the Commission of 1900, nothing could be 
 produced but sugar,— sugar, which under the then prevailing 
 system of bounties, could nowhere be sold except at a loss. 
 
 18. An economic area so situated is helpless. Having 
 founded its industrial system on a free trade basis, having 
 encouraged the growth ol population and the investment of 
 capital, in the belief that it could readily purchase what it 
 needed by the sale of its exports, it discovers that, by no fault 
 of its own, nor through any operation of nature, this sale is 
 becoming more and more difficult ; that only by the reduction 
 of profits and wages can it be temporarily continued ; and that 
 finally it becomes impossible. Capital either flies to happier 
 regions or is lost ; labour either emigrates or sinks to savagery, 
 and unless other help arrives our island returns to the state of 
 natm-e from which it had surely been better that it had never 
 emerged. 
 
 19. This represents of coui'se an extreme case ot economic 
 dependence. Let us now consider one of the opposite type 
 Assume that our imaginary island is of vast extent, enjoying 
 consequently great varieties of climates, with a population small 
 
J2 ECONOMIC NOTES ON 
 
 compared to its food-producing area, and with natural resources 
 fitted to minister to all their needs. Such a country finding its 
 exports gradually diminished by growing foreign tariffs, would, 
 no doubt, suffer some economic loss. But it will be very 
 differently situated from St. Vincent. Though it will have to 
 manufacture at home much that it hitherto imported, though 
 capital and labour would be diverted into channels which, at 
 least for a time, would be less advantageous than those through 
 which they had hitherto flowed, yet in the long run the con- 
 dition of such a country would, I conceive, not be seriously worse 
 than if it had been permitted by its neighbours to pursue its 
 industrial development along free trade lines. Though the 
 markets of the world might be closed to it by protection, its 
 own would not be seriously insufficient. Domestic free trade 
 would be enough. 
 
 V. 
 
 20. But now take a third case. Let us assume our imaginary 
 island to be rich in mineral resources, and adequately provided 
 with capital and labour, but to possess no striking advantages 
 over other areas, no natural monopoly in respect of the things 
 it was best fitted to produce. Let us further suppose that 
 owing to the law known to economists as that of " diminishing 
 returns,"" it could not find food within its own limits for a 
 growing population, except at rapidly increasing cost, and that 
 therefore free trade and industrial expansion involved increasing 
 j dependence on external areas of food supply. 
 
 21. Now, what would happen to a country thus naturally 
 endowed, and thus industrially organised, if it found itself 
 confronted with a universal system of augmenting tariffs ? As 
 an economic example it stands between oui* first case and our 
 second. Which does it most resemble ? 
 
 It cannot be doubted, I think, that though it could never 
 find itself in the position of St. Vincent, it would not only 
 be incomparably worse off than the larger area of our second 
 supposition, but worse off than it would have been had it 
 
INSULAR FREE TRADE 13 
 
 never adopted the free trade policy, the advantage of which 
 it has lost through the protective policy of its neighbour. 
 
 From the very nature of the case free trade requires open 
 markets somewhere. If the free trade country is large enough 
 and varied enough, the open markets within its own territory 
 may, as we have just seen, be sufficient. They will not be 
 sufficient if the character and capabilities of the country 
 are limited in such a way that, while large imports are a vital 
 necessity, the exports required to pay for them are not of a 
 kind which other nations— all, by hypothesis, protectionist- 
 are obliged to take. 
 
 22. I imagine that in the conditions supposed, the free 
 trade island would be compelled to change the character of its 
 industries so as to find the weakest spot in the protective 
 barrier. Each change would probably involve a double loss, 
 —the loss of part of the capital and skill devoted to the 
 abandoned industry, and the loss due to the fact that the new 
 industry was presumably less remunerative than the old. Each 
 change would also, by supposition, be sooner or later foiled 
 by some corresponding augmentation of the hostile tariffs. 
 When all was got out of this industrial re-aiTangement which it 
 was capable of gi\dng, the free trade island would have no resource 
 but to pm-chase its imports by lowering prices to the point 
 at which it became possible to force its manufactures through 
 the tariff obstacles by which its exports were impeded. If 
 no diminution of profits or wages enabled such a point to 
 be reached, the island would no longer be able to support 
 its existing population ; nor would any equilibi'ium be attained 
 until, at the cost of much suffering, it was reduced to the 
 position of being self-sufficient— producing that is to say, within 
 its own area, all that it consumed— however little soil, climate, 
 and mineral resources lent themselves to such a policy. 
 
 23. It may perhaps be objected that this imaginary case 
 is not instructive even as a hypothesis, since the protective 
 countries would never be so foolish as to injure their own 
 export trade by impoverishing, and perhaps ruining, a good 
 customer. They might do it in cases like St. Vincent where 
 
14 ECONOMIC NOTES ON 
 
 the amounts involved were small. But plain considerations 
 of self-interest would seemingly forbid so suicidal a policy 
 where the amounts involved were large. 
 
 But are the considerations of self-interest so plain ? However 
 sound be the economic doctrine on which they depend it is 
 not one which easily appeals to protectionists. They would 
 not be protectionists if it did. What they look to are the 
 immediate and obvious consequences which are assumed to 
 flow from high tariffs ; and in the supposed case the obvious 
 consequences are exactly what they desire. They would be so 
 eminently satisfied with the successful "protection of Home 
 Markets "' and the weakening of a commercial competitor, that 
 the more obscure causation of the counter-stroke which pro- 
 tection delivered against their own exporters would leave them 
 unmoved. Here, indeed, if anywhere, the appeal to history 
 should surely be conclusive. We have countless records of 
 fiscal arrangements by which one nation has sought to benefit 
 its commerce at the cost of another. Can a single example of 
 the reverse process be produced ? Has there ever been a nation 
 which modified the commercial policy to which it was otherwise 
 inclined, lest it should cripple the trade of a dangerous rival, 
 who happened also to be an important customer? I trow not.* 
 
 VI. 
 
 24. Among the three variations of our original supposition 
 we are clearly most concerned with the last. The industrial 
 characteristics with which in that case we credited our imaginary 
 community, are precisely those actually possessed by Great 
 Britain. Why then, it may be asked, does Great Britain not 
 suffer all the ills with which our hypothetical island was 
 threatened? That it does not is manifest. We imagined a 
 
 * It must be remembered that it need not be the protective policy 
 of country B which directly and obviously makes it impossible for 
 free trade country A to pay for B's exports. The direct cause 
 might be protection in country C, through which A used to pay its 
 debts to B, but can so pay no longer. 
 
INSULAR FREE TRADE 15 
 
 free trade country completely environed by a wall of pro- 
 tection ; a -wall high enough to make export first difficult and 
 then impossible. We inferred that it would find imports first 
 costly, and then unattainable. In actual fact we see Britain 
 hampered indeed by foreign tariffs, yet able, in spite of them, to 
 carry on an export trade which, if it does not increase as we 
 might wish, yet increases rather than diminishes, and an import 
 trade of unexampled magnitude. 
 
 25. In what then resides the difference between the two cases ? 
 In three separate particulars. 
 
 (a) Foreign countries owe us a great deal of money, which 
 they pay by means of imports into the United 
 Kingdom.* 
 
 {h) Large areas still remain which are not protected at 
 all. 
 
 (c) Existing protected areas are not completely protected. 
 
 It is these three causes, and these alone, which prevent this 
 country undergoing the fate which, in the third example, befell 
 the hypothetical island. Each, therefore, deserves careful 
 consideration. 
 
 VII. 
 
 26. As regards the national income from foreign investments, 
 it has to be observed that while it must always be better for 
 the inhabitants of any country to own capital than not to own 
 it, it is better that the capital they o^vw should be earning a 
 profit at home, than that it should be earning the same profit 
 abroad. If, indeed, there is no further room at home for the 
 
 * Under the first head I do not refer to freights or commissions. 
 These it is more convenient to treat as payment, not for exported 
 capital, but exported sendees. They should be classed with the 
 payments for ordinary material exports, such as textiles or hard- 
 wares. At present we are concerned with the interest on foreign 
 loans, and the profits on commercial undertakings abroad, paid 
 to persons inhabiting this country. 
 
16 ECONOMIC NOTES ON 
 
 employment of capital, then, no doubt, it will be far better 
 for all concerned that the overflow of wealth should be turned 
 to account elsewhere than that it should run to waste. On the 
 other hand, if capital which goes abroad might have increased 
 the effective demand for British labour, its expatriation is 
 pro tanto a loss to the labourer and the nation, if not to the 
 capitalist himself. 
 
 27. Now it seems clear that in many cases this expatriation 
 of capital can be, and is, encouraged by foreign protective 
 tariffs. The imposition of a protective duty upon any article 
 of British manufacture has of course the double effect of 
 discouraging its production here, and encouraging its pro- 
 duction in the protectionist country — say Belgium. The 
 popular free trade account of what happens in consequence 
 is that, on the one hand, the English manufacturer and 
 artisan are injured by the diversion of industry into some 
 other, and presumably less profitable, branch of British 
 industry ; on the other, the Belgian consumer is mulcted in 
 order to find a profit for the Belgian manufacturer. It is the 
 latter, therefore, alone who profits by the transaction. All the 
 rest are losers, though the British loss, so far as this particular 
 industry is concerned, is confined to that part of it which 
 supplied Belgium, and does not affect its success either in the 
 home or in neutral markets. 
 
 28. But this is by no means what necessarily happens. It 
 is assumed apparently that the British manufacturer adheres 
 to his country and changes his business. But he may choose 
 the other alternative. He may adhere to his business and 
 {qud manufacturer) change his country. He may transfer, 
 that is to say, all that is transferable of his capital to 
 Belgium ; engage there, under the shield of protection, in the 
 very industry from which foreign protection had driven him at 
 home, and possibly compete not only in neutral but in British 
 markets with his unprotected countrymen. It is, I think, 
 manifest that if this should happen the fiscal arrangements 
 of Belgium will have destroyed some invested British capital 
 and son^ acquired British skill; will have directly injured the 
 

 INSULAR FREE TRADE 17 
 
 British workman and the Belgian consumer ; will have directly 
 benefited the British consumer ; will have directly benefited the 
 Belgian workmen and the English capitalist engaged in the 
 Belgian industry ; will have (if the capitalist continues to spend 
 his profits at home) indirectly benefited England by increasing her 
 foreign revenue; and will have indirectly injured her industries 
 by giving them a subsidised rival. Without attempting to 
 set out these various losses and gains in a national balance- 
 sheet (which would, of course, show different results for each 
 concrete case), it is, I think, plain that foreign investments of 
 tKis description are by no means the unmixed benefit which 
 some people appear to suppose. 
 
 29. We may, however, reasonably hope that the great 
 bulk of our investments abroad are not of this character ; but 
 have been on the whole of advantage both to foreigners and to 
 ourselves. It must not, however, be forgotten that the magni- 
 tude of these investments is due rather to the fact that we 
 were first in the industrial field, than to the intrinsic merit 
 of our fiscal system. Not every country which adopts free 
 trade is destined to possess a large surplus of available capital, 
 nor even to retain at home all the capital it requires for 
 domestic use. 
 
 VIII. 
 
 80. The second advantage which the actual Great Britain 
 possesses over its hypothetical counterpart is to be found in 
 the large portion of the earth^s surface where protective 
 tariffs are still, to all intents and purposes, unknown. These 
 free trade areas consist either of countries which are protective 
 in theory but not in practice, where the absence of manufac- 
 tures makes importation an imperative though unwelcome 
 need (e,g,, the States of South America and the small non- 
 manufacturing States of Europe) ; or of countries whose tariff- 
 systems have, through historical circumstances, become more or 
 less subject to international control {e.g., Turkey and China) ; 
 
 or of the Dependencies, Crown Colonies, and Protectorates of 
 
 the British Empire. 
 
18 ECONOMIC NOTES ON 
 
 31. Of the first it need only be said that so far they add 
 to the neutral markets of the world not because they will, but 
 because they must. They are not converts to the cult of 
 free trade, though under the stress of necessity they obey its 
 precepts. It rests not with us, but with circumstances 
 depending upon the general movement of industry, and the 
 character of their own internal resources, to determine how 
 long they will thus remain fiscally " orthodox '' against their 
 wishes. 
 
 32. Our position in respect to the second and third class is 
 very different. Here, it is neither the compulsion of economic 
 need, nor the persuasive force of economic argument, which 
 enables us to retain open markets for our manufactures. It is 
 in the last resort on military power that our diplomatic 
 rights in some of these regions, and our ten-itorial rights in 
 others, essentially depend. Without it they would ultimately 
 lapse ; and sooner or later these areas would become absorbed 
 by one or other of the great protective powers, and their 
 markets be lost to us for ever. When we reflect how 
 necessary these are to the full success of insular free trade, 
 and remember how in many cases they have been originally 
 won, and how in all cases they are now maintained, I marvel 
 that small armaments, small responsibilities, a small empire, 
 and a large external trade should ever have been considered 
 as harmonious elements in one political ideal. 
 
 33. If we look to the futui'e of these various classes of 
 non-protective areas there seems no probability of their 
 increase ; while industrial changes, political accidents, and 
 international complications may at any time diminish them. 
 The agricultural states who, if they had any manufactures 
 to protect, would hasten to protect them, may in process of 
 time become " industriahsed." The expansion of the Empire 
 has, broadly speaking, reached its limits. The countries 
 whose markets are, by diplomatic arrangement, equally open 
 to all the world, may, in whole or in part, fall under 
 the control of some predominant protectionist Power. In 
 
INSULAR FREE TRADE 19 
 
 many directions, therefore, there is a possibility of losing 
 free trade temtories. In none does there seem any proba- 
 bility of gaining them ; and it is therefore to the development 
 of their wealth, not the increase of their size, that we must look 
 for any improvement in the opportunities they offer to our 
 enterprise. 
 
 IX. 
 
 S4. The third reason which prevents Britain from suffering 
 the full penalty which might and would befall a free trade 
 community in a completely protectionist world is that tariffs, 
 even in the most protectionist countries, are not absolutely 
 exclusive. In some of those countries, and for some of our 
 main industries, indeed, no loophole is permitted. The barrier 
 is impregnable. Bradford goods do not go to America, nor does 
 bleach to Russia. Yet on the whole there is a large import 
 into the protected area of the commercial world ; protectionist 
 nations and protectionist colonies are still our most important 
 customers. 
 
 35. In order, however, to form an exact estimate of our 
 industrial relation to those communities, we have to consider not 
 merely what is, but what is to be. The tendency of trade, not 
 its momentary position, is what chiefly concerns us. And this 
 gives food for thought. 
 
 36. It is, I think, clear that our export trade, which should, 
 other things remaining the same, have gro^^oi with our growth 
 and with the yet more rapid growth of some of our customers, 
 has, in fact, done neither one nor the other. Absolutely it 
 may have increased, but its rate of increase has on the whole 
 seriously diminished; in some important departments no 
 increase is perceptible, in others there are symptoms of decay. 
 
 37. The cause of this is commonly set down to the "indus- 
 trialisation '' of the world. How, it is asked, can we expect to 
 provide foreign nations with ever-increasing quantities of our 
 manufactures, since they have learned, at our feet, so amply to 
 
20 ECONOMIC NOTES ON 
 
 provide for themselves ? Britain had formerly an undisputed 
 primacy in the industrial world ; she has it no longer ; she 
 could not hope to have it. But, after all, the roots of this 
 great change lie deej) in the nature of things ; why complain of 
 the inevitable ? 
 
 38. But this argument is wide of the mark. No complaint 
 is made of the relative growth in wealth, population and 
 prosperity of other nations. This ought, on the contrary, 
 to be a matter of rejoicing. We might expect* on the free 
 trade theory to gain, not to lose by it. It should increase, not 
 diminish, the rate at which we get richer ; and the tide of 
 international commerce ought to flow, not merely without 
 slackening, but in a volume proportionate to the growing 
 numbers and wealth of the different populations to which it 
 ministers. 
 
 If neither this nor anything like this is happening, it is not 
 simply because " in the nature of things '' and by the operation 
 of some inevitable law it is impossible ; but because it has 
 been made impossible by the operation of hostile tariffs, t 
 National industries have not been allowed to become mutually 
 supplementary ; they have been compelled to become mutually 
 exclusive. Fiscal contrivances have forced them out of co- 
 operative into competitive channels. % 
 
 39. That this is the true theory, on ordinary free trade 
 principles, of what is now taking place, it seems to me im- 
 
 * Though not with absolute certainty. 
 
 t The Board of Trade estimate the ad valorem equivalent of the 
 duties levied on our principal exports to be — in the case of Russia, 
 130 per cent.; of the U.S.A., 72 per cent.; of Austria-Hungary, 
 32 per cent. ; of France, 30 per cent. ; of Italy, 27 per cent. ; of 
 Germany, 25 per cent. ; of Canada, \Q per cent. ; of Belgium, 13 
 per cent. ; of New Zealand, 9 per cent. ; of Australia, 7 per cent. ; 
 of the South African Customs Union, 6 per cent. 
 
 j I do not, of course, mean that under a system of international 
 free trade there would have been no competition between indus- 
 rial nations ; but only that there would have been much less com- 
 petition and much more co-operation. 
 
INSULAR FREE TRADE 21 
 
 possible to deny. But there are two circumstances accom 
 panying the diminishing rate of increase in our export trade by 
 which some observers are greatly consoled. 
 
 They say, in the first place, that if we are losing our pre- 
 dominance in foreign markets, the home market is making 
 corresponding gains. They say, in the second place, that if 
 our staple industries are stationary or retrograde, this is 
 more than made up for by the variety of goods we now 
 manufacture for the foreign consumer. From neither circum- 
 stance can I derive much satisfaction. These are precisely 
 the signs which would accompany the struggle of a free 
 trade country so to modify its industries as to pierce the 
 barrier of foreign tariffs. They are presumably, therefore, in 
 part the consequences of protection. If so, the industrial 
 changes in which they consist must surely involve an economic 
 loss. It would be impossible to hold a version of the free trade 
 theory so perverse as one w^hich assumed that while any artificial 
 diversion of industry due to home protection must necessarily 
 be pernicious, the foreign protectionist accidentally con- 
 fers upon us a benefit which we cannot confer upon 
 ourselves ! 
 
 X. 
 
 40. A closer examination of the details of our export returns 
 in no way allays the anxiety which theoretical considerations 
 thus suixo-est. If we exclude coal from the sum of our exports, 
 
 OO -*■ 
 
 — still more if we also exclude machinery, — there are signs not 
 only of a diminution relative to population, but of a diminution 
 absolute. 
 
 Now what moral, if any, is to be drami from this result ? 
 
 I do not press the consideration that by exporting coal we 
 are lessening our national assets — though this is both true 
 and important. Nor yet do I think much illumination is 
 thrown upon the subject by describing coal as '* raw material."" 
 This is a phrase which easily lends itself to misconstruction ; 
 and if by raw material is meant material whose value is not due 
 in any considerable measure to the expenditure of capital and 
 
22 ECONOMIC NOTES ON 
 
 labour, then coal is not raw material at all. Much labour and 
 much capital has to be expended before what is stored in the 
 seam becomes fit for the furnace. 
 
 41. It is not these considerations which make it desirable, in 
 considering the condition of our export trade, to put coal, 
 machinery, and ships in a class by themselves. The true 
 o-round of the distinction is to be found in the fact that these 
 commodities foster in an especial degree the competition of 
 foreign protected manufactures. Though they may swell our 
 exports now, they must therefore tend to diminish them here- 
 after ; and we can hardly regard the very same phenomenon as 
 at once an indication of prosperity and a cause of decline. 
 
 42. But why (it may be asked) is the export of coal and 
 machinery more pernicious to the future of free trade than that 
 of other British articles used abroad, either as instruments or 
 materials in the production of tariff-protected goods ? 
 
 43. In truth it is a matter of degree. And it may readily 
 be admitted that in most cases foreign protection is but little 
 assisted by these contributory exports. If we did not provide 
 them others would, and almost as cheaply. They constitute, 
 therefore, rather a symptom of the disease than an aggravation 
 of it. Indeed, from one point of view the more we export the 
 constituent elements of the protected manufacture, the less its 
 protection injm-es us. If we imagine an extreme case in which 
 all the constituent elements were exported, and nothing was 
 left to the protectionist country but to fit them together, 
 it is manifest that protection would be little more than a 
 
 name. 
 
 When, however, our exports are of articles in the production 
 of which we hold a privileged position, when they are 
 necessary to the foreign protected manufacturer, and when their 
 value is small compared with the total value of the final result 
 to which they contribute, the case is different. Such exports 
 do more than mark the development of protective tariffs ; they 
 add to their effect. And, therefore, it is that we may, or rather 
 must, look otherwise upon coal and machinery than we do upon 
 
INSULAR FREE TRADE 23 
 
 the manufactured and half-manufactured goods which constitute 
 the rest of our outward-bound trade. 
 
 XI. 
 
 44. If, then, an examination of the quantity and character 
 of our exports to tariff-protected countries confirm the un- 
 satisfactory conclusion which theory independently suggests, we 
 have to ask ourselves whether there is reason to anticipate any 
 improvement in the future. Are we to be permitted to take 
 our fair share in the growing industrial labours of the world, and 
 to reap our fair share of their reward ; or is our position going 
 to worsen relatively to that of other nations, or even to worsen 
 absolutely ? 
 
 45. I see no satisfactory symptoms. The highly developed 
 industrial countries, like Germany, America, and France, give 
 no sign of any wish to relax their protectionist system. The 
 less developed protectionist communities, like Russia and some 
 of om- own self-governing colonies, are busily occupied in 
 building up protected interests within their borders — a process 
 which is doubtless costly to them, but is not on that account 
 the less injurious to us. 
 
 46. Nor has it, I think, been sufficiently noted that the 
 injury in these cases is, or tends to become, a double one. The 
 effect of any artificial stimulus to manufacturers in a country 
 like the United States of America, or Russia, or Canada, is to 
 ante-date the period w^hen their food supplies will be required 
 for internal consumption. Protection of manufactures diverts 
 the supply of capital and labour from agriculture to manufac- 
 tures. It diminishes the relative number of those who grow 
 corn, and increases the relative number of those who eat it 
 without growing it. To us, who not only wish to export 
 manufactures but to import food or (if you prefer it) who have 
 to export manufactures largely because we have to import food, 
 this may become a serious matter ; and in the interests of cheap 
 bread, it is eminently desirable that the produce of the wheat- 
 
24 ECONOMIC NOTES ON 
 
 growing areas available for exportation should be kept at the 
 highest possible level. 
 
 XII. 
 
 47. So far I have only dealt with the injury inflicted on 
 a free trade country by protectionist neighbours through the 
 restriction of markets, the consequent loss of some of the 
 capital and skill by which those markets were formerly supplied, 
 and the diversion of industry into presumably less profitable 
 channels. There is, however, another kind of injury which 
 tariffs, working in alliance with modern methods of trade 
 combination, may inflict upon national enterprise, on which 
 something still requires to be said. 
 
 48. In the popular presentation of the free trade case, it is 
 usually argued that howsoever differential tariffs may foster 
 the production of any articles intended for domestic con- 
 sumption, the country imposing them cripples its power of 
 competing, with that article, in outside markets. Clearly 
 the manufacturer in the protectionist country (so runs the 
 argument) can have no advantages apart from tariffs for 
 the production for the home market of the protected article, 
 otherwise protection would have been superfluous. His 
 position, therefore, in the neutral markets would in any 
 case be worse than that of the rival against whom he 
 is protected. But it is still further worsened by the 
 general operation of protection which raises the cost of 
 living and therefore, it is urged, of production, in the 
 protectionist country. From this it seemingly follows that 
 the free trade manufacturer must always have a double 
 advantage — one natural and one artificial — over his protected 
 rival ; so that his predominance is fully secured in neutral 
 markets, and ajortiori in his own. 
 
 49. The argument is good as far as it goes, but it 
 omits (among many other things) to notice the indirect 
 effort of a contrivance which has only recently been adopted 
 on any considerable scale. 
 
INSULAR FREE TRADE 25 
 
 Put shortly, the contrivance is this: In a country where 
 protective duties render outside interference in some industry 
 (say steel) exceedingly difficult, the steel manufacturers com- 
 bine to fix the home price at a level, which may vary from time 
 to time, but is always well above the cost of production. So 
 far the case does not differ from any other trade combination to 
 raise prices, and protection only facilitates the operation by 
 limiting to a single country the number of persons whose 
 consent is necessary to make the combination effective. 
 
 Its further effects, those with which we are here alone con- 
 cerned, show themselves only when the combination make the 
 export of their protected manufactures play into their general 
 scheme of profit-making. 
 
 50. Now there are three things which it is peculiarly difficult 
 for a manufacturer or combination of manufacturers to do, and 
 at the same time peculiarly desirable. 
 
 The first is to run their works evenly — that is to say, 
 without undue pressure at one period, without dismissing 
 workmen and leaving plant unused at another. 
 
 The second is to design their works on the scale which shall 
 secure the greatest economy of production — which, in the 
 language of political economy, shall take the utmost advantage 
 of the " law of increasing returns.'"' 
 
 The third is to secui*e a footing in foreign markets which are 
 already occupied. 
 
 51. Now, in the attainment of all these objects, any manu- 
 facturer or combination of manufacturers who have, with 
 the help of protection, obtained a command of their home 
 market, are at an immense advantage compared with their 
 rivals in a free trade country. 
 
 The unprotected manufacturer is compelled either to 
 restrict his plant to a point well within what may sometimes 
 be required of it, or, in ordinary times, to leave it partially idle. 
 Even a small excess of supply may lower the price of his 
 goods out of all proportion ; and if it does, he not only loses 
 heavily in respect to this small margin of over-production, 
 but in respect of his whole output. 
 
2G ECONOMIC NOTES ON 
 
 Now, there is no reason to expect that the plant erected 
 to meet an average demand would reach the exact size most 
 conducive to economy of manufacture. Should it prove to do 
 so it could only be by accident. Neither is it practicable to 
 arrange that the plant shall always be kept working full time. 
 If it is, there must evidently be recurrent periods, during which 
 over-production, with the consequent evils just described, must 
 inevitably take place. 
 
 52. Such is the ordinary position of the manufacturer under 
 free trade. Compare with it the position of his protected 
 rival, who controls his home markets. He is not haunted by 
 the fear of over-production. If the home demand slackens, 
 compelling him, if he desires to maintain prices, to limit home 
 supply, he is not driven, like his less-favoured brother, to 
 attain this result by also limiting output. He is not obliged 
 to close part of his works, or to dismiss some of his hands, or to 
 run his machinery on half time. On the contrary, so long as 
 other countries are good enough to offer him open markets, he 
 can dispose of his surplus abroad, at prices no doubt lower, 
 often very much lower, than the prices which his quasi-rnonopoly 
 enables him to obtain at home, but at prices which never- 
 theless make the double transaction, domestic and foreign, 
 remunerative as a whole. 
 
 53. Why, it may be asked, is no similar policy open to the 
 manufacturer in a free trade country? Because free trade 
 makes it difficult for him to obtain control of his home 
 markets ; and because, unless he has this control, it is difficult 
 for him to fix two prices, a low foreign and a high domestic 
 one. If he attempts it he will be undersold in the home 
 market by his rivals, or even, if the divergence of price exceed 
 the double cost of carriage, by himself! His own goods 
 will be re-imported. He will become his own most dangerous 
 competitor ! * 
 
 ■^ There are, indeed, exceptional cases, where, even in a free 
 trade country, a monopoly can be established and where no re- 
 importation is possible — certain shipping combinations provide a 
 concrete ilUistration. Here no distinction can be drawn between 
 free trade and protection. 
 
INSULAR FREE TRADE 27 
 
 It is worthy of note that in theory it is not only possible 
 that the foreign prices charged by the quasi-nionopolist 
 should be less than the home prices, but even that they should 
 be less than the cost of production. And it has often been 
 so in practice. German steel, for instance, has been sold in this 
 country at a price for which no English manufacturer could 
 produce it — or German manufacturer either, without the 
 double aid of combination and protection. 
 
 54-. But why (it may be asked) should any free trader object 
 to such a proceeding ? After all what it comes to is that the 
 German consumer is amiable enough to make a handsome 
 present to the British consumer and sometimes to the British 
 manufacturei'. ^Vhy should either the British consumer or 
 the British manufacturer reject it? I was told the other 
 day of a shipbuilder who was able to obtain contracts solely 
 because he had secured a consignment of German steel at a 
 price lower than it could possibly have cost either to a British 
 or a German ironmaster, ^^^ly should we refuse to our shipping 
 trade a bounty which the Germans are so generously anxious 
 to confer ? 
 
 55. The question is a pertinent one ; yet I think the answer 
 is conclusive. There is a utilitarian objection, as well as a 
 sentimental one, to a form of competition which most persons 
 would instinctively regard as unfair. 
 
 In the first place it disorganises industry. The manufac- 
 tui-ing capitalist when investing his money in costly plant, 
 has, in any case, many risks to run — new discoveries, new 
 inventions, new fashions. Add to these his loss, actual or 
 anticipated, through the operation of foreign protection, aiid 
 his burden becomes insensibly increased. But add yet again 
 the further uncertainty and the further loss due to the system 
 I have just been describing, and he is overweighted indeed. 
 Will the hostile combination keep together long enough to ruin 
 him ? Can his credit stand the strain ? Is it worth while hold- 
 ing on in the face of certain loss and possible ruin ? These are 
 questions which the leaders of the threatened industry cannot 
 but ask. And surely the mer6 fact that they have to be asked 
 
28 ECONOMIC NOTES ON 
 
 must shatter that buoyant energy which is the very soul of 
 successful enterprise. 
 
 56. This is serious ; but this is not all. The " unprotected '"' 
 manufacturer is not only attacked at home but abroad. He, 
 perhaps, possesses what maybe described as the " good will" 
 of some neutral market. He has, in other words, a clientele 
 whom he has served well, and who, under ordinary conditions 
 of trade, would never have deserted him. Suddenly, under 
 the trust system, through no fault of his own, nor through any 
 shortcoming of his staff or plant, he finds himself undersold. 
 It is true that the power of underselling will last no longer 
 than the ring whose monopoly has made it possible. It is 
 also true that in some trades, though only in some, there is 
 nothing so evanescent as these commercial conspiracies. Yet, 
 however short-lived they may be, they have probably lasted 
 long enough to destroy a valuable asset ; and if his business 
 survives at all, it will only be by slow and laborious stages that 
 it can reconquer territory reft from it in a day by a tariff- 
 protected combination. 
 
 XIII. 
 
 57. I have now said enough to indicate the grounds of my 
 difference with our commercial optimists. At first sight their 
 case seems a good one. Judged by all available tests, both the 
 total wealth and the diffused well-being of the country are 
 greater than they have ever been. We are not only rich and 
 prosperous in appearance, but also, I believe, in reality. I can 
 find no evidence that we are " living on our capital," though in 
 some respects we may be investing it badly. Why then, it is 
 asked, do we trouble ourselves to disturb a svstem which has 
 been so fruitful in happy results? 
 
 58. I will not take up the barren challenge contained in 
 the last phrase, or add to the profitless and inconclusive 
 dispute as to whether the growth in our prosperity is due 
 to a good financial system, and the still greater growth in 
 the recent prosperity of some other nation has been reached 
 
INSULAK FREE TRADE 29 
 
 in spite of a bad one. The point to which I desire to direct 
 attention is a different one. I ask the optimists to study 
 tendencies — the dynamics not the statics of trade and 
 manufactures. The ocean we are navigating is smooth 
 enough, but where are we being driven by its tides ? Does 
 either theory or experience provide any consolatory answer 
 to this question? Consider some of the points on which I 
 have commented in these notes: the injury which foreign 
 protection is calculated to inflict on a free trade country ; its 
 need for open markets : the threatened contraction of existing 
 free trade areas; the increasing severity of tariffs in pro- 
 tectionist areas ; the building up of vested protected interests 
 in new countries, which may be discouraged now, but not 
 hereafter ; the eff'ect of this protection on our future corn- 
 supply ; the uncertainty and loss which tariff'-protected trusts 
 are inflicting, and may hereafter inflict, upon British capital 
 invested in Britain. 
 
 59. One and all of these evils, actual and prospective, are 
 due to protection. The man who says that their cumulative 
 effect is so small as to be negligible, can hardly describe 
 himself as a " free trader '"'— at least he can attach but a very 
 small value to free trade. The man who, admitting their 
 reality, does not anticipate their increase has (it seems to me) 
 not learned the lesson which theory and experience agree in 
 teaching. The man who admits their present reality and the 
 probability of their increase, and yet is too contentedly 
 properous even to consider whether any mitigation is practic- 
 able, appears little short of reckless. 
 
 XIV. 
 
 60. I cannot accept any of these positions. It seems to me 
 clear that we are bound to seek for some mitigation ; and that 
 only in one direction can we hope to find it. 
 
 The source of all the difficulty being protective tariff's 
 imposed by fiscally independent communities, it is plain that 
 we can secure no concession in the direction of a freer exchange, 
 
30 ECONOMIC NOTES ON 
 
 except by negotiation, and that our negotiators can but appeal 
 to self-interest or, in the case of our colonies, to self-interest 
 and sentiment combined. 
 
 Now, on the free trade theory self-interest should have 
 prevented these tariffs being originally imposed. But it did 
 not ; and if argument failed before powerful vested interests 
 were created, it is hardly likely to be effective now. 
 
 The only alternative is to do to foreign nations what they 
 always do to each other, and instead of appealing to economic 
 theories in which they wholly disbelieve, to use fiscal induce- 
 ments which they thoroughly understand. We, and we alone, 
 among the nations are unable to employ this means of persua- 
 sion, not because in our hands it need be ineffectual, but 
 because in obedience to '* principle " we have deliberately 
 thrown it away. 
 
 61. The " principle " to which we pay this strangely incon- 
 gruous tribute is, of course, the principle of " free trade.'"* But 
 what a curious view of free trade it implies. The object which 
 these fiscal inducements are intended to attain is increased free 
 trade and nothing else ; yet simply because the "fiscal induce- 
 ment "" may, if it fails of its effect hut not othcrivisc, involve 
 duties not required for revenue purposes, or in certain cases 
 even carry with it some element of protection to home industries, 
 we are to turn away from it as from an accursed thing. 
 
 62. This seems to me, and has always seemed to me, extra- 
 ordinarily foolish. It is certainly quite inconsistent with rational 
 free trade. There is one, and only one, standard by which we 
 can measure the free trade merits of any policy, and that is the 
 degi'ee to which it promotes free trade. This to be sure is as 
 near a tautology as anything well can be, yet seemingly there 
 are free traders to whom it presents itself as heresy, if not as 
 paradox. They regard the maxim " thou shalt not tax except 
 for revenue ''"' not as the concise description of a fiscal ideal, but 
 as a moral imperative of binding force. In their judgment it 
 admits of no qualification or exception. It is, in school 
 jargon, " universal " and " necessary,"''' and could you prove to 
 them that by risking the imposition of the most trifling 
 
INSULAR FREE TRADE 31 
 
 protective tariff at home, it was possible to secure the (greatest 
 relaxation of protective tariffs abroad, they would only answer 
 that we must not do evil that good may come of it I 
 
 63. This attitude of mind seems to me absurd. I hold myself 
 to be in harmonv with the true spirit of free trade when I plead 
 for freedom to ne":otiate that freedom of exchano-e mav be 
 increased. This freedom to negotiate, like all other freedoms, 
 mav of course be abused. But are we therefore in a mood of 
 iiTational modesty to declare ourselves unfitted to enjoy it r I 
 think mvself that it ouo;ht not to be difficult to devise a method 
 
 ^ CD 
 
 of turning it to most useful account. But were I proved to be 
 wrong, mv opinion on the fundamental question would remain 
 unchano^ed. AVhere we fail others may succeed. It cannot be 
 right for a country ^vith free trade ideals to enter into compe- 
 tition with protectionist rivals, self-deprived of the only instru- 
 ment bv which their policy can conceivably be modified. The 
 first and most essential object of our national efforts should be 
 to wet rid of the bonds in which we have crratuitously en tan cried 
 ourselves. The precise manner in which we should use our 
 regained liberty is an important, yet after all only a secondary 
 issue. \Miat is fundamental is that our liberty should be 
 regained. 
 
82 
 
 INSULAR FREE TRADE 
 
 EXPORTS TO PROTECTED AND UNPROTECTED MARKETS 
 
 OF ALL ARTICLES OF BRITISH PRODUCTION, 
 
 EXCEPT COAL, MACHINERY, AND SHIPS. 
 
 I 
 
 Year. 
 
 All 
 
 Countries. 
 
 Principal principal 
 Protected I^^'otected 
 
 Foreign ,,^.^'""^'% 
 
 CountHes. (Victoria & 
 
 Canada). 
 
 All other 
 Countries 
 
 and 
 Colonies. 
 
 India. 
 
 
 
 Value. 
 
 1880 
 1890 
 1900 
 1902 
 
 Thousand £. 
 205,423 
 228,100 
 224,364 
 231,216 
 
 Thousand £. 
 87,124 
 89,416 
 80,906 
 76,667 
 
 Thousand £. 
 11,498 
 13,497 
 12,879 
 14,859 
 
 Thousand £. 
 106,801 
 125,187 
 130,579 
 139,690 
 
 Thousand £. 
 29,278 
 31,349 
 
 27,784 
 29,742 
 
 Peecentage Distribution. 
 
 1880 
 1890 
 1900 
 1902 
 
 Per Cent. 
 100-0 
 100-0 
 100-0 
 100-0 
 
 Per Cent. 
 42-4 
 39-2 
 .36-1 
 33-2 
 
 Per Cent. 
 5-6 
 5-9 
 5-7 
 
 6-4 
 
 Per Cent. 
 52-0 
 54-9 
 58-2 
 60-4 
 
 Per Cent. 
 14-3 
 13-7 
 12-4 
 
 12-9 
 
 II 
 
 Year. 
 
 Value of 
 
 Exports of British 
 
 Produce except Coal, 
 
 Machinery, and Ships. 
 
 Ditto per head of 
 Population. 
 
 1881 
 
 1886 
 
 1891 
 1896 
 1.901 
 
 Thousand £. 
 215,277 
 193,186 
 21.S,270 
 208,931 
 222,726 
 
 £, 
 
 6-2 
 5-3 
 5-6 
 5-3 
 5-4 
 
 Note. — The years selected are those for which ■ the decennial 
 census is in each case first available, and the years falling midway 
 between them. 
 
 Printed by Ballantyne, Hanson A^ Co 
 London^.A^ Edinburgh 
 
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