THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES INSULAR FREE TRADE THEORY AND EXPERIENCE BY RUSSELL, REA, M.P. CASSELL AND COMPANY, LIMITED London, Paris, New York, Toronto and Melbourne MCMVIII NOTE. I This pamphlet is a reprint of a lecture I delivered in ' Birmingham in 1905, considerably extended, with the few fig-ures I made use of brought up to date. I have retained the original form so far as the use of the first person in matters relating to personal experience. I assume on the part of my readers a knowledge of the published records of international trade, and of the statistical case for Free Trade and Tariff Reform as presented to the country by their respective advocates. My object has been to bring into opposition the two theories of foreign trade — that of List and his followers and that of Adam Smith and Free Traders, with the fruits of their policies as practised by foreign nations and by ourselves respectively ; and to add inductive proof or disproof from the experience of two genera- tions, to abstract deductive argument. Russell Rea. January, 1908. CONTENTS. SECTION I. THE TWO THEORIES. PAGE The Function and Limits of Foreign Trade . . 6 The Fundamental Axiom admitted as the Basis of both Theories ...... 9 The Partingf of the two Theories . . . .11 The Protectionist Theory . . . . -13 Application of Protectionist Theory to the United Kingdom ....... 18 Consequences deduced from Protectionist Theory if Great Britain persists in Free Trade . 21 SECTION II. THE TWO THEORIES IN THEIR RELATION TO GREAT BRITAIN, TESTED BY THE EXPERIENCE OF SEVENTY YEARS. (I.) The Protectionist case from experience . . 23 (II.) The Free Trade case from experience . . 28 The nature of the proof required. I. — Static 30 (a) Wc arc keeping the first call on the trade of the world . . . -32 CONTENTS PACJE {l>) We are keeping the best of the trade of the world . . . . . '35 (c) We are keeping- as much of the trade of the world as we can do in good times . 36 The phenomenon of unemployment of the fit and willing- in Great Britain . . . -39 Summary of the case (Static) . . . -41 II. — Dynamic — Protectionist arguments tested 43 {a) Are our markets contracting, and are we at a disadvantage, constantly in- creasing, in the international exchange of commodities? . . . . -44 {b) Are our exports, if not shrinking in quantity, degenerating in kind? . . 45 {c) Are British capital and labour flying to protected countries? . . . ■ 5^ GENERAL CONCLUSIONS. Failure of Protectionist Theory and Practice . . 54 (i) To benefit Protectionist countries . . 55 (2) To injure British trade . . . -59 Forecast of the future . . . . . .60 THE ETHICAL CASE. National and International . . . . • ^3 SECTION I. THE TWO THEORIES. THE FUNCTIONS AND LIMITS OF FOREIGN TRADE. Before entering into the consideration of a theory of foreign trade, either the Free Trade theory or any Protectionist theory, it is necessary to have a clear idea of the functions and limits of foreign trade in a nation. In the great economic controversy in which the people of this country have been engaged during the last five years, it has been an error, committed sometimes by Free Traders, and almost always by Tariff Reformers, to speak of our foreign trade as our " trade." Tariff Reformers have even published statements of our exports and imports, and called them our " National Balance Sheet." Nothing could be more misleading. To one nation a foreign trade may be a matter of small importance, and a very minute proportion of the national industrial energy be directed to the production of goods for export ; to another it may be of the greatest importance ; but, taken alone, its foreign trade is no measure of a nation's activities, its income, its prosperity. The truth is, the income of every nation is the produce of its own industry, made either in its own home by its own citizens, or its own capital and the enter- 7 prise of its own domiciled citizens abroad — that and nothing more. The portion of this produce it may suit one nation to exchange for the produce of other countries is no indication at all of the quantity remaining which it does not suit such nation to exchange. The amount of foreign trade of a nation, therefore, is no sufficient indication of its activities or prosperity, and to speak of a table of exports and imports as a national balance sheet is absurd. During the course of the fiscal controversy, Free Traders have pointed to the total sum of our exports and imports, and the amount by which these exceed, both in gross and per head, those of foreign nations, as in themselves a proof of our superior efficiency and wealth; Tariff Reformers have pointed to the more rapid growth of the exports of certain foreign countries in certain years as in itself a proof of our relative decadence in efficiency and prosperity. Neither of these arguments is economically sound. The foreign trade of the United States, for example, does not amount to one-third per head of that of the United Kingdom, but the average income of the American is now at least as great as that of the Englishman. It is, however, scarcely a real necessity to him to import anything at all. His imports of food are practically confined to sugar, tea, coffee, wine and spirits, and fruits ; his imports of raw materials chiefly to silk, hides, indiarubber ; and those of manu- factured goods to special goods and articles of luxury, diamonds being an item of importance, not to staple manufactures for general consumption ; while the great American exports of raw cotton and food stuffs are only rendered necessary as payment for the prodigious expenditure of American citizens in Europe.* To different nations in varying degrees is a foreign commerce valuable, and to some necessary. To ourselves, who have to import most of our raw material, and half our food, a great export trade is not only valuable, but vital. And the question forced upon us to-day is, How shall we best preserve our great export trade by which we pay for our imports ? Shall we continue our present policy of Free Trade, whatever course may be pursued by foreign nations, or shall we regulate our exchange by tariffs and preferences ^ THE FUNDAMENTAL AXIOM ADMITTED AS THE BASIS OF BOTH THEORIES. I will not insult the intelligence of my readers by stopping to prove that foreign trade is really exchange and nothing else, that imports are paid for by exported goods and services and by nothing else. There is no living or dead economist, English * The late Edward Atkinson, a few weeks before his lamented death, stated to the writer his reasons for believing that this import of the Uaited States cannot be less than 60 millions, and may reach 80 millions sterling per annum. This is, of course, as genuine an American import as any which passes through an American Custom house. It is imported direct into the stomachs and on to the backs of American citizens, and in the supply of their various personal wantvS, and is paid for by the drafts which Brown, Shipley and Co., Baring Bros., etc., meet out of the proceeds of the sale of cotton in Liverpool, or corn at Mark Lane. lO or foreign, Protectionist or f>ee Trader, who doubts it. The Protectionist Professor Ashley calls the notion that imports are paid for by money which might otherwise " be spent at home," " the crudest of popular fallacies, which ought no longer to need refutation." That very able Tariff Reform cham- pion, Mr. J. L. Garvin, says, " It is true that every import must develop a corresponding export." Every international banker and bill broker conducts his business on this fundamental assumption, and proves its truth in practice every day. Yet, while every man with one grain of capacity to understand a perfect deductive argument, or any practical experi- ence in international commerce, knows, and will explicitly admit, that exports pay for imports, nine- tenths of the arguments of the Tariff Reformers are implicit denials of this fact. All the arguments of various kinds of British manufacturers, who truly enough point out that foreign goods are imported into this country in successful competition with their goods, and that these goods might be made here, and British labour employed to make them, are arguments of this nature, they are implicit denials of the axiom that these imports are now being paid for, and must be paid for, by the produce of British labour, though perhaps not of the labour employed by the manufacturer advancing the argument. It is necessary to be always on the watch for some implicit denial of this fundamental principle. For my own part, I always remember that when a man asks that the German iron or American window frames should be excluded from this country for his benefit, he is asking, unconsciously, that my ship which is earning the money to pay for these articles shall be put out of commission and laid up. THE PARTING OF THE TWO THEORIES. The fact being accepted by the common consent of all instructed persons, that exports and imports do and must balance, we are prepared to consider the rival economic theories and policies — that of the regulation of imports by Protection, and that of Free Trade. Mr. J. L. Garvin says, as I have quoted already, " It is true that every import must develop an export," but he goes on to say, " The vital ques- tion is, What do you exchange for what ? " This is a perfectly accurate and fair statement of the point at which dispute arises between instructed Tariff Reformers and Free Traders. By instructed Tariff Reformers, I mean, of course, persons who have some knowledge of the theory and practice of the inter- national exchange — first of products, then of Bills of Exchange, and then of bullion and the precious metals. Among the advocates of Protection in and for England, these men are a minute minority. They are to be distinguished from the vulgar intriguing manufacturer, who seeks to establish a corner at home. They are to be distinguished from those working men, fortunately few in number, who can see that they and their particular trade would profit at the moment if all the rest of the people would consent to be taxed for their benefit, and cannot 12 see a step beyond. These men are the brain of the Tariff Reform party, and they profess, not only to be economists, but to be the most advanced and the most scientific of theoretical economists. They tell us that the old faith delivered to us as an ever- lasting gospel by Adam Smith and Cobden was no such thing, but was an excellent temporary system which it suited England to adopt sixty years ago ; but to maintain that it is a policy fitted for every nation, at every stage of its economical development, is to write yourself down an ancient fossil — a petri- fied survivor of a former period of economic thought. The gospel of the modern " historical " and " scien- tific " school, put forward in Germany sixty years ago by Friedrich List, and preached by his disciples and successors ever since, has, they say, entirely superseded the ancient doctrine, which they nick- name " Smithsianismus " and " cosmopolitan Free Trade." In considering the rival theories, that of Free Trade as expounded by Adam Smith, preached by Richard Cobden, and adopted by England, and the Protectionist theory as promulgated by Fried- rich List and his followers, and put into practice by almost all other countries, including our own Colonies, I shall not enter on the academic argu- ment that Free Trade is the best system for all nations, in all possible circumstances, in all periods of their growth, that it is demonstrably right for all time and all space, as a general economic proposition. Still less shall I attempt to prove that no other 13 national considerations than those purely economic should influence a national policy of foreign trade. I shall confine this argument to an examination of contemporary commercial phenomena, the growth and the present lines of development of international trade, considered specially in relation to this country at the present time, and attempt to show that, whether one holds fast to the theory of Adam Smith, or adopts the Protectionist theory of List, Free Trade is not only the best, but the only possible fiscal system for this country. THE PROTECTIONIST THEORY. And first, what is this new learning, and what is the light we can gain from it ? We find on examina- tion that Friedrich List and his followers declare themselves to be the only worshippers at the shrine of true Free Trade, and that Richard Cobden's clumsy foot had desecrated her temple, his sacrilegi- ous hand had torn down her veil, and his profane tongue had uttered her mysteries to nations which had for long ages to live and labour before they could be ready for initiation. Of Free Trade itself, the abstract " Free Trade," written in capital letters, and uttered in whispers. List, writing about the time of the institution of the German Zollverein, says : " In the Union of the three Kingdoms of Great Britain and Ireland, the world witnesses a great and irrefragable example of the immeasurable efficiency of Free Trade be- tween united nations Let us only suppose all other nations of the earth to be united in a similar manner, and the most vivid imagination will not be able to picture to itself the sum of prosperity and good fortune which the whole human race would thereby gain." And he piously adds : " Unquestionably, the idea of a universal confederation, and a perpetual peace, is commended both by common sense and religion." Having thus given us a glimpse of a vision brighter than " the most vivid imagination can picture to itself," he straightway slams the door of the temple, and says, " It is not for us or our children's children ; " the way to go is long and hard, and for each nation it has three great stages, long as geological periods, to be passed, not by one, but by all nations, before universal Free Trade can come. In the first, a nation will " adopt Free Trade with more advanced nations as a means of raising itself from a state of barbarism, and of making advances in agriculture ; in the second stage, promoting the growth of manufactures, fisheries, navigation, and foreign trade by means of commercial restrictions ; and in the last stage, after reaching the highest degree of wealth and power, by gradually reverting to the principle of Free Trade and of unrestricted competition in the home as well as in foreign markets, that so their agriculturists, manufacturers, and merchants may be preserved from indolence, and stimulated to retain the supremacy they have acquired." Note that this last stage must necessarily be a state of one-sided Free Trade for the more advanced nations, until all nations have achieved IS the same level of economic development. This, says List, is the natural economic order, which would, in due course, lead to a millennium of universal Free Trade, if nations were composed of fleshless and bloodless calculating economic units. But the units and the rulers of a nation are jealous, passionate, human beings, and a nation has other interests and other ideals than those purely material and economic. It is certain that the nations of the world will not consent to pursue the even scientific path of their natural economic development. Therefore, however sound the theory may be, the facts of life must be looked in the face, and even the sound economic theory must bend to a National Policy. Wars will happen, and a nation economically dependent upon other countries, either for food or manu- factures, will be at a fatal disadvantage against a more self-contained people. Therefore, this natural economic order of progress, from an infancy of Free Trade, through an apprenticeship of Protection, on to a manhood of Free Trade, must be controlled and modified by considerations not economic but political and social. And thus arose the National Economics of List and his followers — the foundation principle being, in his own words, " Every great nation must seek, before all other things, the independent and uniform development of its own powers and re- sources. Agriculture, manufactures, commerce, and navigation must all be developed in a nation pro- portionately." It is now sixty years since List lived and wrote j6 his greatest book, " The National System of Political Economy." At that time the manufactures of Germany were insignificant, and her exports chiefly agricultural produce. His immediate object was to persuade his countrymen to enter upon his second economic stage, that of protection of their manu- factures, that they might thus develop their own powers to manufacture for themselves ; and, to induce them to face a certain immediate loss and burden, he invented his celebrated dogma that imme- diate production and enjoyment are not the princi- pal thing, but " Productive Power," and that, to build up a manufacturmg productive power, it is worth while to tax an agricultural community. Round this dogma the Free Trade and Pro- tectionist argument in all countries of the world except our own, which had already reached List's third stage when his book appeared and to which, therefore, it had no application, has centred. It is on it the Protectionists have achieved such victories as they have up to the present won. It is the well- known plea for the protection of infant industries until they are strong enough to take care of them- selves, but always in seeking to guide his country- men through what he called the three great economic phases of development, through Free Trade to Pro- tection, and then back from Protection to Free Trade, this national idea was the dominant one ; and he taught that the trade of the country must be controlled and restricted by imposts on either manufactures or agricultural produce so as to produce 17 as nearly as possible this internal economic equili- brium ; in short, that nothing should be imported that can reasonably be produced within the limits of the country itself. Germany in late years has pursued the policy of its most celebrated Protectionist teacher, and, al- though, as we shall see later, a great expansion of German manufactures was inevitable under any fiscal system, yet this expansion has been stimulated by the protection accorded to her manufactures, until, accord- ing to the " National " theory, it is now excessive. Professor Wagner, of Berlin, views with the greatest anxiety what he regards as the present excessive industrialisation of Germany, his views on this matter are shared by many others, and it cannot be doubted would be held to-day by List, were he alive. The tendency of the new German tariff is to redress the balance. While it adds slightly to the duties for the protection of manufactures, it adds much more largely to the duties for the protection of agriculture. Therefore, while it may restrict our direct sales to Germany, it must still more restrict her power to compete in other markets with us. This is quite as it should be, according to the Nationalistic theory. It is better that they should sell less manufactures, if they also buy less food, and if, incidentally, they have to cat less and wear less, that is their proper sacrifice to a patriotic theory. This is the theory, in as few words as I can put it, of the theoretical, " historical," and so-called " scientific " Protectionist economist. B i8 To follow it is, from the point of view of the world at large, avowedly economically, a policy of the " second best." It is directed, not to extend international trade, but to contract it within the smallest possible limits. Nevertheless, we find it accepted and acted upon, for the present, alike by foreign nations and our self-governing Colonies. The great question put to us to-day is not what is the best commercial policy for the world, but what is the best policy for Great Britain, in a world of nations which have adopted more or less thoroughly a Protectionist policy .-' Is it possible for us to per- severe in our solitary course of Free Trade and live ; or shall we turn our backs on Adam Smith and Cobden, and put ourselves into line with other nations, and follow List and his school .'' APPLICATION OF PROTECTIONIST THEORY TO THE UNITED KINGDOM. We have, therefore, now to consider List's theory of a self-contained nation, "with its agriculture, manufactures, commerce, and navigation developed in strict proportion," in its application to England. If this ideal be accepted, with this Kingdom for its unit, then it must be admitted our Free Trade has been wrong, our manufactures, our shipping, and most of our foreign trade are wrong. We have twenty millions of people in this country who have no business to have been born. And the most wrong of all are the Tariff Reform Commission, who are aiming at increasing still further this national 19 disease, the excessive development of our manufac- turing side. What we must do on this theory is to tax imported food, so as to encourage its pro- duction at home, let in foreign manufactures free, so as to discourage our own overgrown industries. By this means, if severe enough, we should bring back some of our own surplus people to the land, and starve out or drive out others until the blessed equilibrium was established. The new German tariff is a deliberate attempt of this character, practised upon a nation which, as yet, imports a comparatively small portion of its food. The application of German economic theory, and American economic practice, in this form, with this country for its self-supporting economic unit, we may surely rule out of the range of practical politics. But the English Tariff Reformer of the neo-German Nationalistic school does not take this Kingdom as his economic unit. His unit is the Empire. There is no lop-sided development of manufactures in the Empire taken as a whole. Here is his ideal economic national unit. But he here comes face to face with an obstacle completely insurmountable. The unit refuses to unify. The British Empire is a great fact, but, unfortunately, it is not an economic unit in the sense required for a " National " economic policy. We have India practically a Free Trade country, with which we do as much trade as with Australia, Canada, and the South African Colonies put together, and we have these self-governing Colo- nies, each determined to work out its own national 30 economic development in its own area, on the lines of strictly national — that is, Colonial — Protection. To speak quite frankly, I have at this moment more hope that Germany will find her new tariff insup- portable, and relax it — I have far more hope, even an expectation, that the United States will exten- sively reform her tariff in the Free Trade direction than I have of a similar movement in any of our self-governing Colonies. We have to acknowledge the candour of our Colonial brothers. Throughout this controversy they have made it clear that, pre- ference or no preference, their ideal is the self- contained nation — their national economic unit is the Colony, not the Empire ; and the means they take, and mean to continue to take, to secure this end, is Protection, effective Protection, of their manufac- tures. Notwithstanding any small preference they may give us over other foreign countries, foreigners we remain, and the national economic unity of List is accepted by the Colonies, each for itself, as the ideal at which it aims — the economic equilibrium which will enable it to do without any foreign trade at all, either with the Mother Country or with other foreign countries. On the theory of List and his followers, which our Tariff Reformers accept, and are doing all they can by means of translations to make knov/n and popular in this country, all these nations, and especi- ally our own Colonies, are economically and politic- ally right in being Protectionist in the present stage of their industrial development, with the exception of Germany and the United States, who have ad- vanced far enough for the third or Free Trade stage. But even Germany and the United States, although not economically justified, may be politically right in retaining a Protectionist system. At any rate, at present they do retain it. The practical problem before us, therefore, I repeat, is not the question whether, in the abstract, Free Trade is " the best policy for England." On every purely economic theory it is. Adam Smith and Cobden teach that it was always right for England and for other nations, too ; List and his school teach that for England it was not always right, but it is right now in her advanced stage of economic development. So far the English Protec- tionist would agree with us. The position is that most foreign nations, in matters of trade, have adopted the tactics of war, and we find ourselves solitary Free Traders, one-sided Free Traders, in a " world of Protectionists." Surely, then, of all nations on earth we ought to be the most miserable. Every other nation is school- ing itself, by painful tariffs, to do without us, and we are becoming more and more dependent upon others, and what will be the end of it ? CONSEQUENCES IF WE PERSIST IN FREE TRADE. The deductive economist of the Protectionist school proves to us by deductive reasoning what the end ought to be and what it must be ; the whole catalogue of woes is set forth by Mr. Balfour in his 22 " Economic Notes on Insular Free Trade." Our staple manufactures, the exports in which we used to trust, will be shut out ; we shall have to pay for our imports all the same. How are we to do so .'' We are even now being " engineered " — Mr. Balfour's word — by the foreigners' tariffs out of one trade into another to pay for them ; " necessarily " they say all these changes are from superior to inferior trades ; meanwhile our manufactures are becoming continu- ously less and less necessary to the foreigner, we are at a disadvantage in the exchange, we must " neces- sarily " not only sell our inferior goods, the produce of low-class and sweated labour, but we must also constantly reduce our price to get them taken at all. It will become, in the language of Mr. Balfour, first " difficult," then " impossible," to obtain and pay for our imports ; then will follow suffering, starvation, and wholesale emigration, until little England is reduced to a little fifth-rate, self-feeding state. All these things will happen, says the deductive Protec- tionist economist — must happen — have begun to happen. Meanwhile the British capitalist manufac- turer, excluded from his old markets, takes himself, his capital, enterprise, and machinery to other countries, where he flourishes greatly under the shade of a tariff wall, when he has got to the right side of it. These in short, and as fairly as I can put them, are the conclusions as applied to England the Pro- tectionist deductive economist deduces from the theory I have already explained. SECTION II. THE TWO THEORIES IN THEIR RELATION TO GREAT BRITAIN, TESTED BY THE EXPERIENCE OF SEVENTY YEARS. A theory however plausible, and deductions from it however apparently logical, must come to the test of the facts of life. Can the Protectionist confirm and prove his theory from the world of facts and figures which are available for the purpose ? He maintains that he can. I. THE PROTECTIONIST CASE FROM EXPERIENCE. The one great fact upon which all English Protectionists base their whole case, which they force Free Traders to face and answer if they can, is the phenomenon of the rapid rise and growth, not only of the total national product, but especially of the manufactures, and still more of the export of the manufactures of certain Protectionist countries (particularly the United States and Germany), under their systems of protective tariffs. The more ad- vanced Protectionist countries have increased, not only their production of their manufactures, but their exports, in the last thirty years at a greater rate than England, a Free Trade country, has done. What more complete vindication of the tariff system under which this has been effected can be desired ? they ask. All the arguments of Tariff Reformers are based upon this undeniable fact — are elaborations and illustrations of it. 23 24 What is the significance of this striking phenomenon ? We Free Traders must face this question fairly, and show, if we can, that it is due to other causes than the protective tariffs, under which it has come into existence. I decHne to consider America, for any conclusion drawn from this fact in regard to America is useless for any economic purpose. With such a raw material as the best part of the richest of continents, that of North America, not half developed, with its land, its rivers, its mineral wealth, its immigrant labour, it is beyond the power of human folly to arrest its growth. Germany is a fair parallel, and may be taken as the strongest case in point. The great cause of the rapid rise of the manufactures of Germany and other nations is not difficult to dis- cover, for it is the most conspicuous phenomenon affecting the human race in recent centuries. It is what is known as the " Industrial Revolution." With the forces of nature placed by modern science and invention at the service of man, it is no longer necessary that nearly the whole population of a country should be employed on the land to raise mere food, and in the primitive rural industries, and a large proportion has transferred its labour from agriculture and village handicraft to manufactures, and removed from the country to towns. Mr. E. Atkinson has calculated that under favourable conditions, such as obtain on a great wheat farm of Dakota or Manitoba, one man's work for one year of 300 days will produce sufficient wheat 25 to feed 1,000 people for the year ; that it can be carried through the flour mill and put into barrels, including the labour of making the barrel, at the equivalent of one other man's labour for one year ; that it can be moved from the far West to a flour mill in Minnesota, and thence to the city of New York, and all the machinery of the farm, the mill, and the railroad can also be kept in repair at the equivalent of the labour of two more men ; " so that the modern miracle is, that 1,000 barrels of flour, the annual ration of 1,000 people, can be placed in the city of New York, from a point 1,700 to 2,000 miles distant, with the exertion of the human labour equivalent to that of only four men, working one year in producing, milling, and moving the wheat." This is an extreme example of a universal move- ment. As the agricultural population is liberated, and the mechanical arts grow, new occupations are necessary, new wants arise, new manufactures are born. In this stage of social and economic develop- ment, in this migration of the greater part of the population from occupations immediately connected with the cultivation of the soil to manufacturing and other pursuits, which removed them from rural dis- tricts and collected them in towns, we were a genera- tion ahead of Germany and other countries. Thirty years ago the revolution in this country was practic- ally accomplished, while in Germany it had scarcely begun. At the beginning of the last century 80 per c^t. of the population of the countries which now form the German Empire were engaged in agricul- 26 ture. In 1870 two-thirds of the population was agricultural, while in England and Wales at the same date the proportion employed on the soil was not 17 per cent. Since that date the proportion of the population of Germany engaged in agriculture has been reduced by one-half, the population inhabiting large towns of more than 100,000 inhabitants" has in- creased sixfold, that inhabiting medium-sized towns of from 20,000 to 100,000 inhabitants has increased nearly threefold. Germany has been drafting into the cities a large half-employed, underfed, under-paid rural population to found her new industries. We had no longer this resource, it has been long practic- ally dried up, our agricultural counties are to-day underpeopled, and the land is crying out for labour. The sufficiency of this explanation of the some- what more rapid expansion of German manufactures and exports than those of the United Kingdom must be obvious to anyone who considers the importance of the Industrial Revolution of the Nineteenth Cen- tury in its effect on the conditions of human life in Western countries. The movement to the towns in Germany has doubtless been accelerated by her past protective policy in favour of her manufactures, she will now probably check it by her new " agrarian " tariff. But the process itself is a natural and inevit- able stage in the development of a modern nation in modern conditions. It was inevitable under any fiscal system, and was anticipated by every man of reasonable foresight. That during its progress the growth of German manufactures and exports should 27 have been more rapid than our own is a consequence equally inevitable. It was the necessary result of modern forces far more powerful than tariffs. That the disparity was not greater during this period of the absorption of a great supply of cheap labour is not only a signal proof of our national efficiency, but furnishes a strong presumption of the superiority of our fiscal policy. It is likely that in Germany, as in this country, this movement of population has now almost spent its force ; for, although the proportion of the popu- lation engaged in agricultural pursuits remains double that existing in the United Kingdom, it is no longer excessive. The fact that the natural increase of the population in Germany is double that of the United Kingdom, that the birth rate is 25 per cent, higher than our own, and nearly 30 per cent, higher than that of the Colony of Victoria, will doubtless tend towards maintaining the growth of her indus- tries, and of the exports necessary to pay for her increasing imports of food. On the other hand, the effects of the new and distinctly Nationalistic tariff on the condition of the manufacturing working classes must tend both to decrease the birth rate and revive emigration. An analysis of the conditions which produced and accompanied the recent expan- sion of her manufactures and exports leads to the conclusion that the Protectionist policy of Germany has been rather a disturbing than a governing factor in her industrial evolution. It doubtless accelerated its earlier stages, it has distorted its course of pro- 28 gress, and at present, under the new tariff, it retards the natural manufacturing and commercial expansion of the country in a manner approved by Professor Wagner and other Nationalistic economists, and doubtless intended by its " scientific " authors ; and yet in the whole course of the fiscal controversy I have not met with one argument by induction from experience which was not based upon the erroneous assumption that the rise of manufactures in foreign Protectionist countries was almost entirely due to their protective tariffs. 2. THE FREE TRADE CASE FROM EXPERIENCE. The nature of the proof required. In the days of Adam Smith the argument for freedom of trade was necessarily a purely deductive argument — that efficiency would be an effect of free- dom, that the division of labour, which in the village and the nation had so incalculably increased pro- duction, would have a like effect if brought into operation on an international scale — that inter- national trade is in truth simply an exchange of commodities, and that a " favourable " balance of trade to be paid in gold cannot be maintained per- manently, and, if it could be, would be futile. These and other similar unanswerable propositions were the arguments of Adam Smith, and the logical deduction from them was Free Trade. With two-thirds of a century of Free Trade practice behind them, British Free Traders have now so great an accumulation of experiences, which add 29 historical proof to inherent probabihty, that their difficulty is how to focus it all so as to bring it within the range of vision of the ordinary human being. The general arguments for British Free Trade have thus altered in character ; the old deductive argument has been supplemented and almost super- seded in the arena of controversy by inductive statistical reasoning. The argument from experience has been added to the argument from reason, and the whole general case is thus far stronger than it was in Richard Cobden's days. But the present-day Free Trader has to meet another and more plausible, if not more formidable, argument. It is that which I have endeavoured fairly to put forward, and it may be re-stated in a sentence thus : Cobden's forecast of a rapid universal victory for Free Trade principles has not been realised. The Nationalistic Theory has been adopted by almost every civilised country but this country. Whether it is a better theory or not than that of universal Free Trade is not the question ; as put to us now, the practical question for us is. Can we trade on Free Trade principles with nations who trade with us on Nationalistic Protective principles ? Can one-sided Free Trade go on for ever .-' Peel and Cobden answered this question, which, it must be admitted, they believed would never become the practical question it is to-day, by abstract deductive reasoning in the affirmative. " Hostile tariffs are best met by free imports," they said. After sixty 30 years of experience we have now to ask ourselves the question, Does this experience confirm their dogma ? Does the present position of British trade, do the indications of the future, do the hnes of the development of contemporary international com- merce enable us to supplement Peel's dogmatic affirmation, by induction from the ample material available ? This is the task the Free Trader must fairly face to-day. I shall endeavour to state the case of the British Free Trader, first, in its Static aspect, by examining the position to which two generations of Free Trade practice has brought us — the absolute and relative position of the international trade of this country to-day ; second, in its Dynamic aspect, by consider- ing its relation to the contemporary movements and the lines of development of international trade ; how far a policy which may have been wise and successful in the past is likely to continue to succeed in a world which I assume, for the purpose of this argument, to be definitely committed to a Nationalistic policy. The British Free Trade Case : (I.) Static. Tariff Reformers assume as self-evident that this rise and growth of foreign manufactures has been at our expense, to our loss. Is it not a fact, they inquire, that sixty years ago England was the work- shop of the world ; we were not only first but alone in the production and export of the new manufac- tures ? Now other, and Protectionist, nations have approached, and m some respects passed us, and 31 notably in the production of iron we have fallen back to the third place. Is not this in itself a sufficient proof of the error of our policy? The dogma that as England was once the sole workshop of the world, she should have retained the trade of the world in its infinite expansion — in other words, that the world should cut its coat according to England's cloth — is a proposition too absurd to require serious refutation. Yet it is an argument constantly in the mouths of our Protectionists, notably in that of Mr. Deakin, who appears to com- bine a belief in it with a determination that the Commonwealth of Australia shall be an exception. We could not, of course, keep the whole, and the only useful question is, What have we kept, and how does it compare to-day with the new manufactures of foreign countries and their exports, the conditions under which these goods are made, and the condition of the people who make them ? Any competent examination of the general production of the various manufacturing countries and their exports of manu- factures will show three things : — {a) We are keeping the first call on the trade of the world. (b) We are keeping the best of the trade. (<:) We are keeping as much as we can do in good times. And this position we maintain with a higher level of nominal wages, a still higher level of real wages, and shorter hours of labour than any of our Conti- nental neighbours. 32 (a) We are keeping the first call upon the trade oj the ivorla. That we are keeping the first call upon the trade of the world is a broad, and perhaps a bold, general proposition to state. It can only be tested by a broad survey of the courses of the main streams of international trade, the significance of which, persons who are unable to extend their vision beyond an import of window frames, or a contract for foreign horse shoes, are incapable of estimating. Such a comparison of the main streams of the distribu- tion of our exports, with those of other and compet- ing exporting countries, shows that the first call of the world is for British goods produced under Free Trade conditions ; and that in foreign markets of all kinds we maintain our supremacy — I. In the neutral markets of the world, i.e., in those countries in which the import duties do not aim at the protection of native industries, as in China, India, and Turkey. Countries of this class send their exports largely to the Protectionist countries ; they receive payment for them principally in British manufactures. In consequence, our exports to these countries greatly exceed our imports from them, and the nations receiving the produce of these countries have to settle the international account with us. Thus, China exports goods to the conti- nent of Europe to more than double the value of her exports to Great Britain, but she imports from Great Britain goods to more than double the value of her imports from the continent of Europe. The 33 exports of India (by sea) to all foreign countries amount to almost double the value of her exports to Great Britain, but her imports from Great Britain are of more than three times the value of her imports from all foreign countries. 2. In the markets of the newer countries in which a deliberately adopted protective policy has not yet worked out its full results — as in our Australian Colonies and such countries as the Argentine Re- public. In these countries the position is very much the same as in the neutral markets — the imports of British goods into the ports of the Argentine exceed the exports of Argentine produce to Great Britain by more than 50 per cent., while their imports from all other countries than Great Britain do not amount to half the value of the exports of Argentine produce to these countries. That the great export of Australian wool to the continent of Europe is paid for by the export (with- out any preference) of British manufactures, is shown by the fact that the total Australian exports to other countries than Great Britain exceed those to Great Britain by a very considerable amount (13 per cent.), while the imports from those countries fall short of the imports from Great Britain to a still more considerable extent (about 50 per cent.). It appears fair to conclude that in the two classes of markets, the neutral and the imperfectly protected markets, the superiority of British organisation and enterprise, and the superiority of the British articles of export in quality and price, enable us to retain 34 the first call upon the trade, and lead to an enormous increase (in the neutral markets I may say the doubling) of what our export trade with these countries would be were it confined to a direct inter- change of commodities. It remains to consider the fully protected markets, that is to say, the countries in which a complete system of protection has been in force for a sufficient number of years to enable it to pro- duce all the effect in restraint of international trade which it is capable of producing ; such nations are Germany, France, and the United States. Year by year these countries find themselves enormously in our debt ; first, for our purchasing for them in the way I have shown a great part of their requirements from the outer world ; secondly, for our shipping services (we carry more goods for the group of the ten protected countries than we do for ourselves — that is, to and from the ports of Great Britain) ; and thirdly, for the gold they require for the renewal and expansion of their circulation, and for the arts — that is, for gold considered as a commodity, annually produced, distributed, and, in part, con- sumed. This gold they procure in great part through Great Britain. To keep straight with the world, and especially with us, they must export ; they, conse- quently, do export to us considerably more than they directly receive from us. But they cannot force us to take anything we do not want ; and the condi- tions under which they produce their export goods — their longer hours of labour, their lower wages — are 35 an indication, and in part a measure of the relatively greater effort necessary to bring their export goods into effective competition in the markets of this country and of the world. The practice of dumping, so far as it is practised, is itself an evidence of the shortage of a healtliy and remunerative demand, and at the same time of the presence of economic forces of which the human agents are probably unconscious, and which demand exports to balance international accounts. This very short analysis of the main courses of international trade, so far as they affect N this country, I think is sufficient to show that we hold, under our present Free Trade conditions, the first call on the trade of the world. (b) We are keeting the best of the trade of the world. That we are keeping the best of the trade of the world is undeniable, if we are considered as what we are and must be, a manufacturing and commercial people. Whether it is a better or happier lot to pro- duce and export agricultural and pastoral produce, I am not prepared to maintain ; I can only express my surprise that so many nations of the world are so anxious to escape from this Arcadian state. But for us this is impossible, and we must compare like with like. The proposition that, as a manufacturing and commercial people, we are keeping the best of the trade of the world can be proved by a detailed comparative examination of that portion of our exports which passes through our Custom houses, and is published monthly in the Board of Trade 36 returns, and annually iu the Statistical Abstracts of this and foreign countries, which my readers can consult for themselves. They show that our exports are of the most desirable kind, in the main the pro- duce of our most skilled and best-paid labour. But it is shown to a still greater extent in the character of what is called our " invisible " exports — that is our shipping and other services, which are of a still more desirable character than even our material exports, and are of a nature in which we maintain a lead in many cases amounting to a virtual monopoly. (The question of this section is more largely dis- cussed in a later section, that under the heading, " Is Our Trade Degenerating in Kind .-' ") (c) We are keeping as much as we can do of the trade 0/ the world in good times. That we are keeping as much as w^e can do of the trade of the world in good times, which is my third statical proposition, will probably not be accepted by Protectionists so readily as the two former arguments, but the experience of the late seasons of prosperity and " booms " in trade amply prove it — that in good times we are keeping as much as we can do. The Protectionist at this point asks, " Is not the German taking our trade and throwing our people out of employment .-' What about the unemployed millions in this country, robbed of their work by foreign competition } " The answer to this persistently reiterated query is simple and direct. There are no unemployed millions of workers ; they simply do not exist. We have to-day no available 2,7 reserve of unemployed for our ordinary industrial purposes. We are a fully employed nation, our existing industries are sufficient to absorb all avail- able and willing workers in good times. Take the year 1899, or, to almost the same extent, the year 1906 and the greater part of 1907, as examples of good times. The comparative stagnation of the building trade in the latter j'ears renders the former year the better for the purpose of illustration. It was a year of peace and booming trade ; at that time our prosperity reached saturation point, v^'e had as much as we could hold ; we all know every mill, factory, mine, and ship, and every man had the choice of two jobs. Orders of all kinds were refused by our manufacturers, as I know by my own experi- ence, both in my own business and as a railway director — orders which overflowed to the foreigner because we could not take them. It was the year in which the official statistics of unemployment reached their lowest recorded level — 2.2 per cent. — of that part of the working population covered by the returns. It is frequently objected to the use of these figures of unemployment that they apply only to skilled workmen, members of the trade unions which make the returns. This is true, and it is doubt- less also true, although we have no statistics to prove it, that, in times of depression, the proportion of the unemployment among the unskilled workers is greater than among the skilled. But in the good times of abounding trade the opposite is the case ; again I speak from pretty extensive observation and » »t )i'*/r\t^Mi> 38 in the absence of official statistics — and I think it cannot be denied that in iSqq every unskilled able and willing worker in the country had a choice of onijiloyments. That 2.2 per cent, of the skilled men were out of employment is no indication that the total supply of skilled labour exceeded the total demand by 2.2 per cent. These unemployed men belonged to trades which, for some special cause, such as changes in manufacturing methods or fashion, had been left out of the movement. They could have been absorbed over and over again by the trades in which operations were limited by deficiency of labour, had they been fit and willing to undertake the work which there were not men enough to do. And yet this is a period in which notably German and American exports expanded more than our own, and the Tariff Reformers tell us this was at our expense. If this were so, they are bound to tell us how wc could have taken them on, what we could have done more than we did, or what we could have done better than we did. " If a man were Ferdinando, He can do no more than he can do, And he who more than this expects, Is wanting in his intellects." IIUDIBRAS. It may be accepted as proved by the experience of good times that our industrial organisation is thus equal to the powers of our working population, and in such times to foster and stimulate one in- dustry by Protection could not add to the sum of 39 employment, but would be at the expense of some other more deserving industries, and at the expense of the consuming community in addition. Tk& Pheno7nenon of Unemployment. Whence, then, appears the phenomenon of un- employment of the fit and willing workers? It is necessary to distinguish this from the great general problem of poverty, that of the aged, and the widows and fatherless children, the sick and disabled, and the unemployable. The unemployment of the will- ing and fit is a much smaller question ; it is doubt- less in part due to the waste by industrial friction, to the supersession of one trade by another, and one class of workers by another, due to the intro- duction of machinery, changes of processes or to changes of fashion. It is thus the few chronically unemployed fit and willing workers are produced. But this class is very small, and the problem of dealing with it is one well within the power of organised effort, without having recourse to heroic remedies. This class of unemployment exists in all countries, Free Trade and Protectionist alike, and no sensible Protectionist would seek to abolish it by Protection, for this would be to protect his country against the introduction of new industries and superior processes. But bad times succeed good, and with bad times appears really extensive, but not chronic, unemploy- ment in the best employed State and in the best regulated trades. In both Protectionist America and 40 Protectionist Germany the swing of the industrial pendulum appears to be greater than in this country, and greatest in their most protected industries ; and it is the backward swing which is the great cause of the unemployment of the fit and willing worker. The problem is almost entirely that of mitigating and tiding over bad times. It must be remembered that under these alternations every trade produces its own employment, and as a consequence its own unemployment in bad times, and it is quite obvious that as the substitution of fostered and protected industries for healthy and natural indus- tries cannot add to the sum of employment in good times in a nation already fully employed, so it can- not diminish the sum of employment in the bad times which follow. For, I repeat, it is a fact too often overlooked that every trade produces not only its own employment, but its own unemployment, and to import a trade by tariffs and taxes is not a measure that will absorb the unemployed in bad times ; it is to import unemployment as well as employment. This the Americans found when, at an enormous cost to other unprotected industries, they violently imported a tin-plate manufacture. That I might read a full report of Mr. Chamberlain's speech in South Wales, in which he gave this as a striking example of pure profit to America and pure loss to us, I bought a Cardiff newspaper, and in the very same issue that recorded his speech I read these words in their market reports : " The condition of the American tin-plate industry is most unsatisfac- 41 tory, over half the mills being closed down, and the American Tinplate Company has reduced its quota- tion for plates by 20 cents on the loo-lb. box. Little business is said to be coming in from canners. Inde- pendent sheet mill owners have secured a reduction of 20 per cent, in wages." No such state of affairs at that time or since has existed in South Wales. America had imported this unemployment, and her unemployment is always greatest in her projected industries. It is obvious the problem of the unemployed must be attacked by other methods than tariffs. It is equally obvious that until some method is found of equalising employment and eliminating the lean years, the test of a nation's industrial employment can only be the degree to which it is employed in good times, and the amount the average of employment from year to year falls below this maximum. The application of the first test shows that our existing industries absorb all our available labour in good times ; that of the second, that they possess greater stability and show less fluctuations of employment than those of protected countries. Summary of the Case {Static). From a survey of the present condition of the British manufacturing and export trades statically, that is to say, of the position in which our Free Trade policy has placed us to-day, we cannot avoid coming to the following conclusions. First, that in the infinite expansion of the con- sumption of the world it was a physical impossi- 42 bility under any tariff system, or under a system of universal Free Trade, that England should remain the sole workshop of the world, and that the rise of other manufacturing nations was inevitable, and has been beneficial both to themselves and to the world. Second, that this expansion of industry has not been at our expense, for, as a matter of fact, which can be observed and proved — (i) We are keeping the first call on the trade of the world ; (2) we are keeping the best of the trade ; (3) we are keeping as much as we can do in good times. Third, that owing to the low price at v/hich her policy of free imports enables her to buy what she requires for her work and life, and to the general efficiency of her working population, England is able to retain this position while paying higher nominal wages, and much higher real wages, with shorter working hours, than her Continental neighbours. Fourth, that tTie problem of unemployment of fit and willing workers is common to all countries, and is a malady to be treated by other means than tariffs ; that the importation of new industries by protective duties means the importation of unem- ployment as well as of employment ; and that our Free Trade policy has to some extent moderated the alternation of good and bad times, which is the main cause of unemployment, and mitigated the severity of the effects of bad times on our industrial population. Thus we reach the conclusion by induction from the ample experience of sixty years, which Peel and Cobden had reached by abstract reasoning. We have 43 found it true that the best way to meet hostile tariffs is by a policy of free imports. The British Free Trade Case: (II.) Dynamic. There are Tariff Reformers who will admit the main part of the statical case. They will admit that Free Trade has up to the present, or rather almost up to the present, been our best policy. But they point out that conditions are changing and have changed. The nations of the world who have adopted nationalistic protective systems are one by one realising their national aims, they are becoming independent of us and our goods. Accepting this as their general proposition, they deduce the following " logical conclusions " as the consequences which must " necessarily " befall, and are now befalling, solitary, undefended. Free Trade England. (