CHAPTER VII

MEANING OF PROTECTION TO NATIVE INDUSTRIES

§ 1. The term Protection not used by Adam Smith. JUST as the expression "free trade" is often used as equivalent to "natural liberty" or laisser faire, so also the term protection is often used to cover all the artificial encouragements or hindrances that may be adopted by the state for the regulation of trade, especially foreign trade.

Such a vague usage is unhistorical, and can only lead to confusion. As it happens the term "protection" is not used by Adam Smith at all, except in the sense of military defence, and the provision of security to life and property. He constantly uses the term "free trade," but he has no single expression which can be considered as the antithesis. The mercantile system which he attacked, as the dominant commercial policy of his day, was highly complex, and neither the original aims nor the methods by which they were to be attained could be summarised under the term "protection." The term which Adam Smith most generally uses as the opposite of free. trade is "monopoly"; e.g. he says that "monopoly of one kind or another seems to be the sole engine of

the mercantile system." The centre of his attack is certainly monopoly; but he also attacks other mercantilist ideas that are not covered by the term monopoly; e.g. the undue importance attached to money, and the consequential ideas of a favourable balance of trade; ideas which led to peculiar commercial treaties in which the leading idea was neither protection to the home producer nor reciprocity.

§ 2. Used in narrow Sense by Alexander
Hamilton.

The term protection (with its corresponding adjective protectionist) was used by Alexander Hamilton (1791) in a narrow sense. The object of his Report on Manufactures was to show, first, that it would be of immense advantage to the United States to become a great manufacturing nation, and, secondly, to indicate the methods by which this end might be attained. In this second part of his task he appeals to the experience of other nations which have succeeded in manufacturing industries. In discussing these methods adopted by other countries he puts first "Protectionist duties—or duties on those foreign articles which are the rival ones of the domestic ones intended to be encouraged." 1

But besides this method he discusses ten others, e.g. prohibitions of rival articles or duties equivalent to prohibitions; prohibitions of the export of the materials of manufacture; bounties; premiums; exemption of raw material of manufacture from taxa

1 Hamilton's Works (Federal edition), vol. iv. p. 143.

tion, etc.; some of these other methods being plicitly approved of by Adam Smith.

§ 3. Meaning depends on Correlation.

Protection is one of those terms so common in economics in which the meaning depends on the correlative term with which they are associated. If we interpret the term to mean the support or encouragement of native industries (and native labour) by the employment of capital within the home country instead of in foreign countries, then we may say that the object of protection was approved of by Adam Smith. As already shown the test of economic advantage, to which he constantly appeals, is the employment of the productive labour of the country within the country. To keep capital in existence (as measured by the practical test of the continuance of its own value) it must be continuously reproduced after being consumed, and it is this reproduction of the forms by which the value is continued which gives employment to the productive labour. This productive labour keeps up the auxiliary capital in a state of efficiency, replaces the sustaining capital, and also assists in turning out the great stream of consumable things which Adam Smith speaks of as the annual produce of the land and labour.

With Adam Smith the local habitation of the capital during the process of consumption and reproduction is of fundamental importance. The employ ment of a given amount of capital in home trade or industry is so far directly more advantageous than

its employment in foreign trade or industry, although the latter may yield equal or even greater profit. This idea of national advantage is not only admitted by Adam Smith, but is developed to an extent that has never been approached by any subsequent writer. If this is protection Adam Smith is the blackest of all protectionists.

Conversely, however, it may be presumed that if on balancing the arguments for and against restrictions on foreign imports, Adam Smith was satisfied that the interests of the home producers were best promoted by freedom from restraints, he is a free trader against whom the usual protectionist arguments are simply irrelevant. Or putting it otherwise, the difference between "protection" and "free trade" becomes a difference not of principles but of methods; and in this case a reconciliation ought to be possible on an appeal to the facts.

As will appear in the chapter on the exceptions to free trade admitted by Adam Smith, these are in themselves of vast importance; but apart from these definitely stated exceptions his whole treatment depends not on the reiteration of a simple dogma (or assumption), but on a careful balancing of opposing considerations.

§ 4. Distinction between Objects and Methods of Protection.

The distinction between the ultimate objects of any commercial policy and the methods by which that policy may be achieved is of vital importance.

If

the objects are fundamentally different, if they appeal to different ideals, to different standards of morality, or to different prejudices of race or nationality and the like, reconciliation is not possible until the ideals and prejudices are altered. But if there is no such fundamental opposition in ideals, if the dispute is only as regards methods, then a reconciliation ought to be possible after a scrutiny of the facts by impartial authority (e.g. in this country a Royal Commission). Adam Smith treats of what is now commonly called protection to native industries under the title: "Of restraints upon importation from foreign countries of such goods as can be produced at home."

§ 5. Taxes for "Revenue" and for "Monopoly" distinguished.

And it should be carefully observed that in dealing with this question he does not consider the general policy of taxes on imports. At the conclusion of the chapter he says: "How far it may be proper to impose taxes upon the importation of foreign goods in order not to prevent their importation, but to raise a revenue for Government, I shall consider hereafter when I come to treat of taxes.' Adam Smith certainly approved of custom duties as a source of revenue, although he showed that the revenue might be increased by a better system, and he suggested reforms which were afterwards adopted with great advantage by the United Kingdom. So far from

1 Book IV. chap. ii.

" 2

2 See Book v. chap. ii.