Continued . . . .
>>At the same time this development makes increasingly possible a measure of imports over the tariff wall. The more efficient producers in the lower-price and lower-cost countries, can, as the price differential widens, pay the tariff and still compete with the American producers, whose costs are adjusted to the higher price level. Thus the inflow of gold caused by the tariff policy tends to offset, in part, the tariff obstruction. Therefore an old tariff is less effective than a new one. But this counter-tendency is never completely compensating. When the new equilibrium has been reached it will be found that both imports and exports have been materially reduced by the tariff policy. Modem nations, misled by mercantilistic notions, are always striving to develop a favorable balance of trade by means of high tariffs. But the balance of trade is, in point of fact, not materially affected by a tariff policy. What is affected is not the balance of trade but the volume of trade. Suppose we start with an even balance of $4,000,000,000 of exports and $4,000,000,000 of imports. Assume now that the tariff is raised so high that all imports are checked. We now have 0 imports and $4,000,000,000 exports. Gold flows in, and prices rise in the United States relative to the rest of the world. As gold flows out of the European countries, credit is contracted and prices tend to fall. As prices fall in Europe costs of production also fall. Eventually the European costs on many articles become low enough, and the prices in America become high enough, so that the cost plus the tariff does not exceed the price. Thus as the price differential develops, more and more goods climb in over the tariff. As soon as the price differential equals the tariff, goods can flow in over the tariff wall. On the other hand, as the price differential develops costs rise in America, while prices fall in Europe. The result is that more and more American export goods are withdrawn from international markets. American exports are in this manner curtailed. Eventually a new equilibrium is reached at, say, $2,000,000,000 of imports and $2,000,000,000 of exports. The tariff has reduced the volume of trade, but the balance remains unchanged.
What does determine the balance of trade? It is not tariffs, not change in technique, not the comparative costs of production, not the relative physical advantages of one region over another, but net capital movements. Debtor countries and lending countries have a favorable balance of trade; creditor and borrowing countries have an unfavorable balance. Only in so far as tariffs and technical improvements affect these capital movements do they affect the balance of trade.
In the long run, therefore, the high-tariff policy of the United States does not absolutely preclude the payment of the international debt or the reparation. But it does and will have the effect of increasing the burden of the payments. The price level having been reduced in the debtor countries, the fixed money payments of reparation, war loans, or interest on past investments will have become more difficult. The tariff by interfering with the most efficient international division of labor will have lowered the real income of the whole world. And the mal-adjustments in the transition stage will have intensified business depressions. And while the American tariff policy will not, indeed, make impossible the payment of the annual sums owing to us, this is true only because it will not, in the long run, achieve what our mercantilistically minded business community desires, namely, a favorable balance of trade. Our imports of goods and services will tend to exceed our exports of goods and services by something like the annual amount owing to us.
Even though the tariff were continually raised, this tendency would still develop. While the tariff, frequently adjusted up-ward, might absolutely prohibit the importation of nearly all manufactured goods, we should still import in large quantities leading raw materials such as rubber, silk, coffee, wood pulp, sugar, furs, wool, hides and skins, petroleum, tin, and copper. Moreover, the wider the price differential between America and the rest of the world, the greater would be the inducement to travel abroad and consume foreign goods and services on the spot. This might readily reach huge proportions. With exports sharply reduced, we should still have an unfavorable balance of trade in merchandise and services, even though we virtually excluded, by higher and higher tariffs, any imports of finished manufactured goods.
Our creditor position therefore will eventually and inevitably lead to a new equilibrium. based on a net excess of imports of goods and services. Under a high and continually rising tariff policy this result will be reached through a sharp curtailment of exports on the one hand, and on the other through a stimulus to tourist expenditures abroad and the purchase of foreign services. Both of these developments result from the price differential induced by the tariff policy.
Let us review the connecting links by means of which this conclusion is reached:
1.. Foreigners must make annual payments to the United States on account of war loans and interest charges on private investments.
2. A prohibitive tariff prevents a sufficient sale of goods to the United States to supply the foreigners with the necessary exchange to meet these payments.
3. Exchange rates move against the foreign currencies and gold flows into the United States.
4. World prices are forced below the American level.
5. American goods produced under a price level that is high, relative to the rest of the world, cannot be sold at a profit in the low-price countries.
6. American exports decline.
7. Under the price differential some imports, at first prohibited by the high customs rates, begin to creep in over the tariff wall.
8. European shipping, insurance, and banking services enjoy an advantage because of the price differential and are purchased by our citizens in larger measure.
9. Tourist expenditures are encouraged by the lower prices abroad.
10. A new balance is reached in which the annual payments owing to the United States as a creditor country are balanced by a net excess of imports of goods and services.
Foreign Markets and "Surplus" Products. Now the curtailment of American exports, caused by the high-tariff policy as explained above, necessarily forces a readjustment of American production with results more or less disastrous for export industries. But it is not true, as is generally believed, that American industry must remain forever depressed unless it can ex-port an ever-increasing quantity of "surplus" products abroad. Such is emphatically not the case. When we reach the position normal to a creditor country (in which the imports of goods and services exceed the exports of goods and services), our manufacturers and farmers will have no greater difficulty in selling their products on this account. Our internal income will be sufficient to buy our domestic production, and the sums flowing in from abroad will give us the surplus buying power to purchase the net excess of imports without encroaching upon the market for our domestic goods. History completely disproves the popular yet wholly fallacious notion that advanced industrial nations cannot survive without finding foreign markets for their "surplus" products. In point of fact advanced industrial nations, instead of exporting a net surplus of goods, normally import a net surplus year in and year out. With considerable income flowing in from their foreign investments, they can and do buy more than they sell. Thus England has had a net excess of merchandise imports from 1853 down to the present day; and Germany from 1888 until the loss of the World War made her a debtor nation.
As our investments abroad diminish in relative importance it is quite possible that the pressure of savings in the domestic market will lower the rate of interest on long-time investments. Property-holders will get a lower income, but wages and salaries will be correspondingly higher. If industry pays a lower rate on borrowed funds, it can pay higher incomes to its employees. This in itself will tend to increase the volume of consumption and lessen the volume of savings and so bring its own corrective.<<
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