How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
ONE of the remarkable phenomena of the world's economic life in the past few decades has been the way in which international commerce has grown by leaps and bounds. A hundred years ago the aggregate value of world trade was less than $2,000,000,000 or only $2.34 per capita; by 1900 it had increased tenfold, to over $20,000,000,000, or $13.00 per capita. With the dawn of the twentieth century, however, the rate of increase became even more rapid, and in the interval between 1900 and the outbreak of the World War it doubled, reaching a value of $40,000,000,000 or $24.50 per capita.[i] By 1929 the value of world trade had reached a total of over 67 billion dollars -- more than $35.00 for every person on the face of the globe.[ii]
This rapid increase in international commerce was, of course, a corollary of the industrial revolution. The increase in factory production in favored industrial sections, at first predominantly in Great Britain, created a demand for materials far beyond the ability of the local region to supply; and at the same time the magnitude of machine output required a market much larger than the local area had capacity to consume. This meant that to the trade in articles of skill and refinement, in goods of high value and small bulk, which for centuries had dominated international exchange, there was added the enormous volume of bulky foods and raw materials characteristic of present-day trade. The limited local economy of days before the industrial revolution was transformed with startling rapidity into a world economy in which the economic machine of each country was dependent more and more upon the smooth operation of the economic organization of every other country. The industrial countries grew and prospered under this division of economic activity, as did also the countries producing the foods and raw materials which were exchanged for the factory-made goods. Standards of living increased along with rapid increases in populations.
In the United States, the growth of foreign trade has followed in general the trend of the trade of the rest of the world. There was a gradual but not rapid growth of American exports following 1830; a more rapid expansion from 1850 to 1873, when American cotton, foodstuffs, forest products and mineral exports came into increasing demand in industrialized Europe; a much less rapid growth from the depression of 1873 down to the end of the nineties; and then at the opening of the century a burst of exports which was still further stimulated by the war and, after a lull in 1920, carried on upward during the post-war boom. In 1929 exports from the United States were in value more than twice the value of pre-war exports and, after eliminating price changes, 70 percent greater in volume. The United States became the greatest exporter of all the nations in absolute amounts, although in per capita importance it was still behind the small industrial nations of Europe or sparsely populated agricultural nations such as Australia. The great advance in American foreign trade during the post-war period was in manufactured products. Although crude material exports had increased markedly in absolute amounts, and foodstuff exports also were larger, the great advances were in manufactured goods. In 1929 manufactured products made up 63 percent of the vastly expanded American exports as compared to 32 percent of our much smaller trade in 1900.
This period of expanding exports in the United States was, of course, also a period of tremendous increase in domestic trade. In fact, the growth of exports as a whole did not quite keep pace with the growth of production. This was due especially to the fact that farm products exported did not keep pace with the tremendous increase in farm production during the period. In the export of manufactured goods other than foodstuffs, however, a larger percentage of production was exported in 1929 (9.1 percent) than in 1900 (7.8 percent). In a country as large as the United States and with such diverse resources it of course is inevitable that the domestic market should absorb a large part of the total production. What is foreign trade to the small countries of Europe is domestic inter-state trade in the United States. But the fact that foreign trade takes so large a proportion as 10 percent of the tremendous production of the country is a factor of the very first importance to our industries and to our general economic prosperity.
Following the great depression that began in 1929, foreign trade of all countries suffered a great decline. The exports of the United States in 1931 were less than half those of 1929 in value although the marked decline in prices materially exaggerates the decline when value figures are used. For the first quarter of 1932, exports were 35 percent less than for the corresponding quarter of 1931 and 60 percent less than the five-year average, 1927-31. No other important trading country has had so great a falling off in its foreign trade, although the decrease is universally large.
The great slump in international trade during the last two and a half years raises the question as to the actual importance of foreign trade in the modern world and especially its future significance to the United States. Certain it is that the economic conditions favoring the flow of trade have grown steadily more and more adverse in recent years; and political action has made the barriers more and more insurmountable or impenetrable.
It has been suggested that the era of large foreign trade development characteristic of the past one hundred years has come to an end. The spread of industrialization and the growth of agricultural production in many parts of the world, the intense nationalism that seeks for each country economic as well as political independence, the multiplication of trade barriers through tariffs and other means until trade in some regions is all but eliminated -- all these factors are pointed to as indicating a permanent growth of local economic self-sufficiency and a corresponding decline in international trade. The first phase of the industrial revolution, it is said, was one in which certain nations, having become highly industrialized largely as a result of an early start, of necessity traded heavily with those nations which remained producers of foods and raw materials; but now the world has become, or is in process of becoming, commercially equalized. There has been, so to speak, an economic "evening-up." As more and more nations develop efficiency in local production the reasons for international trade, namely the advantages of an international division of labor and the comparative gains growing out of the exchange of goods, become less important, particularly under the economic and political conditions of post-war nationalism. Certainly there is much to indicate that a leveling process of this nature is going on, fortified by the spirit of nationalism and artificially aided by high protective tariffs and other methods of trade control.
In the first place, there has been the spread of industrial, engineering, and agricultural science to all lands and among all peoples. No longer does a single country and a single people have a monopoly of the technical knowledge required for efficient production. England has sent her engineers and her machines to help establish new industrial plants in Japan and India and wherever there was prospect of profit. America likewise has lent her scientific agriculturists to the Argentines and the Brazilians to help them perfect their farming and pastoral industries and, in these post-war years, has sent her industrial managers to establish, direct and perfect all kinds of industrial enterprises in all parts of the world. Machines, men, patents, managerial skill, capital -- all these have flowed out to the former undeveloped areas. Ideas and methods and inventions are universally exchanged. Even factories have migrated from old to new industrial countries. The old industrial countries have therefore been facing the competition of new countries not only in foreign markets, but in their own domestic markets as well; and often the old markets have been lost. In many cases, as in the former market for American shoes in Brazil, local production has come to supply almost completely the demand.
Furthermore, new technical methods and scientific discoveries have given new opportunities for the spread of industries in other countries and have lessened the dependence of certain regions for supplies that once were secured only by importation. For example, the perfection of new sources of power has given new opportunities for industrialization to countries without coal or with only inferior coal. This is illustrated by the expansion of the use of oil, the perfection of the internal combustion engine, the ability to use low-grade coal, and the improvements in the use of water power. Moreover, such developments as the manufacture of synthetic dyes, the production of artificial nitrates, and the discovery of rayon have given certain countries an opportunity to lessen their dependence on others for essential materials and thus to develop a more balanced domestic production. Obviously, the geographical extension of the areas suited for industrialization has been very great; and doubtless the process will be carried still further by new inventions.
Nevertheless, although these new conditions do operate to bring about the geographic extension of industry and agriculture, there is serious doubt whether this fact diminishes either the necessity or the volume of foreign trade. We shall discuss this subject in a moment.
The spread of industrialization into new areas, already begun before the war, for the reasons just mentioned, was greatly stimulated and hastened by the war. Many countries, shut off from their usual supplies and encouraged by the demand for war materials at exceptionally high prices, could and did develop industries and expand the production of raw materials to meet their own needs and even to export to the belligerents and to their neutral neighbors. Thus the textile mills of Japan and India and China took on a great activity during the war. India and Australia began the manufacture of iron and steel on a large scale. Brazil developed textile and boot and shoe production. Even the industries of older industrial countries like the United States were greatly stimulated by the prevailing conditions.
Furthermore, the war aroused a determination on the part of many countries, both belligerent and neutral, to conserve and strengthen at any cost the advances in diversified production already begun. After the war the determination to secure economic as well as political independence became an obsession of practically all nations, both new and old. Economic self-sufficiency was regarded both as an end in itself and as a means of securing and defending political independence. The chief instruments readily at hand for attempting to gain economic independence were protective tariffs. But the perpetuation of war-created industries by the use of ever-mounting tariff walls did not satisfy the new nationalism. Still other industries, often unnecessary and uneconomic, were created behind tariff barriers to complete the desired national self-sufficiency. Thus began the upward spiraling of tariffs, the establishment of import quotas, and the many other restrictions to foreign trade that multiplied as the post-war decade advanced.
There were also other incentives to set up high tariffs. In a period of widespread financial stress the nations laid hold of tariffs as means of increasing national revenues, to aid in balancing budgets, and to stifle imports in order to stop the outflow of gold. Tariffs were set up also to offset the results of war debt and reparations payments, obligations that could be met ultimately only by the export of merchandise by the debtor countries. But whatever the motive, tariffs as the chief agent of nationalism stimulated the building up of new industrial plants and the opening of new raw material sources in each individual country at the same time that they sought to lessen imports. Each country, acting independently, rushed the development of its productive equipment without planning, without giving thought to its ability to produce effectively, and without consideration of the world's consuming power. Each country sought not only to supply its own markets but to export as well. Produce all, export much, buy nothing -- this appeared to be the slogan. The inevitable result was the expansion of production capacity and of production far beyond the world's ability to consume. There followed, as night the day, declining prices, a consequent lowering of buying power, and finally the general demoralization of trade.
To add to the difficulty, the ordinary effects of protective tariffs on trade (usually less important than generally supposed), were much magnified during the post-war period by the unusual situation resulting from reparations and war-debt obligations. The war debts themselves, as already mentioned, gave further stimulus to the move to bring tariff rates to super-high levels in order to prevent "debt dumping." This made debtor countries less able not only to pay their debts, but, since they could not export, less able also to buy the products of other countries. Foreign markets for the products of newly created industries therefore could not be developed. With imports cut off, exports automatically declined also. The situation was for a time relieved by the huge loans made by the United States to European countries -- loans that so long as they continued kept up the flow of American and other exports. But when the sources of foreign lending dried up in 1929-30 the debtor countries rapidly ceased to import and the creditor countries ceased to export.
Furthermore, the monetary effects of the war debts greatly intensified the harmful results of excessive tariffs. Since the flow of merchandise for debt payments had been curtailed, gold was drained off in excessive amounts from the debtor to the creditor countries -- especially to the outstanding war-debt creditors, the United States and France. The maldistribution of gold that followed resulted in a still further lowering of price levels; and the low price levels in turn added to the actual debt burden of the debtor countries (a 50 percent increase has occurred since 1928) and let loose the whole pack of monetary, exchange and budget troubles that finally in 1931 forced much of the world off the gold standard and demoralized the currencies and exchanges of nearly all countries. Currency depreciation in turn gave added impulse to still higher tariffs aimed against exchange dumping, and to restrictions on the purchase of exchange to help save national finances. Thus the vicious circle was further strengthened, and heavier and still heavier burdens were put on international trade as new and higher tariffs were imposed, as import quotas were set up, and as embargoes and restrictions on foreign exchange were multiplied.
The course of events during the post-war decade may be summarized, then, as follows: There was a tremendous expansion of productive capacity initiated by wartime industrialization; the process was continued after the war by intense nationalism operating behind the shield of high protective tariffs; it was sustained for a time by heavy lending by the United States; but it finally collapsed under the economic and monetary strains and stresses in the over-expanded edifice.
The development of productive capacity throughout the world at first was stimulating to foreign trade, especially to the export trade of the United States. There was an increasing demand abroad for equipment goods, first to rehabilitate the belligerent nations, and then to modernize plants and expand the industries, farms and mines of the neutral nations now bent on economic expansion, and to equip the new nations of central and eastern Europe which had set out to win industrial independence. Equipment goods, usually imported duty free even by the high tariff countries, were the very goods which the United States was particularly well prepared to supply. Industrial, mining and agricultural machinery; road building and construction equipment; store and office equipment; automobiles and trucks; all such merchandise was made in the United States under mass production methods and had been highly perfected by an inventive people. On the score both of quality and cost, the United States has superior advantages in the production of such material.
Furthermore, it was the United States that supplied the capital to finance the rebuilding and equipping of a world bent on increasing production. It did so with such eagerness that American capital flowed abroad in unprecedented amounts. As far as the United States was concerned, then, nationalism in combination with lending abroad very largely nullified for several years the restrictive effects of tariffs, and allowed the exports of the United States to advance from 1922 to 1929 to unprecedented peacetime heights.
Then came the collapse -- first economic and localized, then monetary and world-wide. The world had been overbuilt to produce as a result of artificial stimulation and unplanned expansion; it now found itself caught in its own trade restrictions and unable to sell. Nations obliged to make large payments to foreigners on debts for which no productive enterprises had been created, were shorn of their ability to pay as soon as the United States ceased to loan. With the gold supply centered in two countries, with prices collapsing and with credit restricted, monetary and exchange problems were added to the economic difficulties. It is not strange that under these conditions depression swept across the world and that international trade was disrupted and demoralized. Nor is it strange that the foreign trade of the United States, built so largely upon the export of goods designed to equip the nations of the world with a new or enlarged productive plant, and upon foreign investments that so largely financed the equipment, should have been most severely affected when the crash came.
It would appear from this analysis of foreign trade after the war that the chief factors causing the declines in the movement of international goods were the commercial policies of protection and the trade restrictions imposed almost universally by governments seeking to become economically self-contained. The slump in foreign operating trade is not the result of the working out of economic factors under new conditions and bringing in a new period of national economic isolation; rather is it, in the words of the World Economic Conference of 1927, the result of "the hindrances opposed to the free flow of labor, capital and goods," in the effort to obtain self-sufficiency.[iii]
Let us now stop to examine the economic basis upon which modern foreign trade rests. In the first place it may be said that the principles of foreign trade are fundamentally the same as the principles of domestic trade. Trade is an exchange of commodities between people. If the exchange is across an international boundary it becomes "international trade." But the same reasons, the same motives, even the same methods, are involved whether John Jones of Boston is trading with James Smith also of Boston, or with James Smith in Illinois, or with James Smith in England. This is commonly forgotten in discussions of foreign trade. The fact that trade is international often carries the idea that somehow it is different from domestic trade. There is supposed to be something about it that is mysterious, subtle, even dangerous to national welfare; it is to be tolerated as a necessary evil, not promoted as a means of improving national well-being. This conception lies back of much of our tariff legislation and national commercial policies. But international trade is not between nations, but between individuals residing on opposite sides of a national frontier. This consideration is of the greatest significance in understanding foreign trade.
John Jones trades with James Smith, no matter where located, generally through a middleman or a series of middlemen, for either one or both of two reasons. John Jones is skilled in the making of some product -- say textiles -- and James Smith is most proficient in the making of tools. This simple division of labor makes exchange necessary and profitable to each if both are to obtain the best textiles and the best tools at the lowest cost in labor and money. Or John Jones owns a timber tract and James Smith a potato farm. The difference in the type of resources owned by the two again makes exchange of products between them both necessary and profitable if Jones eats potatoes and Smith uses timber in constructing his home.
What applies to John Jones and James Smith as individuals applies also to groups of peoples and to regions. Certain peoples have certain aptitudes or have acquired certain skills in the producing of specialized goods. The peoples of Asia Minor, for example, have a special skill in making rugs of artistic merit and fine quality; in the Thuringian Forest of Germany special aptitudes exist for making wooden toys; Americans appear to be especially proficient in the invention, production and use of labor-saving machinery. But what the different peoples do in different areas is not only a matter of skill, or aptitude or quality of artistic sense; it is also a matter of physical resources and environment. A certain section of the earth, by virtue of its resources, climate and situation, is well prepared to produce one kind of product; another section is equipped to produce another and different class or type of product. This is obvious in the case of tin production in Malaya and iron ore in the United States, of bananas in the West Indies and wheat in Argentina; it is less obvious but equally true in the case of industrial areas. Usually the character of one region's products reflects both the character of its resources -- including climate -- and the skills, experience and aptitudes of its people. These two factors -- quality of resources and quality of people -- act and react on each other and result in the "geographical division of industry." Just as the exchange of products between John Jones and James Smith, both in Boston, is to the mutual advantage of each, so the exchange between the citizens of different countries brings advantages to each country and increases its wealth and prosperity. It is obvious that if no such advantages were to be mutually gained there would be no need of trade, either local or international.
But, it may be said, the fact that the United States is so large and has such varied resources, that it is already to such an extent self-sufficient, is evidence that foreign trade need not be regarded as necessary or important to our economic welfare. It is, of course, true that no country, unless it be Russia, could dispense with foreign trade with less hardship than the United States. But a hardship it would be even to the United States. It is conceivable that the United States could be a world to itself; but it would be at the sacrifice of much that it now enjoys.
As a matter of fact, it is impossible to achieve self-sufficiency in the twentieth century world and at the same time maintain existing economic standards. No country is so large or so rich in resources that it can supply all its various industrial needs in this age of science and invention. Certain products occur or can be produced only in certain restricted areas. We cannot alter the geological distribution of minerals or the geographical distribution of rainfall and soils and water power, nor those combinations of advantages that give certain regions, like Central Europe or the northeastern part of the United States, superior advantages for industrial development. Even in regions generally similar in resources, there exist minor differences that give one region certain small but definite advantages over the other, either in cost of production or quality of product or both. And in the modern competitive world these small advantages are important and persistent.
The advantages of the regional division of industry and the consequent international exchange of goods become, not less, but greater with economic development and advancement. Even in the best equipped industrial countries the need of trade in industrial raw materials grows constantly with every scientific discovery and every improvement in technical method. A new development in transportation starts a demand for a new import material -- rubber -- and furnishes a new finished product for export -- the automobile. Technical improvements in methods of steel and tinplate production send ships to the four corners of the world to secure necessary products -- manganese and chrome ore, tungsten, nickel and vanadium, tin and palm kernel oil -- all essential, none of them produced in sufficient quantities in the United States. The perfection of the telephone receiver alone has called to its aid eighteen or twenty import commodities from nearly as many countries.
The woolen industry no longer requires just wool. If cloth is to be produced in the exact quality to meet the demand of the consumer and the competition of manufacturers at home and abroad, many wools from many lands must be blended -- wools from Australia, from the Argentine, from Scotland, from Wyoming. Cotton from the southern states no longer can satisfy the textile manufacturer. To American varieties must be added the special types from Egypt, from Peru, from China, in order to obtain the qualities of finished products desired and the economies demanded by competition. The shoes Americans wear are made from leathers dependent for their particular uses in the shoe on hides from Argentina, on goat skins from Europe, Brazil and Arizona, on calf skins from India, Germany and Chicago. These illustrations indicate how exacting are demands of modern industry. Such conditions of industry can be met only by international trade. There is no such thing as "independence" in modern factory industries. Foreign trade could be eliminated or even greatly curtailed only at the expense of progress and of the individual and collective welfare of American industry and the American people. The success of Gandhi's campaign in India to go back to hand spinning and weaving would not be a more backward step in the industrial world than would be the abandonment by the United States of international trade in favor of an isolated self-sufficiency.
The very fact that industry demands these imports in ever-increasing amounts and varieties itself makes possible and necessary an export trade. Exports must be created to pay for the necessary imports -- and the more is imported, the more is exported. Trade feeds upon itself and grows.
As with raw materials, so with foods and manufactured goods. Industrial populations must be fed; peoples with increasing living standards demand more and better foods. Coffee and sugar and fruits flow in from the tropics; the grassy plains of the continental interiors where are grown the best and cheapest wheat are reclaimed for agriculture and add to the flow of trade. With spreading education and rising living standards, there is an increasing demand also for luxury goods and works of art. Silks and oriental rugs, the art goods peculiar to different peoples --jewelry and embroideries and novelties of all kinds -- swell the total. These are the normal conditions. Tariffs and embargoes may temporarily interfere; patriotic slogans like "Buy British" may have some temporary and slight influence; but they do not alter the basic motives that lie at the bottom of all trade. With their profit and welfare at stake, individuals and industries will not willingly confine their business activities within narrow geographic limits. To abandon or curtail permanently the trade across international boundaries would entail such handicaps upon economic progress that it is inconceivable that an intelligent world would long endure it.
It is a principle of foreign trade that trade grows fastest between the most highly industrialized countries. Industrial Germany before the war was, next to India, the most important market for industrial England; and England in turn was Germany's chief market, taking 14.4 percent of all German exports. Very soon after the war similar relations were reëstablished. And yet these two countries are the most highly industrialized nations of Europe and the most intense rivals.
The highly developed industrial countries of northwestern Europe are by far the most important markets for the United States -- not only for its exports of raw materials and foods, but also for its exports of manufactures. Nearly one-half of all our vast exports to Europe in 1929 were manufactured goods; and Europe for many years has taken more than twice as much of our manufactures as has South America. Japan has been feared as a rival of the industrial countries of the West, and is a growingly important competitor. But despite her growing industrialization Japan has been a rapidly growing importer of the products of the West. Japan's imports per capita increased from $4.41 in 1908 to $17.21 in 1923, a greater per capita increase than in any other country -- and this during a period when the population was growing nearly a million per year. During this period every item of Japan's manufactured imports increased in quantity, with a slight exception in the case of cotton piece goods. Imports increased even more rapidly than exports. As markets these developing countries are more important than as competitors; and this applies to an old and established industrial country like England as well as to a new industrial nation like Japan.
The fact remains, however, that economic considerations have not been controlling in the formation of national commercial policies. Most attempts to moderate the excesses of nationalism and to call a halt to mounting tariff and trade restrictions have proved unavailing. Economic conferences, suggestions for tariff truces, proposals for customs agreements or unions -- all have failed as yet to modify the restrictions that are throttling trade. And yet to bring about revival of trade there seems no alternative to removing existing barriers, the chief of which, of course, are tariffs.
National self-sufficiency is an idle dream. It is simply impossible unless we are prepared to sacrifice much of the advance already made in industry and in economic well-being. To turn back the hands of the clock would be to deceive ourselves; it would aggravate the disease, not cure it. National commercial policy must recognize the economics of the situation and act on it. Although the way out is beset with great difficulties in a world gone tariff mad, two major conditions apparently need to be met if the flow of trade is to be renewed and confidence restored. First, there must be a removal of the excessive trade barriers, principally through the modification of tariffs; secondly, there must be a reduction or cancellation of war debts.
For the United States, no application of sound theory and no experience in the economic history of nations can defend or justify the maintenance of our excessively high tariffs along with our position at the same time as the greatest industrial nation and as the world's greatest creditor. As an industrial nation we must import; and if we import we must export. As a creditor nation we must receive payments, if we receive them at all, in imported goods; and if we revive our lending, we must lend with an export of goods. However we look at it, foreign trade is imperative, unless we choose to abandon our present economic position and curtail our future growth.
The modification of war debts and reparations is not a question of legality or justice, but of expediency and common sense. The requirements of war debt payments are obstacles direct and indirect to the trade of the United States in several particulars. They relate to the United States particularly because payments find ultimate lodgment here and their influence on trade is far out of proportion to their actual size. Their presence is one of the prime factors sustaining the demand for high tariffs both in the United States and in other countries; they are perhaps the most potent basic cause of the maldistribution of gold and the currency afflictions that hold back sound recovery; the payment of them offers artificial competition in world markets to American exports; through their influence on prices, currency and exchange, they help to keep production costs low in Europe relative to those prevailing in the United States; they keep down the living standards of the peoples of the debtor countries; in combination with our own high tariffs and the high tariffs of the debtor countries, they encourage the establishment of American factories in Europe and thus develop American competition against America; they keep open the old sores growing out of the war and are a powerful factor in preventing the return of confidence and sane optimism. Modification or cancellation of them would help restore international credit and start again foreign investments which are now hesitant to embark on new enterprises.
It is impossible to visualize American business interests failing to participate in a large way in the future development of a dynamic world. Private enterprise, with capital, energy, initiative and experience at its command, will refuse to live in narrow isolation. Participation means international trade; and international trade cannot thrive under our present tariff systems nor in a world beset with the problems growing out of the war debts.
[i] Day: "History of Commerce," p. 271.
[ii] "Commerce Year Book" for 1931, vol. 2, p. 679.
[iii] Final Report of the League's World Economic Conference, 1927, p. 12.