How Russia Decides to Go Nuclear
Deciphering the Way Moscow Handles Its Ultimate Weapon
IN THE new British House of Commons, with its total membership of 615, the National Government has a majority of about 500 -- some 550 against 50. And in this majority probably 450 are men who, quite apart from the special conditions of this year's crisis, have long desired to see protection an integral part of the British economic system. Of the remainder, some have been converted to this view, others are prepared to support such tariffs as the emergency may seem to require without prejudice to the more permanent policy. It is obvious, therefore, that the British parliamentary position in regard to tariffs is substantially different from what it has been during the eighty years or so in which Great Britain has been (with minor deviations) a free-trade country and the leader of liberal economic policies throughout the world.
To say so much, however, and no more, would be most misleading. The election certainly does not represent a sudden and complete conversion of the British electorate to the view that protection should be the basis of the country's economic system. The issue on which the electors voted was not, though many tried to make it so, that of tariffs versus free trade. One thing is abundantly clear from the campaign in the different constituencies, and from the results. The voter -- especially the voter insecurely attached to any party, whose action decides the change of governments -- considered quite simply that there was a national crisis, that the country was in danger, and voted for those who seemed to him most likely to concentrate upon dealing with this danger, by whatever means might be appropriate in priority to any other consideration. The weakness of the pound, the danger of its losing its value very seriously if either the budget again fell out of equilibrium or the balance of trade remained substantially adverse, the consequences that would follow not only in the loss of investments and savings but to the structure of the real wage level and social services -- these were what concerned him. The mass of the "balancing" electors did not mean to prescribe, nor did they mean to exclude, any particular measure whether of tariff or other policy. It happened that most of the candidates who in the eyes of the elector stood for a national policy were Conservatives and protectionists. That was a political accident which he could not help. Where a Liberal and free trader stood for such a policy the same balancing elector voted for him. Sir Herbert Samuel, in spite of the fiercest opposition from the protectionists, was elected at Darwen by a majority exceptionally large for that constituency.
The post-war British electorate is very different from that of the nineteenth century. It is much larger. It is based on adult suffrage for both men and women. It contains a much larger proportion of those who have no strong attachment either to a party or to definite opinions on long-standing controversial questions. The result of an election tends much more to depend on the view taken of the last-moment issue by this great mass of unattached voters. They voted against tariffs when Mr. Baldwin raised the issue in 1924. They swung back in reaction against a fear of Russian influence at the time of the Zinovieff letter in the same year. This time they have voted on a "national" issue to the exclusion -- or complete subordination -- of everything else. In all these oscillations, and especially the last, the woman's vote has been of special importance.
The attitude of the elector as shown during the contest is probably better evidence as to the character of the issue and the mandate than the somewhat ambiguous, and sometimes conflicting, statements of the different leaders. But on the whole these statements tend to the same conclusion, that the electorate intended the new government to have a "doctor's" mandate, including the authority to impose new duties if the situation seemed to demand them, but was not giving a verdict as to the permanent and normal basis of the country's economic system.
This does not mean, however, either that there has been no change in the British attitude to tariffs, or that new tariffs with a much longer life than that of the present emergency will not be imposed. There is no doubt that as British economic difficulties have been intensified, as the inequality between the few duties in England and the many elsewhere has become more marked and an obvious factor in the financial crisis, and as the British balance of trade has become adverse, the support for a protectionist system has grown. The Empire movement has also made some progress, though much less than might be inferred from a perusal of the press; it has been restrained by the absence of any real prospect of the Dominions being willing to make very substantial concessions and by its dependence upon food duties, against which feeling still remains strong. I should hazard the guess that had a referendum been taken at a time when the issue could have been isolated, say in the early part of this year, the majority of the country would have been in favor of new duties on manufactured articles but against protective duties on food.
Any prophecy as to the course of policy in these circumstances must be very conjectural. That policy will depend partly upon the development of the crisis, partly upon the action of other countries and their willingness to negotiate, and partly upon certain special features in the British economic position. We must consider each of these factors before we attempt to form a judgment.
The general world position with regard to tariff policy during the last few years must first be taken into account.
The World Economic Conference of 1927 demonstrated beyond question the existence of a general, indeed universal, dissatisfaction with the tariff systems. That Conference gave the most strikingly unanimous and authoritative expression of expert opinion as to the direction in which the world needed to reform its policy in order to increase its prosperity. Some two hundred members of every type of relevant qualification and experience, chosen as responsible persons by the governments of nearly every country, including that of the United States, all agreed that tariffs ought to be simplified, stabilized and reduced. In coming to this conclusion they were influenced partly by the reasons which have appealed to economists in the past, partly by the increase in the level, complication and instability of post-war tariffs and the fact that the war has created new tariff-making authorities, but partly, as men of practical business experience, by one modern factor which needs emphasis. The natural development of industry towards large-scale operations is constantly increasing the handicap of small economic units. Large-scale operations need assured large markets, much larger than those comprised within national frontiers. Trade barriers are not only worse absolutely than before the war; but their obstructive effect on natural economic development is also greater, because the advantages of organization on a basis of equal opportunity over large markets is certainly increasing.
The subsequent history of commercial policy has unhappily demonstrated, not indeed the complete impotence, but at least the inadequacy of the world's governments to secure effect for even the most authoritatively recommended general policy. This is partly because the advantages can be fully secured only by simultaneous and equal action by many different countries, between which agreement is extremely difficult; partly because in each country the particular interests are politically better organized than those of the public generally; and partly because a tariff in which a national industry has once developed has created forces which make its removal or reduction extremely difficult.
Nevertheless, it would be a mistake to say that, even under these disadvantages, the influence of the World Economic Conference counted for nothing at all. When the Conference met in 1927 the upward movement of tariffs was in full swing; a number of new tariffs were in preparation which were much higher than the tariffs in force up to that time. After two years, the absolute position was not worse but perhaps a little better than when the Conference met. The upward movement had been arrested, if not reversed. The immediate effect in 1927 was to stop a number of proposed increases; and in the following year, 1928, substantial reductions were made by means of bilateral negotiations and extended to other countries by virtue of the most-favored-nation clause. In addition, a series of attempts were made at Geneva to remove barriers by multilateral agreement. Conventions were negotiated to remove "prohibitions," to secure tariff reductions for specified groups of commodities, to establish a "tariff truce," and so on. These attempts, with unimportant exceptions, failed to attain their goal. Either a convention was not signed or ratified, or it was so diluted in negotiation as to be of little real effect, or the adherents were too few to bring it into effective operation. But though the League did not succeed in securing the legal engagements which it tried to secure, the influence exercised through the negotiations was considerable. Countries which would not bind themselves did nevertheless refrain from imposing new prohibitions or new tariffs. The procedure of the negotiations, by bringing into personal and frequent contact those responsible for commercial policy throughout Europe, gave to all concerned a vivid warning of the dangers of a new upward movement of tariffs and a realization of the heavy responsibility which would attach to any country which started it.
The cause for the League's comparative failure, and the measure of its partial success, are both to be found in one consideration. The negotiations which followed the World Conference, in the three and a half years from 1927 to 1930, took place between European countries; it is on them that the League has, in practice and in this sphere of commercial policy, exercised its main influence. Now two things stand out in any general review of the commercial policy of the last few years. The first is that it is in other continents, and not in Europe, that the great new increases of tariffs have been witnessed. The second is that Europe's attempts to reduce tariffs have been greatly impeded by increases elsewhere. In Europe (apart from the automatic and unintended increase of the real weight caused by falling prices), the trade barriers from which industry (though the same is not true of agriculture) was suffering at the beginning of 1931 were on the whole not greater than in 1927. This was in spite of the fact that large increases were being made elsewhere, and that the same forces which caused these increases were operating with at least equal strength in Europe. While the failure to reduce European tariff barriers is far from being a satisfactory result, the fact that the level has not been increased will not be dismissed as negligible.
It is obvious that the tariff increases in the United States of America, the British Dominions and elsewhere could not but handicap Europe's efforts to reduce her tariffs. And this was the more so because of the traditional European method of attempting such reductions -- by bilateral negotiations, subsequently extended by the operation of the most-favored-nation clause. After a time, however, the working of this clause presented a formidable obstacle to progress; and it is one which has so important a bearing on future developments that we must consider it in a little more detail.
The unconditional most-favored-nation clause, long the traditional basis of British policy, more recently appreciated by the United States, and accepted to an increasing extent in recent years by Continental nations, may claim great advantages. It is designed to secure equal treatment, to be simple, and to avoid dangerous complications and confusions of political and economic motives, and thus of many causes of friction. Moreover, the two principles of "reciprocity" and "no discrimination," logically alternatives, are in practice capable of conciliation under certain conditions. A country giving and claiming undiscriminating treatment can without difficulty secure what it asks from countries which negotiate reciprocal treaties inter se, if it is a free trade or a low tariff country. Two countries arranging reductions of special interest to each other are content to give the advantage to other countries if the general policy of the latter is such as not to make the resulting situation impossibly unfair. Even though the duties are equal for other countries, the choice of the articles by the two negotiating countries gives the "reciprocity" a real sphere of action.
But when the countries have high tariff systems the situation rapidly becomes impossible. When two moderate-tariff countries can only negotiate reductions inter se if they are prepared to give these reductions to countries whose general tariff is higher than even their unreduced tariff, and who give them no advantage in return, two results must follow: first, reduction by the method of bilateral agreements extended by most-favored-nation must be arrested (as happened in 1928); and secondly there must be a growing feeling that some modification in the unconditional most-favored-nation arrangement is both just and necessary. The American tariff forced this difficulty into great prominence; and it has been aggravated by other factors. The United States has become the greatest exporter, not only in total exports but also in the category of industrial products. But she has at the same time one of the highest tariff systems in the world and has recently increased it. On the top of this the United States is one of the two largest creditor nations -- far the largest as regards public debt -- and she presents herself to the world as refusing to take the goods with which alone other countries can ultimately pay. She is succeeding in at once having more exports than imports and drawing large cash payments in respect of debts.
This situation at once impeded other efforts to reduce trade barriers and also gave an impetus to the "United States of Europe" movement, the attempt to give Europe some aspects of economic unity and some of the advantages possessed by the United States of America. But this attempt, still in progress, also encounters as its principal obstacle the operation of the most-favored-nation clause. A complete zollverein is indeed a recognized exception to that clause; and if it were practicable for Europe, by a single decisive act, to establish complete free trade within a single customs frontier, as the United States has done within its own frontier, no difficulty on this score would arise. But no one who knows the extent to which national tariffs are interwoven with the economic structure of Europe, and the supporting political forces which they have brought into existence, will imagine that any such single and complete transformation is possible. It must come, if it comes at all, by stages. And that means either the abandonment of the most-favored-nation clause, with the great danger of causing a chaos of confused, complicated, differentiating and provocative tariff systems, or a carefully safeguarded extension of the present admitted exceptions to the clause with the good-will and consent of non-European countries. This is too big a question to discuss here in detail, but it is certain to be one of the important world problems of the near future.
One other adverse factor in the attempt to reduce trade barriers must be noted, the more because of its direct bearing upon the present English position. The importance to Europe of the British market, still practically a free market in spite of high duties on a few articles, and the danger of losing it, should have been a principal inducement to other countries to reduce their tariffs. But in practice it was impossible to make this an effective bargaining factor in the negotiations at Geneva, for one simple reason. Free trade versus protection had long been a main political issue between the British parties. Countries which might have been inclined to reduce their tariffs in order to retain the free British market felt that to do so in the hope of influencing the British electorate (who might after all be thinking at the time of some quite different issue) to vote for the free trade rather than the protectionist party, was much too remote and uncertain an inducement. This situation, as we shall see, has now changed.
So far we have followed, very summarily, the development of commercial policy in the four years following the World Economic Conference of 1927. This period included the first year and a half of the economic depression. We now come to the recent period of the financial crisis which began last June.
There can be no doubt that the disturbance to normal economic adjustments caused by tariffs was at least a contributory and aggravating factor in that crisis. The financial crisis represents a failure of the world's monetary, financial and credit system to cope with an economic disequilibrium which had become too great for it. In its essence it results from a gap in the balance of payments between creditor and debtor countries, uncorrected by adjustments in the balance of trade and unbridged by loans. The world needs, on the basis of existing obligations and the distribution of world trade of recent years, some two billion dollars a year of new lending from creditor to debtor countries to maintain its balance of payments. This was forthcoming as late as 1928. But after the collapse of the speculative boom of 1929 the investor in creditor countries was no longer willing to invest abroad either to a sufficient extent or on a long-term basis. For a time the difficulty was met, and default avoided, partly by short-term operations, partly by the export of gold to creditor countries whose new lending was unequal to the surplus in their balance of payments. The first of these methods was precarious, and failed at the first serious shock to confidence; the second was temporary, for four-fifths of the world's gold stocks are already in two creditor countries and nearly all the rest is legally affected as currency reserves. The only alternatives to moratoria or repudiation by debtor countries are to bridge the gap in the balance of payments between creditor and debtor countries by loans, or to reduce it by either cancellation of existing obligations or a change in the balance of trade. The extent to which a creditor country can, while exporting on a large scale, restrict its imports, is mathematically determined by its willingness to lend abroad. Foreign lending will doubtless in time start again, though slowly and with difficulty; but it will have an immense, and probably an impossible, gap to bridge unless it is helped by adjustments in the balance of trade, which means in effect a greater willingness to receive imports from debtor countries.
But however much the financial crisis may have added a further demonstration of the evils of high tariffs, its first effect is to increase them. It is so much easier for debtor countries, or for countries which like Great Britain are embarrassed in their immediate obligations in spite of a strong long-term creditor position, to attempt to secure an equilibrium by keeping out imports than for creditor countries to facilitate their entry. And unhappily that is happening, as a direct result of the financial crisis; trade balances are being readjusted in a form which means a reduction, and not an increase, in world trade. If a country goes off gold, like Great Britain, Sweden and Denmark, the exchange depreciation operates as an import duty. If a country struggles desperately to remain on gold, like Germany or Hungary, it restricts its imports and forces its exports out at any price. The second of these measures both drives down world prices again and aggravates the depression, and quickly leads other countries (like Holland) to impose new duties. And so the process continues. The financial crisis, itself partly caused and certainly aggravated by high tariffs, especially in countries to which -- in the absence of other means of settlement -- excessive gold has been flowing, tends while it lasts not to remove tariffs but to increase them.
We now come to Britain's present position, and her probable course of action. Prophecy is the more dangerous because the policy pursued by other countries, both in dealing with the problems of the financial crisis and the depression and in the modification of their own commercial policies, will be important factors. All that we can do is to mention some of the principal forces likely to operate and to make certain guesses as to what is likely to happen. We need to take into account the political forces, the composition of the new British Parliament and government and the mandate on which they were elected; the circumstances arising from the position of the pound and the financial crisis which caused it; the special characteristics of the British economic structure and organization; the position of the Dominions; and the traditions of British budget and commercial policy.
The political environment in which the new policy will develop has already been described. It is enough to add that the character of the electoral decision has been fairly reflected in the new government, which includes as Chancellor of the Exchequer (Mr. Neville Chamberlain) a convinced protectionist, and as President of the Board of Trade (Mr. Runciman) a free trader of equally long standing, who is however not opposed to tariffs which may seem to be required by a special situation. The rest of the Cabinet includes every shade of opinion -- except the most extreme. No place is found in it either for the extreme advocate of an Imperial system, Mr. Amery, or for any free trader pledged against tariffs in all circumstances. But, within these limits, the Prime Minister, Mr. J. H. Thomas, Mr. Baldwin, Lord Hailsham, Mr. Snowden, Sir John Simon, Sir Herbert Samuel, represent a variety of opinion on the main principle which makes speculation as to the course of policy both difficult and intriguing.
At the center of the Government's immediate problems is the fate of the pound. This has several interesting -- and in different circumstances possibly divergent -- reactions on tariff policy. In the last weeks of the struggle to maintain the old parity most free traders would probably admit that an emergency tariff (or perhaps prohibitions of luxury goods) would have eased the strain and been a definite (though, as we see in retrospect, probably not a decisive) help. But as soon as the pound went off gold the situation changed completely. The depreciation of the pound is itself a trade regulator, and it operates at least temporarily as both a protective tariff on imports and a bounty on exports. The case for an emergency tariff which existed early in September has therefore gone -- at least for the moment. It may be, of course, that it will soon recur. Other countries may go off gold, as some have, and some currencies may perhaps depreciate to a lower point than sterling. Or new prohibitions or tariffs may be imposed to counteract the British "exchange-dumping." Or if, with the depreciation of sterling, luxury imports seem likely to threaten our supplies of imported necessities, discriminating measures against the former may seem desirable. But in the absence of such developments, and in the situation as it is at the moment, there is one powerful consideration tending to restrain any lasting imposition at least of a general tariff. The Prime Minister has announced that, until the pound is again definitely stabilized, a main objective of policy will be the substantial maintenance of its internal purchasing power. This means in effect that the main wage-price-cost level in terms of pounds must be prevented from increasing. Now some increase in the cost of living is inevitable as a result of the increased cost, in pounds, of imported goods. If this should be followed by increases in wages the internal value of the pound could not be maintained -- and the pound would lose what is now its only real foundation. There is no reason why this should happen, as the cost of living need not increase so far as to compel adjustments of wages unless aggravating factors are added, but anything like a general tariff in these circumstances would greatly increase the danger.
One further consequence of the depreciation of the pound has been to modify the attitude of some industries which have in the past clamored for protection. This is particularly the case with some which have arrangements with their Continental competitors. They fear that these arrangements will be upset, and that retaliation will follow, if to the accidental exchange advantage is added a deliberate duty as well.
Another retarding factor whose importance will become more evident as practical tariff proposals are brought forward consists in the actual economic structure of the country. Under a free-trade system of nearly a century those industries which are most appropriate to that system have grown up. It is not so difficult to impose as to remove tariffs, and the vested interests in free competition are neither so evident nor so vocal, but they exist. It is, however, only in face of specific proposals that these interests express themselves. Shipbuilders, for example, will quite cheerfully assent to protection in principle, but may be expected to be very critical of any duty on iron or steel which seems likely to increase the cost of their raw material substantially, and to ask for safeguards and conditions which will make the protection much less attractive to the industry concerned. It is of course noteworthy that the industries which have fared worst in England, and in which unemployment is greatest, such as shipbuilding, coal and textiles, are essentially exporting industries to which protection could give little or no advantage.
We must next remember the position of our Dominions, which has been widely misunderstood because of the misleading phrase "Empire Free Trade." The Dominions are not willing to admit English goods either freely or in such a way as to cramp the development of their own industries. What they are ready to do is to give a preferential advantage to English over such foreign imports as they admit, in return for corresponding preference for their own imports into England. These are mainly food and raw materials, so that England is asked to make a very serious concession in return for what might be a very limited advantage. Some duties on minor articles of food may be practicable, though the failure to include duties on tea and sugar in the recent taxation proposals (for which the technical arguments were overwhelming) reflects a continuing reluctance to tax food, and the position of the pound described above makes it specially important in present circumstances to prevent unnecessary increases in the cost of living. As regards wheat, the situation has been completely changed since the days of Mr. Joseph Chamberlain by the fact that the Empire as a whole now produces more wheat than it consumes and has a large surplus beyond what England could absorb. If therefore a duty were imposed on all foreign wheat, and all Empire wheat were admitted free, the price of wheat would not be affected; the world price would still prevail and the Dominions would have no substantial advantage. These considerations are not set out as an argument against an Empire policy, but to suggest how complex the problem is and how much time is likely to elapse before anything more than partial and tentative measures are taken. In this connection it should be remembered that an Imperial Conference is being arranged in Ottawa for July 1932.
Lastly, among the factors in the problem we must remember certain traditional features in British procedure and practice. We have already seen how bargaining with other countries has been impeded by the fact that protection has been a principal political issue between the parties. This difficulty does not now exist in the same degree, but two others remain; first, the attachment of the country to the most-favored-nation principle in its widest and most unconditional form (to which we have already referred), and secondly, the British budget system. It is a cardinal feature of this system that proposed taxation, including duties, is kept an absolute secret until it is announced in the budget speech, when it is made immediately operative by resolutions of the House of Commons. This procedure, it is evident, allows no scope for prior negotiations.
The above considerations suggest, not that there will be no development of protection in England -- for we must remember its strong political forces and its new though limited support in public opinion -- but that the evolution will be tentative, not very rapid, and probably moderate. The rest of the world can do much to keep it moderate by their own action in showing a willingness to move towards equalizing tariff systems by reducing those that are highest.
With great diffidence I suggest the following course of development as probable. In the first place, emergency powers are likely to be secured from Parliament for the imposition of such new duties or prohibitions as events may require. This would cover duties or restrictions against excessive dumping resulting from the world's financial crisis, and special duties against luxury imports, designed to help the pound or to prevent a fall in its external purchasing power from depriving the country of its more necessary imports. Duties (including some on subsidiary articles of food) of a tentative and temporary character may be expected under these powers, the exact extent and character of them depending upon the development of the financial crisis. In the meantime, it is likely that a scheme of protective duties of a more permanent character will be elaborated and examined by a commission which will take evidence from the interests affected. Such an examination is likely to bring out much opposition in detail to particular proposals. The effect of this will be to restrict the protection and make it subject to onerous conditions as to reorganization and as to safeguards against price increases that are out of line with world conditions. Meantime the Government will be able to bargain with a freer hand with other countries. This process of bargaining will in turn raise the question of a considerable extension of the exceptions to the most-favored-nation clause. It is likely also to involve a further departure from the conditions of secrecy with regard to prospective duties. Meanwhile negotiations, culminating perhaps in the Imperial Conference of July next, will proceed with the Dominions; and the whole development will be influenced at every stage by external world events.
This forecast can be nothing but a guess. Many factors, both internal and external, which cannot now be clearly foreseen, may affect it decisively. In particular the organization of a strong Empire Industries Committee in the House of Commons may force the government to more rapid action than they would wish. It is clear in any case, however, that a new stage has been reached in the history of the development of world commercial policy; and that, whether it tends ultimately to greater or less freedom of international trade, Great Britain's rôle will be substantially different from what it has been in the past. I shall conclude with one final observation. The World Economic Conference emphasized the evils of the height, complication and instability of the world's tariff systems. As the economic depression, and next the financial crisis, have developed, successive committees of experts have placed increasing emphasis on one other feature of those systems -- as a principal cause both of economic disequilibrium and of financial breakdown -- their inequality. In one way or another, by reduction or by increase, it is inevitable that this inequality between different tariff systems should be diminished.