How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
AMERICA'S attainment of financial power coincided with epochal achievements in science and combined to create in the American imagination a new sketch of destiny. By Lindbergh's flight the world seemed re-spaced; the miles that divided men were shortened. The instantaneous transmission first of the voice, then of the living photograph, were almost the same as the handshake between men meeting and looking into each other's eyes. Our world is small, these things seemed to prove; all people will, inevitably must, traffic with each other. For ten aggressive years, American finance, American management and engineering skill, American sales effort, exerted themselves outside the borders of the United States. They sought growth and profit in utilizing the new discoveries of science, and in developing the system and forms of international commercial intercourse.
We invested fifteen billions of dollars in foreign countries -- an investment favored by the calculation that in supplying the means of improving the economic conditions of foreign countries we would make richer customers, and that in bringing under command natural resources stored abroad the American people would benefit in common with others. This employment of capital naturally fostered a foreign commerce that grew rapidly. By 1929 our foreign commerce exceeded $9,500,000,000; we drew from other countries $4,400,000,000 of needed goods, and sold to them $5,200,000,000. These totals were two and a half times as great as they had been before the war. Though they represented but a minor fraction of the sum total economic activity within the United States, they formed very important fractions of the total external commerce of other lands. To illustrate, sales to the United States composed more than one third of the total foreign sales in 1928 of Brazil, Canada, Cuba, Chile, Colombia, Mexico, Japan, Peru and the Philippines.
Nurtured by the Federal Reserve System, there grew up a capacious acceptance market to finance cheaply our growing foreign commerce. Subsidized in some branches by our government, American shipping interests built new ships to carry the increasing loads and travel. Our experienced construction companies like J. G. White, Ulen and Company, Stone and Webster, learnt how to work with Spaniards, Mexicans, Greeks and Persians. American corporate energy laid out and systematized the stages of fast air travel between New York and Buenos Aires; the American Government gave air mail subsidies so that blueprints and commercial documents could be conveyed with speed. Our cities were connected by telephone and radio with most of the capitals of Europe and South America and with the more distant Australian and Asian continents.
We loaned, traded, built, and established lines of intercourse. Now we are stopped in fear and disillusionment; we regard with some unhappiness the connections with the outer world that are so troublesome; we should like to sink back into ourselves and escape the difficulties of leadership in the international economic community, as we have refused the responsibilities in the political sphere.
The anxieties which beset us are in part a consequence of our own blunders. The international debt payments to us have been a strain on other national economies and made them collapse more easily into the present general depression. A substantial part of our foreign financing was ill-considered. Loans too easily received were used to sustain public and private economic activity that failed as soon as the supplies of new funds ceased; other loans sustained military and political rivalries which paralyze men's planning for the future. Large capital sums were applied to develop natural resources with too great assurance that the world would at once require them. Our excited stock-exchange speculation drew from other lands capital needed there. None of these results came from deliberate choice; they were evil incidents of a too rapid economic growth.
Not so the results of the tariff act we passed in 1930. That action was an outright contradiction of the interests and purposes to which we seemed to be committed. It impoverished groups of foreign producers, who were our customers and whose efforts in many instances we had directly or indirectly financed. It closed our market in whole or in part to goods produced by American interests operating abroad -- as when it blocked the movement of vegetables from Mexican farms, financed in San Antonio and transported on the Southern Pacific of Mexico. By swiftly wounding foreign industry, it intensified the fall in raw material markets from which all American producers suffered -- as with copper, cotton, lead, hides and cereals. Industrial depression abroad weakened the public credit of many of the governments that are our debtors; so that now we wait anxiously to see whether Brazil, Australia, Mexico, Germany can meet their debts.
But in our present disappointment and suffering we would go further. It is proposed to use still harsher measures to protect ourselves against the competition of foreign lands, to apply special restrictions, quota systems, prohibitions against their products. Imports of oil, copper, wheat are to be barred or rationed; all shipments of Russian products are to be embargoed. Still other proposals would extend the restrictions to corn, butter, tobacco, palm oil, dried beans and eggs. For this last step in the renunciation of an intercourse which we find too trying, the papers are almost drawn. We would like to seek in isolation a security that seems lost. But interests established in the past arise to plague us. The foreign securities we bought, we still own. The foreign properties we manage still depend upon our purchases. The capacity of our farms and many of our industries still exceeds the amounts we are likely to consume. Our banks, our merchant marine and ports, our cables, ships and airplanes all need traffic. We cannot with wisdom and satisfaction go farther in the attempt to live by ourselves. Our own interests and circumstance make the application of new restrictions unwise and costly.
The embargoes placed upon Russian products must be considered apart from the others that are proposed. The Secretary of the Treasury has imposed an embargo upon lumber and pulpwood produced in four districts in the north of Russia; and decisions as regards other products are pending. A dozen bills have been brought into Congress, having as object the prohibition of some or all imports from Russia. The action of the Treasury rested on Section 307 of the 1930 Tariff Act which bars out all goods made in whole or in part by convict or forced labor -- the labor in this case of political exiles confined in the prison camps. The protection of American industry against the competition of goods so produced is the chief argument of the proponents of the broader measures. Though Russian commerce has during 1930--1931 been of sustaining benefit to various American industries (as for example those producing automobiles, tractors and agricultural implements), and though our action will very likely lead Russia to retaliate against American goods, the American decision may be sound. But the official reason given is perhaps not as convincing as other reasons which exist. The Soviet Government, for one thing, denies the state of facts from which the Treasury Department drew its conclusions. All the timber exported by the Soviet Union, the chairman of the official Soviet agency has declared, is produced "on conditions established by collective agreements between the trade unions representing the workers and the state timber-producing trusts." But it is not necessary to argue about these facts. All Russian exports, whether produced by free or forced labor, present an unusually troublesome problem to the outside world. They are exported only through the official government foreign trade monopoly which (in consultation with other government agencies) can set the prices where they wish, and modify them as they wish. Ordinary computations of economic cost need not control their decisions. Such state trading the private producer cannot be expected to combat successfully -- whether it be the completely organized state trading of the Soviet Government, or emergency dumping as it has often been proposed that the Farm Board do with the wheat which it controls. The state trading organization can, because of its necessities or by deliberate intention, destroy industries, built up by patient labor and investment over years, even though those industries are well adjusted to their economic environment and merit survival on ordinary economic grounds. Private producers in such industries have a right of protection against state trading which will become manageable only when and as it is made the subject of international understanding. These are the special grounds and reasons justifying action in the Russian case. The difficulty is certain to persist until some understanding can be reached with Russia regarding its method of disposing of its exports.
No problem of special state competition enters into the sufferings faced by other American industries now seeking formidable government protection. The demand for an embargo, or quota restriction, on imports of crude petroleum and refined petroleum products arises primarily because of the acute situation facing thousands of small producers in Kansas and the Southwestern oil fields. The wells (as many as 300,000, it has been estimated) which they own, represent at present the high-cost production in the oil industry. They are mainly in explored fields, and, long past the flush of their flow, are made to yield by pumping daily a small amount of oil. By their continuance or extinction the pocket books of many outside the operating owners are affected -- thousands of oil field workers, and farmers deriving royalty or receiving lease money. They wish by prohibiting imports to bring back the price of petroleum and petroleum products to the point where production from their wells can be continued or enlarged; for proration schemes greatly curtail current production, and the operators long to extend their drillings into other areas which they hold under lease but dare not try to bring into production under present conditions. In demonstrating their case, they can quote with conscientiousness that principle sanctified by recent tariff acts -- to wit, that as soon as a commodity may be more cheaply procured from abroad than it can be produced at home, the foreign product should be put out of the reach of American purchasers. To the group affected, the calculation made that Venezuelan oil may be delivered at the Atlantic seaboard at 79 cents a barrel, while the cost of mid-continent oil at the same port is $1.98 a barrel, is an imperative proof of their right to a tariff of $1.19 a barrel.
The critics of the measure have concentrated upon its domestic results and its probable ineffectiveness. They contend that the situation, in the words of Secretary Wilbur, "has been brought about through unfortunate practices, bad engineering, bad financial set-ups and over-zealous competition. . . ." Rightly they argue that all homes, industries and cities which use oil benefit from the cheapness of the available product. Rightly they point to the fact that a rise in price will stimulate further American production, cause proration limits to be raised, new fields to be drilled; as this is written, oil workers from the whole Southwest are rushing in a fighting hurry to a large new flush field in eastern Texas that has just been drilled in -- a hundred wells piercing the same small circle at the same time. On the score of its domestic economic consequences alone, the wisdom of an embargo or fixed import quota is disputable. But let us look at the case in connection with the international expansion of American economic life that has occurred in the last decade.
The oil industry is itself an exporting industry -- particularly of the refined products. In 1929 this country imported 78,933 thousand barrels of crude oil (mainly for use along the Eastern seaboard, or for re-shipment after refining to foreign lands) and 29,632 thousand barrels of refined oils (mostly topped oil). During the same year we sold abroad 26,394 thousand barrels of crude, and 126,377 thousand barrels of refined oils. The volume of the exports has risen more rapidly than that of the imports since 1921. The revival of the industry in Russia, the systematic exploitation of the Persian and Mesopotamian fields, is menacing this export business now. Self-interested foreign competing groups are alert to turn increased resentment abroad to their own advantage. If entry into the American market is stopped, and the price of crude oil raised thereby, American oil refiners will suffer losses in foreign markets; the business will go to foreign producers, or to American controlled refineries located abroad.
Further, the enterprises producing and transporting the imported oil are primarily sustained by American capital. The oil which it is proposed to bar comes from Mexico, from Colombia and Venezuela. It was for the right to produce this oil without unreasonable restrictions that our Government wrestled with the Mexican Government, causing them to revise their legislation; in Colombia we have similarly opposed legislation that would hinder American producers; while in the rotogravure supplements the pictures of the wells in Venezuela have been displayed as testimony, as high as the derricks, of what American energy and engineering technique could do in so neglected and distant a waste. Upon these actions and investments of the past we cannot abruptly turn our backs without evil consequences. If we do, the holders of oil securities may not be alone in paying the cost. In our possession are many millions of the bonds of the Mexican and Colombian Governments. With every curtailment of the oil exports their public revenues fall; with every fall in their public revenues their credit weakens. The roads they are building to bear American automobiles will have less length. Their people will buy fewer of the things our factories have expanded to produce. The past cannot be dismissed so irresponsibly: if this is not clear in the memory of the Oklahoma farmer, it remains bright in the reckoning of the Mexican or Colombian or Venezuelan public official.
Many of the elements in the copper situation are the same as in the oil situation. The high cost producers lead in advocacy of an embargo or restriction. In this industry, too, the imports come mainly from properties developed by American corporations, such as the Anaconda Copper, the American Smelting and Refining, the American Metals companies. As in the case of oil, the amounts imported have been almost always less than the quantities we export. Our foreign customers will certainly not buy American-produced copper, held at a price above that prevailing in other markets. The actions of the past pledge us to a policy of free interchange with foreign producers of copper. The imported metal comes from Chile, Canada, Peru, Mexico and Africa; in 1929 it amounted, in all its forms, to 487,156 tons. In the same year we shipped abroad 499,347 tons. Since we possess a great smelting and refining industry, much of the copper imported is for treatment and re-export. In Chile we have financed not only the copper and the nitrate industries, but the government, the railways, the local public utilities, the mortgage bank, and factories. Our total stake there approximates $700,000,000, of which about half is in the mining field, $250,000,000 in government loans. If our past endeavors to exploit their resources and build up their economic life are now recklessly ignored to meet an emergency, part of the cost must return upon us. In Peru, Canada, and Mexico too, American ownership in the copper producing industry is dominant, and American investment outside the industry important. In Peru, it is the Cerro de Pasco and the American Smelting companies which take the copper metals out of the ground (American capital also owns the main petroleum company). We have become substantial holders of the Peruvian government debt. American groups are now studying the surveys of another railway line that has been ceded to them. The connections between Canadian industry and our own need no demonstration nor fresh comment; nor does the readiness of Canada to strike back when struck. Mexico, whose agriculture the 1930 tariff has already much handicapped, whose oil shipments are being menaced, would certainly feel justified in completely neglecting its American debt, and in defending its exchanges by further tariff action.
Less need be said of the proposed embargo on foreign wheat -- with the favoring judgment of the Chairman of the Farm Board. The American tariffs against wheat already in force keep out of this country all but a small quantity of certain varieties needed for mixing or used as feed grains; these continue to enter from Canada and elsewhere over the tariff. Wheat prices in the United States are already far higher than in world markets; the Farm Board owns and does not know how to dispose of at least 100,000,000 bushels; our once great export trade fell in 1930 to a small fraction of its former amount; the new crop will add to our surplus -- if crop weather is normal. The gain held out to a small group of American producers is in this case small. The action would once again smite the neighbor who is busy smiting us -- Canada. It would give the encouragement of imitation to plans of wheat restriction practised or under consideration elsewhere in the world, specifically in Eastern Europe and between units of the British Empire. Some countries have already taken measures as extreme as any contemplated here. In Germany, the duty on wheat for bread food is $1.62 a bushel, in France $.85 a bushel, in Italy $.87; some countries have in addition to their tariffs restricted the percentage of imported wheat that can be used. Each nation crowded against the others' barriers feels that it must keep alive all forms of economic activity within its borders. It sustains still further the farmers who are raising wheat against a falling market. The creation of the Farm Board was necessary to prevent sudden panic. But now the improvement of the wheat situation can come only through gradual liquidation, curtailment of production, opening the lanes of world interchange and coöperation.
These embargoes and restrictions are the last retreat of our own authorities, and of the foreign authorities that are also employing them, from the advanced point that international activity had reached. While American business was still extending, we became a party to an international accord which condemned their use. The United States in September 1930 ratified the International Convention for the Abolition of Import and Export Prohibitions and Restrictions. The American Secretary of State informed the League: "The American Government views with approbation any endeavor to facilitate world-wide economic relations and remove discriminatory economic measures, and has for this object signed and ratified the convention for the abolition of export prohibitions and restrictions and has coöperated with other international activities looking to the betterment of economic conditions throughout the world." Because Poland withheld its signature, so that it might better bargain with Germany, the original list of eighteen signatory states was shortened. Only Great Britain, Japan, the Netherlands, Norway and Portugal have ratified thus far, and after June 1931 each signatory may free itself from the obligation. The withdrawal of the United States would probably deprive the convention of all force.
If we impose additional restrictions upon the trade of other countries with us, we may expect another series of retaliations. Those who cannot dispose of the products which American capital has helped them turn into exchangeable riches, those who cannot acquire the funds to pay their debts to us, will have an easier conscience in legislating against our goods. They will resist the further squeeze which now, relying on our large measure of self-sufficiency, we threaten to make. Within their borders, too, are groups still without protection, who are ready to assert that their suffering is their country's only responsibility. The governments will be compelled to try to find domestic recompense for the employment we destroy.
Current proposals are bringing out the full meaning of the past half century of tariff history. They are revealing that when once nations give the protective tariff an important place in their arrangements, it develops an irresistible momentum. First timidly extended to protect an infant industry, to foster an occupation deemed essential for national security, the list of situations to which it may seem rightfully to apply inevitably lengthens. If one group can make its opportunity behind a tariff wall, there are always many other groups which claim the same opportunity. Every new buffet of foreign competition is made the argument for a new cushion. Soon within the country the system grows fairly general, and it becomes natural for all to assume that they have a prior right to the home market. Producers of raw materials, usually subject to world competition and the last to receive protection, find themselves handicapped by the high levels of money wages and prices created by the protection given to industry. They can then argue with a fair appearance of reason in the manner of a recent spokesman for the domestic copper industry: "Copper is the only metal of any importance that the United States Government does not protect by an import duty. There is no more reason why blister copper should be admitted to the United States free of duty than there is why pig iron should be admitted. There is no more reason why fine copper should be admitted free of duty than there is why steel bars should be so admitted. Import duties are laid against iron and steel."
The national arc of the circle becomes complete. Domestic producers claim virtually the whole of the home market. To the extent that they make their claim effective they force their countrymen to renounce the expansion of foreign commerce. For, each step taken by any country in this direction tends to force others in the same direction; protection in one country imparts its momentum to other countries. This arises only to a minor degree from a desire for retaliation. Political and economic necessity tends to bring it about. Each time a country loses a foreign market because of tariff action, groups within it seek to save themselves by asserting a new claim upon their own domestic market. A country -- and Great Britain is in that position now -- suffering from the tariff restrictions opposed to the commodities it produces feels itself under the double pressure of having its incomes forced down and having some of its people suddenly unemployed. The only remedial measure usually seems to be the further preservation of its own home market. Tariff increase follows tariff increase. The world divides into tariff sections. Such seems to be the inner logic of the tariff system as we know it. In the final stages the instruments grow more blunt and hard. Alongside of rate schedules there are imposed quota systems, restrictions, embargoes. Various other countries employ them, and we seem on the verge of doing so.
The development of the protective system to its present extreme has still further significance. It is changing the character of the state. It is the cave in which nations seek refuge from the lack of order in the international sphere and from the constant technical change in the economic one. The events of recent years -- rapid price changes, financial maladjustments, technical improvement, the exploitation of previously unknown resources -- have in each country brought suffering to some groups, and with suffering the threat of disorder. The government steps in to restore the balance, to make employment, to protect against the too rapid crowding of change upon change -- no matter what the ultimate cost. By the use of the tariff, the embargo, subsidies, government purchases, it in reality sets the price at which various products are exchanged for others. It displaces the price mechanism of competition on which reliance has hitherto been placed for the adjustment of supply and demand. It enables industries that would have to shift for themselves in the unregulated competitive world to stay in their old places and courses.
But this use of the government's power is controlled by no five-year plan. It is influenced by votes or political bargaining power; it is dictated by a succession of emergencies. Its application is heedless of the manifold disadvantages imposed on other groups inside and outside the country, whenever special pressure is sufficiently strong. In a manner where it is easy for favor to supplant reason, it redistributes the incomes of the people by political means. At that point many tariff systems of the world have arrived today. The logical outcome of the present trend is the nationally isolated, government-controlled economic system.
Between this world and the world of widespread international exchange towards which American capital has been contributing so much we now hang suspended. If we adopt still more complete protective measures, bringing still further strain on foreign debtors, new disappointments to foreign producers, new anxieties to American investors, we commit ourselves to a world of embittered and secluded national states, between which capital dare not move and commerce exists weakly, on sufferance. The work of increasing our own wealth by developing that of others, for which our capital resources and engineering skill equip us, will then remain undone -- the possibility wasted.