Some Aspects of the Tariff Question
Part II, Chapter VI
Porto Rico; The Phillipines; Cuba
The war with Spain brought new complications of every sort, and among them none more striking than those in the sugar situation. In addition to Hawaii, Porto Rico and the Philippines became territory of the United States. Cuba was attached to this country by political and industrial ties. These three, as well as Hawaii, were producers of sugar. With regard to all, essentially the same problems arose.
The case of Porto Rico was almost precisely like that of Hawaii. The consequence of our acquisition of Porto Rico was that after 1901, this island was treated as an integral part of the United States. Its sugar, as well as its other products, became exempted from duty. Porto Rico was from the very outset in the position which Hawaii obtained through its annexation in 1898. Even more promptly and unconditionally than the other dependency, it was brought within the pale of the protective system.
It need not be explained again why sugar from Porto Rico, like that from Hawaii, was sold in the United States at the duty-paid price, though itself free of duty. The imports from the island (or supplies,—since in the view of the law they are not "imports") had not been considerable before 1900, having ranged not far from 100 million pounds a year. After the date when the favored treatment began, they rose fast. They doubled within three years, increased to nearly 500 millions in 1909, and were (in round numbers) 765 millions in 1913. Call it subsidy, bonus, protection, whatever name you will: the obvious fact was that the American consumer paid the full tax, which went, however, not to the federal Treasury but to the Porto Rican planters.
Whether the planters made unusual profits depended, as in the case of Hawaii and Louisiana, on their facilities for production. According as these were more or less good, the bonus operated either to put extra gains into their pockets or to sustain them with no exceptional profit in an industry carried on under unfavorable conditions. The rapid and continuous increase of the sugar output seemed to indicate that the conditions were favorable and that the planters profited handsomely. When an industry doubles its output every five years (such was roughly the rate at which Porto Rican sugar increased during the decade 1900-1910) it is reasonable to infer that the profits are more than generous. On the other hand, well-informed persons state that the land readily available for sugar growing is limited. Though some parts of the island have land equal to the best in Cuba, there is not enough for indefinite extension. Porto Rico is everywhere mountainous; the flat areas along the coast and in the valleys, alone available for sugar culture, are not large. Hence the prediction was made that even with the bonus from the sugar duty the output, while it might approach 1,000 millions, could not exceed that quantity.*41
In Porto Rico, as in Hawaii, the situation led to attempts to extend cultivation and push the yield. Sugar growing was made profitable under conditions that would not have allowed a profit without the bonus. Rainfall and water supply again were of the first importance. The island is divided from east to west by a mountainous ridge, which causes the precipitation (here chiefly borne by northeast winds) to be heavy on the northern side, but on the southern side insufficient for the cane's need of abundant moisture.*42 The insular government undertook great irrigation works, involving the expenditure of millions of borrowed money,*43 all for promoting sugar cane culture; with the expectation, of course, that payments by the planters for the water would make the investment remunerative. From the engineer's point of view, even from that of the zealous colonial administrator, these were most excellent projects. But the economist must question whether they represented a fruitful investment, resting as they did on the unstable foundation of prices raised by the effect of duties.
In Porto Rico, as in Hawaii, it has been the enterprising and moneymaking American who has chiefly profited. "The lands suited to cane culture are rapidly passing under the control of wealthy corporations, by purchase or by contracting for a term of years the cane of the 'colonos' or farmers."*44 This is doubtless inevitable. The same transition has taken place as in Louisiana and indeed in Cuba. Cane sugar making has come to be a large-scale industry, with great central mills to which the cane is brought by light railways for crushing. Only those who have large capital can embark in such an industry with success, and it is they who are likely to reap the larger share of any unusual profits. As an American official remarks, "it is the opinion of many close observers that the colonos and the peons who do the field work are not getting their share of the product."*45
Turn now to the Philippines. They were long treated with less generosity than Porto Rico and Hawaii. Imports from the Philippines were admitted for many years at three-quarters of the ordinary rates of duty. The sugar duty after 1897, it will be remembered, was 1.62 cents per pound on the grades of sugar usually imported.*46 Philippine sugar got a remission of one-quarter, about two-fifths cent per pound. This arrangement continued until 1909.
The difference between remission of the whole duty and of a part of the duty, as has already been noted, is one of degree only. In neither case does the consumer benefit. The favored producer simply gets in the former case a bonus or protection of the whole of the duty, in the latter of a part of it. So with regard to the Philippines: during the period from 1901 to 1909, their producers sold the sugar at the full duty-paid price, and were able to keep for themselves the fraction of a cent which the United States remitted from the duties.
So moderate a degree of favor had no considerable influence on the imports from the archipelago. These imports had never been large; and they showed no tendency to increase during the period of partial remission. Under the Spanish regime, sugar planting had been carried on, as had most other industries, in lazy and slipshod fashion. American rule, for the time being at least, seemed to bring no change in this regard. The bonus previous to 1909 was not sufficiently large to lead to any change of moment.
In the tariff act of 1909, however, a new policy was adopted. Philippine products were admitted free, and among them sugar. This remission of duty, however, was not unqualified. Only 300,000 gross tons of sugar (674 million pounds) were to come in free; any amounts beyond this limit were to be subject to duty.*47 The restriction was due to a fear on the part of the domestic producers that imports might increase indefinitely: a fear justified by the course of events in Hawaii and Porto Rico. For the time being the amount allowed was generous enough,—far in excess of the then existing sugar output in the Philippines. The effect on that output, none the less, was immediate and marked; so much so as to suggest that the limit might have been reached within a few years. The imports of sugar from the Philippines, which had been 8o millions of pounds in 1909, rose to not less than 435 millions by 1912. The remission of duty on this considerable quantity, as need hardly be repeated, had the same effect as in the other cases: a loss of revenue to the United States Treasury, no gain to consumers, a bonus to the Philippine sugar producers.
The tariff act of 1913, though it did not put an end to this situation at once, so altered it that the inducements for increasing the Philippine sugar output ceased. True, it removed the restriction on the quantity of sugar which might come in from the islands free of duty; sugar, like other Philippine products, was to be admitted free without limit. But, as will be remembered, the duty was reduced at once (i.e., by March, 1914) to one-half the previous rate, so that the bonus to the Philippine planters immediately became much less. Within a little more than two years (i.e., by May 1, 1916) all sugar, whencever imported, was to be free; and then the bonus was to disappear entirely.
The liberal treatment of the Philippines had long been urged by President Taft, whose own experience in the government of the islands led him to regard with perhaps sentimental favor all measures for their benefit. It was largely through his influence that the free admission of their sugar was brought about in 1909. In view of the way in which Hawaii and Porto Rico had been dealt with, the ardent for extension of the same favors to the Philippines was wellnigh unanswerable. It was strengthened by the general tenor of the current protectionist reasoning,—the notion that duties are aimed at foreign producers and are borne by them.*48 In fact, the duties had not been taxes on the Philippine producers at all; they had simply served, through their previous partial remission, to give a partial bounty; they now served, through their complete remission, to give a complete bounty.
Last in the list of dependencies and quasi-dependencies comes Cuba.
The sugar supplies from Cuba were, throughout the period under discussion, by far the largest constituent in the total, ranging from one-third to nearly one-half of the amount consumed in the United States. They fell off, inevitably, at the time of the insurrection against Spain and the consequent disordered state of the island; but after the restoration of peace the normal large amounts were again sent to the United States. Until 1903 they were subject to full duty. But in the course of the new arrangements which came after the Spanish war, Cuba, like the Philippines, was given a favored position. When the independence of the island was finally settled, and the United States troops withdrew, a reciprocity treaty was concluded by which Cuba made certain reductions of duty on American products imported into Cuba, and the United States made a general reduction of twenty per cent on Cuban products imported in the United States. Sugar was by far the largest article of import from Cuba, and the significance of the reduction on sugar was shown by some special stipulations regarding this commodity. The treaty went into effect in 1903. Cuban sugar thereafter was admitted at a reduction of about one-third cent from the full duty.*49
So long as imports paying full duty came in from other sources, this reduction must be expected to enure to the benefit of the Cuban producer, not of the American consumer. The case would seem to differ from that of the Philippines (until 1909) in degree only. Though the sugar imports from Cuba had always been large, and became even larger under the influence of the favored treatment, they were in no year sufficient to displace entirely the full-duty sugar from other countries. These full-duty imports became, it is true, small in proportion to the total. They diminished to less than ten per cent of the total consumption, and in some years to hardly more than five per cent. But this small percentage still meant imports that were large absolutely: hundreds of millions of pounds came in each year, and they paid duties amounting at the full rate to several millions of dollars. These continuing imports, by no means small or sporadic, would seem to prove that the price of all the sugar consumed was raised by the full amount of the duty, that the American consumer got no benefit from the Cuban remission, and that the Cuban producer got a gratuity of one-third cent on each pound.
This conclusion, however, is subject to a qualification of the kind considered in the first chapter of this book:*50 a qualification which shows once again the need of watchfulness in drawing inferences from the bare statistics.
The Cuban sugar supply was so large, and the proportion of full-duty sugar so small, that the situation began to approach that which would appear if full-duty sugar had been completely pushed out of the United States market. Had this result been reached,—had importation from non-favored regions ceased,—the relaxed duty on Cuban sugar would have been the only one in fact collected, and the price of sugar in the United States would have been raised not by the amount of the nominal duty, but by that of the Cuban duty,—not by 1.65 cents, but by 1.33 cents. All the other preferences to sugar producers, both those in the United States proper and those in the several dependencies, would have been reduced to the same extent. The rapid extension of production in the various favored regions threatened to bring about this result,—surely one to be welcomed by the American consumer. Though this consummation was not quite reached in the later years of our period, say in 1906-1913, the approach to it caused an appreciable relaxation of the burden from the full duty and some diminution of the gratuity to the privileged producers.
Raw sugar has come on the American market in recent times by instalments distributed unevenly through the year. The domestic beet sugar (of which more will be said presently) is marketed during the autumn months; but this supply reaches chiefly the western region, beyond the Missouri river. Toward the end of the year, the Louisiana crop appears, followed in January by that from Cuba and Porto Rico. During the first quarter of each year, from January until April and May, these West Indian supplies are virtually the only ones available. Then follows a comparatively lean period, in summer, when imports from Java come in; these are (or were) the main full-duty imports. The Hawaiian crop also arrives between the early spring and December. Of all the several supplies, that from Cuba is by far the largest; so much so, that during the early months of the year, it dominates the market. Virtually no other duties were paid at this season than those at the reduced rate on Cuban sugar. Under such circumstances it might happen that for the time being the domestic price was settled solely by the Cuban rate,—i.e., the outside price plus the duty on Cuban sugar; or that some Cuban producers held back a considerable part of their sugar, waiting for the later months when the price would again rise to the full-duty level, and maintaining the price for the time being at a point somewhere between full duty and Cuban duty. Conceivably, so much of the supply might be thus held back as to keep the price throughout at the full-duty level. In fact, it was the intermediate stage which seems to have been settled by the higgling of the market, with variations in different years and in different months of any one year. The Cuban planter did not get the whole of his differential tariff advantage; but neither did the domestic purchaser. The case shows the need of caution in inferring once for all, from the continuance of imports, that every part of the supply is necessarily raised in price by the maximum duty imposed on any part of the imports. Here, as in other parts of the economic world, there are eddies and cross-currents which must be watched and understood.*51
Needless to say, such a transition period could not last indefinitely. The steady increase from the various favored sources of supply,—Hawaii, Porto Rico, the Philippines, Cuba, and the domestic beet-sugar region,—was sure in time to drive out completely the full-duty sugar, and to leave sugar from Cuba alone dutiable. Then this alone would affect the domestic price, and the differential advantage to the Cuban planter would cease.
During the transition period, though the Cuban planter failed to keep for himself the reduction in duty, the domestic consumer did not necessarily secure it. Such a seasonal and intermittent concession in price as the Cuban sellers were forced to make was likely to be absorbed by one or another of the various intermediaries who intervene before the sugar finally passes over the retailer's counter. It would appear that the refiners, who stand first in the chain of middlemen, kept some slice of the concession for themselves. It is quite possible that the wholesale and retail dealers kept the rest. It may be that the consumer got a fraction of it, either directly, or indirectly in the form of "bargains" in other articles, made possible by a shading of the terms on which the dealer secured his sugar.*52 The connection between wholesale prices and retail is a loose one; all that can be laid down is that a long-continued decline in wholesale prices has its effect ultimately in lowering retail prices also, and that this is likely to be the case even if the wholesale fall is not large. Spasmodic and irregular changes, on the other hand, even though considerable, are more likely to dissipate their effects before the retail purchaser is reached.
Notes for this chapter
Statements to this effect have been made to me by persons conversant with sugar planting and with the natural conditions in Porto Rico.
"The average annual rainfall throughout the dry [southern] zone is forty-six inches, varying between twenty and sixty inches. The average amount is insufficient for the cultivation of cane, and a rainfall approaching the minimum is a destructive drought." Report, of the Governor of Porto Rico (Commissioner of Interior's report), 1911, p. 139. Cf. Report for 1909, p. 84, for an account of the physical geography of the island.
By 1911, bonds to the amount of $4,000,000 had been authorized for irrigation works. A map of the proposed systems is in the Report of the Governor of Porto Rico for 1911.
Report of the Governor of Porto Rico (Treasurer's Report), p. 85.
Philippine sugar was and is of lower grade (i.e., less saccharine content) than that usually imported; hence the duty collected on it was less than the figure stated in the text, and the remission of one-quarter was less. These differences, however, affected simply the method by which the duty per pound of raw sugar was adjusted to the content of pure sugar.
The same policy was adopted in the tariff of 1909 as regards tobacco and cigars from the Philippines: free admission of a limited quantity. In general, Philippine products "which do not contain foreign materials to the value of more than twenty per cent of their total value" were made free of duty. Rice, however, remained on the dutiable list.
This same notion appears in the legislation which regulated the financial relations between Porto Rico and the United States during the transitional years immediately after the conquest of that island, 1898-1901. The revenue from duties collected on imports from Porto Rico was put into a "trust fund" to be used for the benefit of the island, and in due time was so used, for roads, schoolhouses, and the like. (W. F. Willoughby, Territories and Dependencies of the United States, pp. 113, 114.) The assumption evidently was that the duties had brought a burden, not on American consumers, but on the islanders, and was no longer to be left on them once they became a part of us.
It was particularly provided that "no sugar imported from Cuba... shall be admitted into the United States at a reduction of duty greater than twenty per cent [of the rates of 1897]... and no sugar, the product of any other foreign country, shall be admitted by treaty or convention into the United States, while this convention is in force, at a lower rate than that provided by the tariff act... of 1897." In the tariff act of 1913 provision was made for putting an end to this restriction on the tariff legislation of the United States.
Cuba admitted a large list of United States articles at reductions of 25, 30, and 40 per cent; the most important being in the schedule which granted a reduction of 30 per cent. The treaty was to remain in force for five years, thereafter terminable on a year's notice.
Most Cuban sugar is of the grade (testing 95°) which was dutiable under the tariff acts of 1897 and 1909 at 1.65 cents; 20 per cent of this is .33 cent; the net duty on Cuban sugar was thus 1.32 cents.
See p. 16 above.
Until about 1909 the planters seem to have got the full benefit of the "differential" on Cuban sugar. Thereafter, as their increased output pressed on the American market during the spring months, the American purchasers began to get part of it. By 1912 and 1913 the Cubans seem to have lost even the whole, at least during part of the season; this is to be inferred from the fact that considerable quantities of Cuban sugar then were sold in England. See the Record in the suit of U.S. Govt. v. Am. Sug. Ref. Co., pp. 7926, 7929
The head of the well-known firm of sugar brokers, Willett and Gray, estimated that for the years from 1903 to 1911 the amount remitted on Cuban sugar was divided between Cuban planter, American refiner, and American purchaser in these proportions:
"Consumer" here signifies the purchaser from the refiner (wholesale dealer). Hardwick Committee Report (1911), p. 3551.
End of Notes
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