Some Aspects of the Tariff Question

Questions somewhat similar arise in the case of tin plate: a curious episode in tariff history, much debated and much misunderstood.
*43

Until 1890, tin plate had been left outside the pale of the protective system. The duty was so low that no tin plate was produced within the country, and the total supply was secured by importation. This exceptional treatment was long the cause of protest on the part of the protectionists. It was said to have arisen from a wrong construction by the Treasury Department of a clause in one of the earlier tariff acts, whose language was such as to be held to impose a low
ad valorem duty,—one much lower than Congress may have intended to levy. At all events the duty, as unequivocally fixed in a series of acts preceding that of 1890, was a moderate one, and operated as a strictly revenue duty; therein being in marked contrast to the highly protective duties on other iron and steel products. This anomaly was put an end to when the McKinley tariff act, with its emphatic protectionist intent, was passed in 1890. The duty was raised to the level of the others in the iron and steel schedule. The increased rate, however, did not remain in effect long; a sharp reduction was made in the Wilson act of 1894. After a slight advance in 1897 (by no means to the figure of 1890), the duty was again lowered in 1909 to the precise rate of 1894. The salient fact in all these changes is that in 1890 a high duty was applied, but was maintained for only four years, the later duties being comparatively moderate.
*44

The development of the industry under this short-lived application of high protection was extraordinary; so extraordinary as to surprise friends no less than foes. The act of 1890 had provided that the duty imposed by it should not remain in effect after 1897 unless the domestic production in some one year before July 1, 1897, should amount to one-third of the importations. In other words, the maintenance of the high duty had been made contingent on a considerable development in the domestic output, and the legislators evidently were not sure that this development would take place. It happened that not only the amount called for under the act was produced at home, but very much more. The domestic production advanced by leaps and bounds, and within three years
*45 the required quota of one-third was supplied. All the provisions of the act of 1890 were of course swept away in 1894, and the duty, as just noted, was almost cut in half. The advance of the domestic tin plate industry, however, went on without a halt, while imports steadily declined. By the close of the decade the domestic product had entirely superseded the foreign. Some imports continued after 1900, but they were only nominal. Almost all the tin plate that continued to be brought in from England was reëxported under drawback, chiefly by the Standard Oil Company, the imported plate being made up into the large square tin cans which this Company’s export trade has made ubiquitous in the tropics and the orient. So far as domestic consumption was concerned, imports were completely superseded. The districts in Wales from which tin plate had previously come, and which indeed had previously been almost the sole producers for the whole world, were hard hit, and went through a long and trying period of depression, which was observed by the American protectionists with a satisfaction but little concealed.
*46

Before the decade was completely ended, however, another event occurred, most unwelcome to the protectionists, and received with a jubilant “we told you so” by the other side. In 1898, in the course of the veritable mania for combinations which characterized this era in the United States, the American Tin Plate Company was formed, including virtually all the producers of tin plate. The protective tariff became the mother of a trust, and that trust exploited the possibilities of protected monopoly. Not long after, in 1901, the great Steel Corporation absorbed the Tin Plate Company as one of its constituents; the great trust succeeded the smaller trust. The protectionists were put on the defensive when the free traders alleged that this sort of thing was the natural consequence of a protective tariff.

So much on the conspicuous aspects of the case. A more detailed examination, however, is necessary, in order to make clear the effect of protection both on the establishment of the industry within the country and on the development of monopoly conditions.

Tin plates are thin sheets of iron or steel coated with tin (in former times, iron sheets were used, since the revolution in steel making, always steel). Their production involves two distinct operations: the making of the steel sheets or so-called black plates, and their tinning. The former of these operations, the more important, divides itself again into two; the making of the crude steel in the form of suitable bars, and the rolling of these bars into thin sheets suitable for tinning. Of the cost of a given quantity of tin plates, something like two-thirds is the cost of the black plates or steel sheets; and of the cost of the black plates again, 60 per cent is the cost of the steel bars (known in the trade as sheet bars).
*47 The making of the fundamental raw material, crude steel in the form of bars,—has been subject to the general influences described in the preceding survey of the steel industry at large. The production of the black plates by rolling from the bars, and the coating of these sheets with tin, involve operations of a more special kind.

The unexpected growth of the tin plate industry after 1890 was due chiefly to the cheapening of the fundamental raw material,—sheet bars. The decade after 1890, it will be remembered, was the period in which the American steel industry reached the stage of independence. For some years after the crisis of 1893, crude steel was considerably cheaper in the United States than in England; and though this extreme situation did not endure after the ensuing revival of trade, differences between domestic and foreign prices became negligible and remained so. The American maker of sheets and tin plates was no longer at a disadvantage in the price of his bars. Before 1890 he had been at such a disadvantage; and the continued importation of tin plate was to all intents and purposes the importation of bars in this form. It was the changed situation as regards the raw material which explains the unchecked progress of the tin plate industry in face of the reduction of duty in 1894. A duty on tin plate of 1.2 or 1.5 cents a pound (the rates of 1894 and 1897), was a very different matter according as the material was or was not as cheap as in Great Britain. With that material equally cheap, the duty of 1.2 cents was no less effective for protection in 1894 than the duty of 2.2 cents had been in 1890. The main cause of the rapid growth of the tin plate industry in 1890-1900 was the lowered price of crude steel; it was one among the consequences of the general revolution in the iron and steel industry.

Both for this earlier period, and for the later stage which set in with the formation of the Steel Corporation in 1901, the relation between domestic and foreign prices of tin plate is instructive. The chart on page 180 shows this relation for the entire period 1890-1913. It indicates that immediately after 1890, American prices exceeded foreign by the full amount of the duty. During the years in which the McKinley duty was in effect (1891-94) there was what may be called the normal effect of protection: domestic prices were raised by the full amount of the duty. Toward the middle of the decade, however, imports ceased; prices were not higher in the United States even by the amount of the lowered duty of 1894. Some difference in price remained, chargeable to the duty, but held in check by competition among the domestic producers, and apparently in process of continuous reduction,—a reduction made possible chiefly by the decline in the price of crude steel.

Then came in 1898 the spectacular episode of the American Tin Plate Company, and the exploitation of tariff possibilities by the newly-formed monopoly. Attempts at pooling and price agreement had been made by the scattered tin plate producers in 1896-98, with the usual instability of these looser forms of combination. Finally, one of the arch promoters in this promoting period, Mr. W. H. Moore, was enlisted, and succeeded in bringing about a tight organization. The Tin Plate Company bought out once for all the various competing concerns, in part with cash, chiefly by the issue of its own common and preferred stock. With the meteoric financial operations that ensued the present inquiry is not concerned. The stock was liberally watered, its par value being four or five times the price in cash which would have sufficed to purchase all the plants; and it became an active speculative stock. This was one of the most profitable among the many profitable speculations of that extraordinary time. So far as the price of tin plate was concerned, the effect was unmistakable. The American price advanced at once, and advanced as compared with the British price. It was raised to the full limit permitted by the tariff (now that of 1897, with a duty of 1.5 cents a pound).
*48

For two or three years, this situation was maintained with no great modification. The price of tin plate was kept, if not quite up to the foreign price plus duty, much above the price which would have prevailed under competition. The Tin Plate Company paid dividends on its common stock as well as on its preferred. It was a profitable property when absorbed by the Steel Corporation in 1901, and that absorption was doubtless expected to strengthen the command of the tin plate industry by the great combination.
*49

After 1901, however, the situation changed in several respects. In the first place, the Steel Corporation’s command of the industry became less, not greater. Some competition had sprung up even before 1901. The Tin Plate Company’s operations had been too profitable not to invite competition, notwithstanding endeavors to shut out interlopers by exclusive contracts with the makers of tin plate machinery. When the company was formed, in 1898, it controlled 95 per cent of the country’s output. In 1901 its successor, the Steel Corporation, found it still in control of nearly three-quarters of the output. The proportion, however, declined almost steadily after 1901, until by 1911 and 1912 the Steel Corporation produced no more than 60 per cent of the total. The independent manufacturers, some of them large-scale producers, had a very substantial part.

Not only in control of the output, but in the course of prices also, is there evidence of changed conditions. As the chart shows, the domestic price continued for many years to range higher than the foreign; yet with a tendency toward a lessening of the difference. At no time after 1901 was there such an exploitation of the tariff as in the year immediately after the Tin Plate Company was formed. The domestic price, though higher than the foreign, was by no means higher by the full amount of the duty. Imports quite ceased; the duty was prohibitory; but the domestic consumer paid a tribute less than the amount of the duty. Gradually that tribute became still less; the domestic price approached the foreign; until finally, by 1911, almost all difference had disappeared. The price within the country became virtually as low as without. The protectionist, surveying the whole course of development, might maintain, for this branch of the steel trade as for others, that notwithstanding regrettable aberrations there had been ultimate gain from the nurture of the nascent industry.

Considering first the years from 1901 to say 1910, when prices were still higher within the country than without, we may inquire what degree of influence was exerted by the Steel Corporation, and to what extent the prices and the profits can be called monopolistic. Control of 60 or 70 per cent of the output is not complete monopoly, but it gives necessarily a commanding position. The independent manufacturers, though no doubt really independent, were yet in awe of the one great producer. Prices were not fixed by combination or agreement; there was a studious effort to do nothing that would constitute a violation of the anti-trust law; but there were conferences and understandings, and friendly pressure for the maintenance of prices. The fact that most of the independents had to procure their material—the sheet bars—from the Corporation, contributed not a little toward its influence throughout the tin plate trade. Here, as elsewhere, the policy of the Steel Corporation was to maintain steadiness, preventing fluctuations in prices and if possible in output. Though not so eminently successful as in the case of steel rails, its policy did serve to minimize fluctuations. The steadied prices were doubtless somewhat higher than unrestricted competitive prices would have been, and in so far were the source of some quasi-monopolistic gains,—gains shared by the independents, or at least by those among them who could produce as cheaply as the Steel Corporation itself.

One important factor throughout this period, not in the United States only, but the world over, was the constant increase in the demand for tin plate. The total output and the total consumption rose rapidly and without halt. The Steel Corporation’s own output, though it fell relatively to the whole, rose absolutely. The use of prepared food, conserved in tins, spread more and more, and the ever-increasing quantities of tin plate found a ready market. It was this increase of demand which proved the saving of the tin plate makers of Wales. The long stage of depression through which the Welsh industry had to pass came to an end as other markets gradually enlarged,—in South America, the East, and the Continent. The Welsh product rose not only to its former dimensions, but even above. This upward swing led to a stiffening of British prices, which in turn contributed to wiping out the difference between them and American prices. Some technical changes also took place in Wales as well as in the United States; of these, more presently.

A significant phase of the course of events after 1901 was the development of an export trade from the United States: not merely the export under drawback of imported tin plate (in the form of tin cases), but the export of tin plate of domestic manufacture. These exports began, as is shown in the
table appended to the present chapter, shortly after the formation of the Steel Corporation, and reached substantial dimensions by 1905 In 1911 and 1912 they increased markedly, and in the latter year were near five million dollars’ worth. At first they went almost exclusively to Canada, for whose market the Steel Corporation had geographical advantages. But in the very recent period (1911 and 1912) large quantities were sent to South America and Asia. Virtually all were exported by the Steel Corporation. Not only this; they were “dumped” by the Corporation. Prices to foreigners were steadily lower than to purchasers in the United States. The policy of selling at lower prices abroad was extended also to American buyers who used tin plate in an export trade of canned goods. Such buyers were given a rebate or drawback, similar to that which the government grants on the export of goods in which imported materials have been used.

Systematic dumping of this kind suggests monopoly price, or something closely akin to it. The general reasoning which points to this conclusion is stated below.
*50 Suffice it here to say that the practice of selling abroad various products at lowered prices,—not tin plate only, but others as well,—adds to the evidence going to show that the prices of many forms of iron and steel were fixed under conditions different from those of unfettered competition. Even though the Steel Corporation possessed no monopoly in any strict sense of that term, and even though its control of prices therefore was restricted and precarious, the general situation was that of a combination price, not a strictly competitive price. A preponderant control of output,—sixty per cent or something of the kind,—suffices to bring about, not indeed complete control of price, but an overshadowing influence. It is possible that, as the advocates of combination assert, the conditions, though somewhat different from those of competition, are not worse, but better. They may be conditions of greater stability, and yet not of prices “unreasonably” high. Without entering on the moot questions thus raised, we may accept this part of the evidence as indicating the continuance under the Steel Corporation of some degree of monopolistic control of the tin plate industry.

But quasi-monopoly and its corollary, discrimination in favor of foreign purchasers, was not the only factor, perhaps not the main factor, in the tin plate exports. After all, there was not complete monopoly, but only some approach to monopolistic conditions; profits doubtless above the competitive rate, but not profits so high as to leave a great margin for reductions in favor of one or another buyer. Though some shaving in price, some acceptance of profits lower than those got at home, might facilitate exports, cost of production and minimum price must have been brought within the neighborhood of the cost and of the prices of those rival producers who must be met in the foreign markets. Tin plate, or anything else, would not be sold abroad at a loss; if it could be sold abroad at low prices, it must be produced at low cost. Such must be the situation if the dumping is continuous, not sporadic. Was the cost of tin plate lowered within the country? Were improvements in production made, of a kind not found elsewhere? Did the American industry progress, not merely in volume, but in technical efficiency as well?

These questions, already considered with regard to the cruder forms of iron and steel, arise also for the two processes by which bars are converted into sheets and then coated with tin,—rolling and tinning. Both had been, through the nineteenth century, largely of a handicraft character. Though the bars were passed through rolls under power, more hand labor seems to have been involved in tending and operating the rolls than in other parts of the iron and steel industry. Tinning was even more distinctly a handicraft operation; the sheets were hand-dipped. When the McKinley Act was passed in 1890, the tin plate mills first established in the United States were copied from the Welsh. Sometimes the whole equipment,—rolls, shears, pots,—was imported, and then was operated by Welshmen also brought over. This sort of literal transmigration of industry has not infrequently taken place after our imposition of heavy import duties. And when it happens, and so long as there is mere transmigration, the need for protection persists. There is then no comparative advantage; the thing is done no better in the United States than abroad; and, wages being higher here, the expenses of production are also higher, and the American manufacturer cannot hold his own without protection. It is the next stage that is of more concern to the economist. The industry feels the influence of new surroundings. Machinery, labor-saving devices, inventions and short cuts, are in the air. Some changes from the old-world methods will not fail to be made. The question is whether these changes will be great enough really to transform the industry, and bring it up to the same level of effectiveness as the dominant American industries. Possibly it too will come to have a comparative advantage; and the object of protection to young industries will then have been attained.

The evidence on this subject is not easily interpreted. It is difficult to make out whether a real transformation followed the transmigration of the tin plate manufacturer. If English writers, technical and non-technical, are to be believed, the Welsh industry had fallen into ruts, and remained so for some time even after the shock from the loss of the American market; whereas the Americans promptly went ahead with new machines, larger plants, better organization of labor. Allowance must be made, when reading all such British jeremiads, for the desire to stir up John Bull, the tendency to overpraise the foreigner as a means of arousing the man at home. It must be admitted, too, that engineers and employers lay stress on all bad things in the labor unions, and sometimes arouse suspicion in their insistence on the opposition of the Welsh workman to labor-saving devices. But there remains a solid basis of fact for these allegations. In the Welsh tin plate industry the union long encouraged, and the workmen maintained, the policy of restricting output; and they opposed labor-saving devices. It would seem clear that the employers also, established as they had long been in apparently secure possession of the tin plate trade, fell into a certain stolid conservatism. Something like stagnation set in.
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In interpreting the evidence from the other side,—that of the American manufacturers and engineers,—there is also need of caution. These witnesses blow hot and cold. At one moment patriotic pride and a wish to prove how deserving is their industry lead them to descant on the improvements they have introduced and on the superiority of their ways over the foreigners’. In the next breath—when the tariff is mentioned—they will assert that they have no superiority at all, that their machines and processes are quite the same as in Wales, that their wages are twice as high, and that they will infallibly be ruined by a cut in the duties.

It would seem beyond question that some considerable improvements were made by the American tin plate makers. Welsh implements and methods, though copied slavishly at the outset, were not long retained without change. Gradually the tin plate mills were made more efficient. For example, the rolls were increased in size (width) from 18 inches to 28 inches. Overhead cranes operated by electric power were introduced for handling the material. Machine pots (for tinning), with some automatic appliances, took the place of hand pots; though the plates, it is said, still continued to be fed through singly by hand. In charging the annealing furnaces, however, the hand method was superseded by charging machinery. Certain of these changes were in time copied by the Welsh makers; sometimes doubtless with the same labor-saving results as in the United States, but in other cases (and these perhaps typical) with less success than in the originating country.

The spokesmen for the American manufacturers, though they admit the introduction of considerable improvements, maintain that in the main rolling and tinning are still handicraft operations. If this is true; if the industry has not been developed much beyond the handicraft stage; if it is carried on mainly by specially skilled workmen, with comparatively little use of machinery and labor-saving devices,—then it is presumably not up to the American industrial standard. It remains under a comparative disadvantage, and the young industry has not been nurtured with success. The evidence from the general economic situation, however, strengthens the impression that these expert witnesses understate their own case. It seems to be beyond question that the lead has been taken in the United States, at least for parts of the industry, and that American devices and improvements have been copied in Wales; always an indication not only of progress on the part of the Americans, but of probable sustained superiority.
*52 There is the evidence, further, from the considerable and growing exports, and the parallel evidence from the approach of the American domestic price to the foreign level. Of this last-named change there is striking corroboration in the circumstance that the Standard Oil Company finally gave up the purchase of imported tin plate, on which it had so long taken the government’s drawback when exporting the case-oil. This shrewdly managed concern at last bought its tin plate from the domestic makers,
i.e., from the Steel Corporation: proof conclusive that the price was as low as that of the foreign plate.
*53

On the whole, the verdict is not unfavorable to the protectionist. It is so, that is, on the question of real success in bringing the new industry to the stage of complete independence; from which follows the further conclusion, not at all welcome to the protectionists, that the occasion for retaining the duty quite ceased. Ultimate independence was achieved, and achieved through domestic improvements. No doubt other factors coöperated: the cheapening of the raw material and the world-wide increase in the demand for tin plate. The unrelenting free trader may indeed maintain that these factors would have led in any case to the same outcome. American invention and improvement, he may say, exercised their influence in every direction, and would have done so in the tin plate industry under any circumstances. It is no more possible to disprove the free trader’s contention than it is to prove beyond cavil that of the protectionist. The difficulties in the way of exact proof remain for this inquiry, as they do for almost every concrete investigation in the economic field. But the protectionist has a strong case.

On the other question also, that of the development of trusts under protection, the free traders have often overstated their case. Surveying the course of events in the three industries for which the connection between protection and combination has been considered,—steel rails, tin plate, and sugar refining,
*54 —the outcome cannot be said to confirm the doctrine that the tariff nurtures monopolies permanently. Protective duties high enough to shut out foreign competition do tempt to the formation of a combination; and they do make it easier for the combination, when formed, to raise prices and secure abnormal profits. This happened conspicuously in the cases of refined sugar and of tin plate; it happened, less conspicuously, in the earlier stages of the steel rail industry. There is here no small charge in the debit account against protection. But in the long run the situation did alter: no one of the combinations was able to maintain indefinitely a price raised by the full extent of the duty. Domestic competition did set in, and brought the profits and prices much below the level which full exploitation of the tariff would have caused. This domestic competition was no doubt a halting and restricted one. A combination price, somewhat akin to a monopoly price, was long maintained. Yet even this price was subject to the influences of domestic cost, and to the indirect action of competition as well as to its direct. Gradually the effect of the protective tariff in supporting combination melted away, and the trust problem presented itself unveiled and bare. Such is likely to be the general drift. The industrial influence of the protective tariff tends to become less and less; but the march of great-scale production proceeds apace. Whether or not the tariff system is radically altered, the economic and political problems of the future will be much the same,—great social problems, that will dominate the public life of the country for generations to come.