Our Neighborly Tariff

I

With what Mr. Thomas L. Chadbourne believes was “almost malign stupidity,” the Tariff Act of 1930 “struck at those countries that are our closest neighbors, our best customers, and, by every force of tradition, our friends and partners.”

In these words before the fourth Pan-American Commercial Conference, which met in Washington in October, the originator of the world-wide plan for sugar restriction laid out for public view the most important single factor in current relations between the United States and its immediate neighbors, Canada, Cuba, and Mexico. In these countries the United States has invested more heavily and trades on a far greater scale than with far bigger, more distant nations. If one may summarily and empirically name them, the principal objectives of foreign relations are probably the maintenance of peace and the promotion of commerce. In the dealings of our Government with its immediate neighbors the possible factor of war is practically negligible. This leaves the promotion of commerce the dominant objective of getting along well with these three nations, all of which are markets for United States goods to a degree that the public of this country fails almost completely to realize.

As long as the attention of nearly the whole world continues centered upon the difficulties of commerce, the tariff will undoubtedly remain the most important factor in the United States’ general relations with each of its neighbors. Moreover, the tariff has for the last couple of years beenthe most important influence in our purely commercial relations with the three neighboring countries.

In the conduct of ordinary foreign relations through the conventional diplomatic channels, the Department of State can be depended upon to avoid unnecessary friction and to promote the maximum of good will. Whether this has been the tendency of the recent relations of our State Department with the Governments of Canada, Cuba, and Mexico is a question which can better be left to others and which it is not necessary to decide in dealing with the topic of commercial relations proper. It is unnecessary because, for instance, the outstanding change in foreign policy, the adoption by the Department last April of the so-called non-intervention policy with respect to Central American countries, beneficial as it was in promoting good will toward the United States, has not led to any visible measures to benefit the trade of this country with any of the nations concerned.

When business is declining and unemployment is increasing, any new tariff schedules tending no matter how slightly to hamper the exports of a country, cause infinitely great psychological harm. In countries much smaller than the United States, this harm is magnified. Canada, Cuba, and Mexico have all the ever-present apprehension of what will happen to them at the hands of the United States that any small country has of the probable action of any larger neighboring country. Indeed, this psychological harm is perhaps the chief feature of the “almost malign stupidity” of the Tariff Act of 1930. A brief survey of the increases in the 1930 act over the previous tariff, in their bearing upon the trade of our neighbors, will show that the benefits to the industries of this country from restriction of the exports of the three countries in question, are small benefits indeed. With the exception of Cuban sugar, these increases have not tended to curtail the leading exports of these three nations. Because business and exports have been shrinking, it has been easy to blame the United States tariff for that shrinkage.

It has been especially easy to place the blame upon the tariff when a political party, such as the Conservative party of Canada, has been standing on the side-lines anxious to take advantage of a dissatisfied public opinion to obtain power and to enact its own party program of protection for the industry and agriculture of its own country.

It is not necessary, in scrutinizing the bearing of our latest tariff act upon the trade of the United States with Canada, Cuba, and Mexico, to condemn tariffs in principle. The purpose of this article will be served if it is appreciated how important the trade of our country is with these three neighboring lands, and if it is further appreciated how much harm an unwise tariff can do that trade. It may be wisest in the long run to assume that tariffs will continue to be enacted by our own Congress, and to learn how to avoid the most harm in framing them. There is a more positive benefit, however, that could come out of an understanding of the incidence of that tariff act upon the exports of our neighbors to us. That is the possible benefit of a change in the most strategic rates through action by the President and Tariff Commission. Cases on practically all these commodities are now pending, or have been petitioned for before the Tariff Commission. Should the Commission act to lower some of these duties, a psychological benefit of great value could follow, in easing the tension in these neighboring countries.

II

This solicitude over the commercial relations of the United States with Canada, Cuba, and Mexico is justified. Not only are commodities exchanged between the United States and each of these three countries on a scale much larger than between the United States and any more distantly-located land, but the investments of Americans in each of these countries is far greater in volume than could be explained reasonably by other factors than the proximity of these lands. The inescapable lesson in this obvious fact, the necessity for guarding against harming the industrial structures of these lands or against unnecessarily prejudicing their populations against American goods, can be appreciated only by perusing the figures on this commodity trade and the investment interest. With less than thirty millions of inhabitants combined, these three nations exercise a telling influence on our commercial well-being.

In 1930, Canada, Cuba, and Mexico combined supplied an outlet for from one-fifth to one-fourth of all exports of merchandise from the United States. By using rough ratios it can be shown that the exports of our goods to those three lands were twice as great as exports to the entire continent of South America, and a little more than half of such shipments to all Europe. Furthermore, they were twenty times as great as our exports to Africa.

Canada alone, with a population of ten millions, took in 1930 a quantity of American merchandise almost as great as did the United Kingdom, with forty-four million inhabitants; and prior to 1930 the largest of the British self-governing Dominions was actually the greatest American export market in the world. Can one say that the average American, his press, or his foreign office is as much concerned with happenings in Canada as with current events in Great Britain? Cuba, with but three and one-half million people in 1930, bought more American goods than Belgium’s eight millions. The island republic purchased almost as much merchandise as Italy with forty-one millions. During what might be considered more normal times than those prevailing in 1930 Cuba was actually as important an export outlet for American products as Italy. Mexico was more than twice as great a market as British India, which contains some three hundreds of millions of persons in contrast with Mexico’s sixteen million and a half. Mexico was also a somewhat greater market than China. It is not altogether unfair to compare China and India with Mexico as consumers of American goods. All three have low standards of living and are beset with the exchange difficulties incident to the low price of silver. Necessarily the preferential rates prevailing in Cuba on American goods account to some degree for our heavy trade with the island.

Figures on the distribution of the private investments of citizens of the United States are almost spectacular in their proof of this commercial intimacy of the United States with Canada, Cuba, and Mexico. As shown by Mr. Paul D. Dickens of the United States Department of Commerce in his various studies of private American investments, these investments in Canada are greater than in any other country in the world. More than that, the Dominion has been the recipient of so much American capital that it can be compared with all Europe, whose enterprises and governments have attracted less than a billion dollars more. This, of course, is exclusive of inter-government debts and old Russian issues still outstanding. Canada has also proved to be a better market for American capital than the entire continent of South America by about nine hundred millions of dollars. Among the Latin American countries the two neighbors of the United States, Cuba and Mexico, take first and second place, respectively, in the volume of American investments. Argentina, Chile, and Brazil follow in the order named. Without quoting exact figures, it is seen that Canada has private American long-term investments of somewhat under four billions, Cuba more than a billion, and Mexico less than a billion. The total of the three countries is slightly under six billions of dollars, which exceeds by roughly one billion all such investments in Europe. It is almost twice as much as is invested in South America and only a little under two-fifths of the entire investments of Americans abroad.

If one recalls population figures, the concentration of American investments in these three neighboring countries becomes all the more impressive. The relating of monetary totals to population totals, it need hardly be added, is misleading for most purposes. Such comparisons do show, nevertheless, as in contrasting England’s forty-four million people and about six hundred and forty million dollars of American private investments with Canada’s ten million population and nearly four billions of investments, that permanent capital investments do not move to countries only on the basis of their standards of living and degree of business organization. Both England and Canada have high standards of living and well advanced business organizations, yet the nearer country has attracted the greater amount of funds despite its much smaller population.

One is moved to conclude, since there are other countries having as high standards of living as those nearby which have attracted such stupendous sums of capital from the United States, and since other countries than those adjacent are as well if not more richly endowed with exploitable resources, that the factor of proximity is the most telling. Natural resources can exist in remote places and remain unattractive to American capitalists, who do not hear of them because of their distance or who do not find their development a good business undertaking because of their remoteness from this country, the greatest single market in the world. Capitalists are also unwilling to invest in enterprises so far away that distance makes supervision and operation more difficult.

There is a further factor of tremendous import in connection with American private investments in these three neighboring countries. They are preponderantly of a type which Mr. Dickens calls “direct” investments. By this he means investments made directly by Americans, principally business houses, in setting up establishments abroad. In the case of Canada this takes the form of American branch factories, of which the Dominion Bureau of Statistics has estimated that there are more than a thousand today. In the case of Cuba the principal investments have been in sugar production and refining, in public utilities, and in banks.

Distributing organizations have been set up in all three nations. It must not be assumed that all these direct investments are in branch factories or in the development of such natural resources as sugar in Cuba or mines in Mexico. A considerable portion of these investments have been made in the setting up of ordinary businesses—real estate and the like—established simply because in looking abroad for opportunities the American investor naturally rested his eye first on the neighboring country which, perhaps, he visited on a holiday. On the other hand, portfolio or securities investments of Americans in Europe far outnumber the direct investments on that continent.

Since direct investments as distinguished from securities investments preponderate as they do in the three nearby countries, the welfare of the investor is intimately hitched up to the general welfare of the country where his capital has been placed. Where a security has been acquired, that security can in normal times be sold readily without much loss. This is not the case with a sugar plantation or refinery, a distributing house, a mine or a branch factory. Where an American tariff policy acts to cause more or less permanent harm to the business of a country in which direct investments have been placed, the American investment is likewise harmed. It is amazing how few people realize that a higher tariff on Cuban sugar is but a penalty on an enterprise largely American, situated some ninety, miles from the tip of Florida.

III

In enacting some of the rate increases carried in the Tariff Act of 1930, Congress was either ignorant or careless of our special concern in the commerce of our neighbors. With the exception of Cuba, the principal exports to the United States were not subjected to rate boostings. In the case of all three countries, the benefit to the industry of the United States from the higher rates is highly questionable.

The most important Canadian exports to the United States have not been affected by rate increases in the 1930 act. The largest class of these exports consists of standard newsprint paper and raw material for use in the manufacture of paper. These are not only admitted free at the present time but were also free in preceding tariff acts. In an issue of its Commercial Intelligence Journal, the Canadian Department of Trade and Commerce published a list of exports to the United States, their value, and the rate changes in the 1930 tariff. It is significant that this report carefully avoids stating that the list is a summary of Canadian shipments to this country likely to be affected in any manner by rate changes. None the less, one may probably assume that the list was intended to be nearly complete. The tabulation shows only forty-seven millions as the dollar value of the trade affected. Canadian merchandise exports to this country normally are worth about a half-billion dollars. A number of important Canadian exports besides paper, such as most lumber items, asbestos, nickel, aluminum, and copper, were not affected by increases. These are commodities, incidentally, which are required by manufacturing and processing industries in the United States.

While the leading Canadian shipments were not subjected to penalty, Congress nevertheless managed with a number of small, “pecking” duties to arouse ire in every province in Canada. There was maple sugar from Quebec, fruits and vegetables from Ontario, cream and other dairy products from New Brunswick and Quebec, and cattle, meats, and wool from the western provinces. The suspense and fear caused by probable action did as much harm in destroying confidence in the United States market and promoting the success of the Conservative, high-tariff party as did the actual rate increases themselves.

Unlike Canada, Cuba was forced to put up with a tariff increase upon her principal export to the United States— sugar. Cuba is more or less weak as an international trader, because of her almost complete dependence upon sugar, molasses, and tobacco. Because of specialization on sugar growing, Cuba has been a heavy importer of foodstuffs as well as of manufactured goods. She has imported from the United States milk and cream, wheat, leather products, footwear, automotive products, cotton cloth, coal, petroleum and gasoline, iron and steel products, electrical machinery and apparatus, chemicals, and a host of other articles. Cuba’s ability to buy these varied products from this country depends directly upon the price of sugar, for it is the island republic’s principal source of purchasing power. In so far as the tariff increase curtailed this buying power, it directly hurt American exports and depreciated the value of American investments in Cuba.

Mexico’s leading exports to this country are copper, lead, sisal, chicle, coffee, bananas, and cattle. The principal changes in the duties on these, where customs charges previously existed, were on cattle and meats. But Mexico, like Canada, was irritated by a number of small changes, which in her case affected fruits and vegetables.

It will be seen that, with the exception of Cuba, the principal products shipped to us by our neighbors were not affected by rate increases. It remains to consider the benefits accruing to industry in the United States from increases in the rates on cattle and beef, affecting both Canada and Mexico, on milk and cream, which hit principally the Dominion, and on sugar.

The increased duties placed upon live cattle and dressed meats afford a typical illustration of the careless manner in which Congress in the 1930 Tariff Act sacrificed the trade of neighboring countries for doubtful advantage to the United States. For a long time Mexico and Canada had done a good business in supplying live cattle and a small amount of dressed beef to the American market. Mexican cattle were used for breeding purposes in Texas and other parts of the Southwest, Canadian cattle were imported and fed by the farmers of Iowa and other northwestern states, who fattened them for market; these animals made a market for the farmers’ surplus feedstuffs. Another purchaser of Dominion cattle was the tobacco grower of Pennsylvania, who also used them for feeding surplus corn and for manuring tobacco fields. By habit the Pennsylvania farmer had been buying Canadian cattle, which he preferred for one reason or another. Neither the Iowa nor the Texas farmer was opposed to the importation of the Canadian cattle, on the one hand, or the Mexican cattle on the other, except as they responded to a manufactured, propagandized sentiment that “agriculture should stick together” for rate increases on farm products. This necessity for solidarity among farm tariff petitioners was emphasized by Senator Brookhart of Iowa, in talking to a newspaper correspondent who, long before the Tariff Act of 1930 was passed, explained to the Senator that the then King Government in Canada would be seriously embarrassed if the proposed rate increases on cattle should finally be enacted. Those who did favor restricting cattle importations were the range cattle growers of the Western states, who sought to prevent farmers who bought cattle for feeding from buying Canadian and Mexican animals, even though in many cases proximity of these two countries to border states made possible cheaper transportation charges for the feeder cattle. And finally, it is worth observing that the competition of foreign cattle had been small. In the year before the latest tariff revision was enacted the combined beef meat supply from importations of both cattle and dressed meats, was about six and one-half per cent of the total consumption in the United States. For other years five per cent was a high average.

Small as this portion was, compared to the total United States consumption of these commodities, it was very important to the farmers of Mexico and Canada, which furnished the bulk of the shipments. Argentine cattle were excluded by sanitary regulations. At a time when all farm commodities had been falling in price, the shutting off of an export market for cattle was a serious blow. In Canada the harm was especially great, for there had been a wheat crop failure in a large part of the prairies. Statistics of trade show that importations were cut to a small fraction of their former level following the operation of the new rates. The tariff in respect to Canadian cattle was especially serious from the psychological standpoint, because the national and local governments of the Dominion had been urging the raising of cattle to lessen the dependence of the prairie farmer upon wheat. The farmer heeded this advice and diversified, and as a result had his market practically wiped out for him, in one blow. The Canadian situation was so serious that one of the best known Canadian observers said six months before the tariff act was passed that the proposed feeder-cattle tariff alone would bring about the downfall of Mr. Mackenzie King’s Government.

Importations of all dairy products into the United States from Canada the year before the new tariff was passed, were valued at only about eight and one-quarter millions of dollars. This consisted mainly of milk and cream produced in eastern Quebec and in New Brunswick, supplied to the metropolitan markets of Boston and New York City. Since the agricultural regions adjacent to those two urban areas had been unable to furnish a sufficient quantity of milk and cream, the Canadian farmers of these two provinces, who are located relatively close to the two markets, took up the business of supplying the needed milk and cream rather than churn it into butter or make it into cheese. Those who have followed the dairy situation closely, concede that the prices of milk and cream to New England and New York State farmers are probably higher than they would have been had not the increases in customs rates been enacted. Of the results to the United States dairy industry as a whole, however, they are not so optimistic. Because the tariff has practically shut out these importations, the Canadian farmer has turned to selling the milk and cream in the form of butter and cheese. The effect of this has been to take from New Zealand and Australian dairy farmers their Canadian market and to make Canada an exporter rather than an importer of butter. As a result of the rather sudden increase in supplies offered by these two countries and of the entry of Canada on the world market, world prices have been depressed considerably more than they would have been had not these additional supplies been offered. The world-wide decline has tended to lower American prices notwithstanding the tariff protection enjoyed in the domestic market, since the United States is also an exporter of butter. Butter, incidentally, is regarded as a “key” product around which the prices of most dairy products gravitate.

In the economics of the sugar-tariff question there are many complications; but a few things stand out. Of the total American consumption of this commodity only about one-fifth is supplied from domestic cane and beet sugar. Half of this country’s consumption comes from Cuba and the remainder from duty-free points, Porto Rico and Hawaii, and the Philippines. In the United States the growing of sugar is not as easily or as cheaply done as in Cuba. The Cuban cane grows for eight or ten years from the same plants, whereas Louisiana sugar cane must be planted yearly. Beet sugar requires a certain type of climate for its production, unless water supplies can be controlled by irrigation, which is expensive. As long as the Philippines are in a customs union with the United States, further tariff increases will merely stimulate sugar production in those Islands, as well as in Porto Rico and Hawaii. Since the available land in the latter two territories is limited, they will probably not lend themselves to further expansion in sugar production as readily as will the Philippines. There is another contingent factor. If the movement now in progress to separate the Philippines from our political control, and incidentally to put it outside the customs union with this country, becomes successful, then a Cuban sugar industry, somewhat run down by a gradual loss of the United States market through tariff increases, will have to be rebuilt again at some cost. For the Philippines, with a much greater freight haul, will then be at a disadvantage in competing with Cuba. Statistics bear out the conclusion that the effect of tariff increases in the United States in the last decade has been to encourage the expansion in the growth of duty-free sugar, Statistics also show that while sugar consumption in the United States has increased, the proportion which Cuba has furnished to the total has not held up. Thus it will be seen that in raising the duties on sugar Congress has subsidized an industry not as efficient as the one in Cuba; and that the Cuban industry is one in which Americans have invested heavily.

What effect tariff increases in Canada, Cuba, and Mexico have had on the imports of those countries from the United States makes up the other side of the tariff discussion. All three countries have raised rates. It may be true, as Dr. Julius Klein of the Department of Commerce insists, that the effect of these increases has been overemphasized. In a period of general trade shrinkage it is hard to measure the results of such changes. Probably they are not altogether obvious at such a time. It is difficult to see how agricultural Mexico and Cuba can effectively burden imports of the many necessary articles they have been taking from this country. In regard to Canada, however, with its thousand American branch factories, the effect will probably prove serious when world trade revives. Trade with Canada will probably run on a much smaller scale following the revival than if the Dominion had not set out in its fiscal legislation to do what a careful scrutiny of the last three tariff alterations in that Dominion clearly shows it intended to do—to require the manufacture in a Canadian branch factory of every article heretofore imported from the United States that could possibly be fabricated or assembled in such branch factories.

IV

Thus the United States has, by its latest tariff act, moved to restrict importations of products, generally not the heaviest, in the export trade of Canada, Cuba, and Mexico with the United States. In the case of Cuba the heaviest export was taxed further, to the detriment of Cuban purchasing power for American products and to the detriment also of Americans investing in sugar and other industries there. In this tariff act, the largest single occurrence in the commercial relations of this country with its immediate neighbors in the last few years, the United States has unnecessarily violated the feelings of these three countries, whose commodity trade and investments of American capital are so heavy as to make such a violation of feelings decidedly ill-advised. In these three small countries, the resentful feeling has arisen that in its tariff increases our Government has been ruthless.

That the United States has a special interest in trading with these three countries is not a new conclusion. It merely has been forgotten in the last few years. In discussing commercial policies of the United States Government in 1919 the Tariff Commission alluded to this special interest. “It has been on occasions recognized,” the Commission then wrote, “that where one country has a long frontier line in common with another country, the unique ties of geographical connection give grounds for exceptional arrangements.” This conclusion could probably be considered applicable to Mexico as well as to Canada. With respect to Cuba, “special political ties and political responsibilities have led to commercial relations also of special character,” the Commission at that time acknowledged.

For the future, our best chance of a wise tariff policy lies in a more widespread knowledge of our commercial intimacy with Canada, Cuba, and Mexico. This would be of advantage even if the American people have forgotten the solemnity with which the United States undertook a fatherly responsibility for Cuba; even if we have since effectually evaded that responsibility by striking at Cuba’s most important industry. It would be of advantage even if people have forgotten that it is more natural for countries separated only by an artificial boundary to trade; this is especially true in the case of Canada, which is, in most respects, similar to the United States in its economic makeup.

There had been pending before the Tariff Commission an application for a study of the foreign and domestic costs of production of cattle, so that a lower rate could be recommended. On the basis of information from the Tariff Commission, the House Ways and Means Committee in its revision of the tariff reported that differences in cost of production of cattle, between the United States and foreign countries, was not enough to justify an increase; notwithstanding this suggestion Congress later raised the duties. This inequality could readily be ironed out by action of the Tariff Commission if our Administration carried out its intention of correcting inequalities through such action. It is advisedly suggested that lower rates could result from pending investigations of the tariff on certain fruits and vegetables and on sugar, should the Administration reveal a clear feeling that such changes would be of benefit. Reciprocity is a far-off possibility because of the extent to which many industries have been built up already under tariff barriers. But reciprocity, might be considered after a sufficiently long period had elapsed for each of the three countries to acquire confidence in the fairness of the United States.

Meanwhile, whatever can or cannot be done to turn the tide toward mutual confidence, the best thing that could happen to the American people would be for them to understand where their true economic interests lie. Those interests, so far as foreign trade is concerned, lie primarily with our neighbors, to whom through our tariff we have hardly been neighborly. If that fact were grasped, we might avoid showing further evidence of “almost malign stupidity.”