§2. The most important exceptional case is that---recognised by J. S. Mill---of ``protecting duties imposed temporarily in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country''. Of course such a duty---if needed and effective---imposes a tax on the consumers of the article protected. But it is quite possible that the cost thus incurred may be compensated to the community by the ultimate economic gain accruing from the domestic production of a commodity previously imported; while yet the initial outlay, that would be required to establish the industry without protection, could not be expected to be ultimately remunerative to any private capitalists who undertook it. This would be the case if the difficulties of introducing the industry were of such a kind that, when once overcome by the original introducers, they would no longer exist for others, or would exist in a much smaller degree: since in that case, almost as soon as the industry began to be profitable, competition within the country would tend to bring down prices to a point at which they would be remunerative to the later comers, but not to the introducers of the industry who had borne the initial sacrifices.
It may be convenient to illustrate this by contemplating a particular hypothetical case. Suppose then that a trade is at present carried on between a mainly agricultural district (A) and a largely manufacturing district (M), in which M sends manufactures to A in exchange for corn: while yet A is in respect of natural resources not materially less adapted for the manufactures in question than M. And for simplicity, we will further suppose that there is no material difference in the average returns to labour (of the same quality) and capital in the two districts respectively; and that the new manufactures can be established in A by means of floating capital which would otherwise be mainly employed in corn-growing. It is evident, then, that the employment of this capital in manufactures rather than corn-growing will be economically advantageous to the two districts taken together if the saving it causes in the cost of carriage of corn and manufactures is not outweighed by a loss of some other kind. And it seems likely that this will be the case, provided (1) that the superiority of A over M in the production of corn falls decidedly short of the degree that would render it profitable for the latter to pay the whole expense of a trade in corn from the former; and (2) that no such advantages from division of labour would be gained by the aggregation of all the manufactures in M, as would materially outweigh the gain in effectiveness of A's labour, which may be expected to result from the new opportunities of producing profitably various kinds of agricultural produce, not well adapted for transportation, and generally from the greater variety of occupations opened by the change.
Supposing then that in this way there would be a net gain to the community in the long run, from the introduction of the manufacture into A, it is further apparent that the intervention of Government, by protective duties or otherwise, will be needed in order to realize this gain, if a private undertaker would have no prospect of securing a share of it sufficient to compensate him for the disadvantages against which he would have to struggle, under open competition, during the earlier years of his undertaking. Among such initial disadvantages the most important appear to be the following:
(1) the difficulty of obtaining the requisite skilled labour without paying an extra price for it:
(2) the difficulty of establishing a business connexion; likely to be aggravated by
(3) the danger of a combination of manufacturers in M, who may lower their prices temporarily to ruin their rivals in A.
(4) the difficulty of effecting simultaneously all the industrial changes required for the commercial success of any one branch of manufacture; (e.g.) the manufacturers in A may lose by having to obtain instruments or materials from M or some neighbouring region, while yet A may be no less well fitted for the production of such instruments and materials.
If on these or other grounds the manufacturer in A would have to incur a considerable temporary loss, it is easy to show that be may not be able to obtain adequate compensation by the share he could secure of the subsequent gain to society, when the manufacture is firmly established. For this gain will consist chiefly in the saving of the cost of transport of manufactures; but of this be would be only likely to secure a portion for a short time; since, after he had overcome his initial disadvantages, he would probably have to transfer a part of the saved cost to the consumer in lowered prices, in order to drive the manufacturers of M out of his home market; and he would only enjoy his remaining extra profit for a short time, before it would begin to be reduced by the competition of new men free from the burden of the initial disadvantages.
Under these circumstances, the imposition of a protective duty on manufactures in A for a certain time, sufficient to induce private capitalists to undertake the manufacture, may be a profitable outlay for the community as a whole, resembling the payment of guaranteed interest on the capital of a new railway; except that in the case of a protective duty the outlay is defrayed by the consumers of the article protected, and ought to be considered, in the adjustment of taxation, as a special tax on this class of persons.
I have never seen any serious attempt to show by general economic reasoning that the case above analysed, in which the most enlightened private enterprise would fail to turn to account an important opportunity of industrial improvement, is one that cannot occur; or to show that if it did occur, a ``protecting duty continued for a reasonable time'' would never be ``the least inconvenient mode in which a nation could tax itself'' to defray the cost of the improvement. What Free Traders usually urge against this as a practical conclusion is that experience shows that such a duty when once imposed is not likely to be taken off---that the protection designed to be temporary will practically become permanent. And I admit fully the force of this appeal to experience: but the consideration thus adduced does not strictly belong to economic theory: it is a political argument, the use of which tacitly concedes the economic correctness of the protectionists' reasoning.
So far we have been considering temporary protection as a means of introducing an advantageous change in industry. But it is theoretically possible that it may be similarly useful to prevent an inexpedient change. It is conceivable that under open competition a certain industry---e.g. wheat-growing---established in one district (A) may become temporarily so unprofitable as to be abandoned, in consequence of an important advantage enjoyed by the corresponding industry in another district (B); while at the same time this advantage may be so transient,---as for instance if it consists in a natural fertility that tends to be rapidly exhausted---that after a very limited period the same industry will tend to be revived again in B. In this case it is manifestly possible that the loss on the whole through the waste of capital involved in the two changes may outweigh the gain from the greater cheapness of the products of the industry during the interval between the changes: so that it would be on the whole profitable to A and B together to maintain the industry by protection. It must, however, be admitted that, actually, the difficulty of definitely forecasting future changes of industry would at best render this application of protection a highly speculative employment of social capital.
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