Book IV, Chapter IV

OF DRAWBACKS.

Merchants and manufacturers are not satisfied with a monopoly of the home market: they also desire the widest possible foreign market for their goods. Their country has no jurisdiction over foreign nations and can therefore seldom obtain a monopoly for them there. They must generally content themselves with petitioning for certain incentives to export.

Of these incentives, what are called drawbacks seem the most reasonable. Allowing a merchant to recover on exportation all or part of an excise or inland duty imposed on domestic industry can never cause a greater quantity of goods to be exported than would have been exported if no duty had been imposed. Such incentives do not divert to a particular employment more of the country's capital than would go there of its own accord; they merely prevent the duty from driving part of that capital into other employments. They do not upset the balance that naturally establishes itself among the various employments of society, but keep the duty from upsetting it. They do not destroy, but preserve, what in most cases it is advantageous to preserve: the natural division and distribution of labor in society.

The same can be said of drawbacks on the re-exportation of imported foreign goods, which in Great Britain generally repay by far the greater part of the import duty. Under the second rule attached to the act of Parliament that imposed what is now called the old subsidy, every merchant, English or foreign, was allowed to recover half that duty upon exportation: the English merchant if he exported within twelve months, the foreign merchant if within nine months. Wines, currants, and wrought silks were the only goods outside this rule, having other and more favorable allowances. The duties imposed by this act of Parliament were at that time the only duties on imports of foreign goods. The period within which this and all other drawbacks could be claimed was later extended to three years (by 7 Geo. I. chap. 21. sect. 10.).

Most of the duties imposed since the old subsidy are refunded in full on exportation. This general rule, however, has a great many exceptions; the doctrine of drawbacks has become much less simple than it was when they were first introduced.

On the exportation of some foreign goods whose imports were expected greatly to exceed what home consumption required, all duties are refunded, without retaining even half the old subsidy. Before the revolt of our North American colonies, we held a monopoly of the tobacco of Maryland and Virginia. We imported about ninety-six thousand hogsheads, while home consumption was not supposed to exceed fourteen thousand. To facilitate the extensive exportation needed to dispose of the rest, all duties were refunded, provided the tobacco was exported within three years.

We still hold, if not a complete monopoly, then very nearly a monopoly of the sugar of our West Indian islands. Thus, if sugars are exported within a year, all the import duties are refunded; and if within three years, all are refunded except half the old subsidy, which continues to be retained on exports of most goods. Though sugar imports considerably exceed what is needed for home consumption, the surplus is small compared with what the surplus in tobacco used to be.

Certain goods, particular objects of jealousy to our manufacturers, may not be imported for home consumption. On paying certain duties, however, they may be imported and warehoused for export. But no part of those duties is refunded upon their exportation. Our manufacturers, it seems, do not want even this restricted importation to be encouraged, fearing that some of the goods might be stolen from the warehouse and thus compete with their own. Only under these regulations can we import wrought silks, French cambrics and lawns, calicoes that are painted, printed, stained, or dyed, etc.

We are unwilling even to carry French goods, preferring to forgo a profit ourselves rather than allow those we regard as enemies to profit by our means. Not only half the old subsidy but the second twenty-five per cent. is retained when any French goods are exported.

Under the fourth rule attached to the old subsidy, the drawback on exports of all wines amounted to considerably more than half the duties then paid on their importation. The legislature seems at that time to have intended to give the carrying trade in wine more than ordinary encouragement. Several other duties imposed at the same time as, or after, the old subsidy—the additional duty, the new subsidy, the one-third and two-thirds subsidies, the impost 1692, and the tonnage on wine—could also be recovered in full on exportation. All these duties except the additional duty and impost 1692, however, had to be paid in cash on importation. The interest on so large a sum was an expense that made it unreasonable to expect any profitable carrying trade in wine. Consequently, only part of the duty called the impost on wine, and none of the twenty-five pounds the ton on French wines or of the duties imposed in 1745, in 1763, and in 1778, could be recovered on exportation. The two imposts of five per cent. imposed in 1779 and 1781 on all earlier customs duties could be recovered in full on exports of all other goods, and likewise on exports of wine. The last duty imposed specifically on wine, that of 1780, can be recovered in full—an indulgence that, when so many heavy duties remain, could most likely never cause a single ton of wine to be exported. These rules applied to every place of lawful exportation except the British colonies in America.

The 15th Charles II, chap. 7, called an act for the encouragement of trade, had given Great Britain a monopoly on supplying the colonies with all goods grown or manufactured in Europe, and therefore with wines. In a region with coasts as extensive as those of our North American and West Indian colonies, where our authority was always so weak and the inhabitants were allowed to ship their non-enumerated commodities in their own vessels, first to every part of Europe and later to every part south of Cape Finisterre, this monopoly was unlikely ever to be strictly observed. They probably always found ways to bring some cargo back from countries to which they were permitted to carry one. They seem, however, to have encountered some difficulty in importing European wines from the countries where they were grown. Nor could they easily import them from Great Britain, where they bore many heavy duties, a considerable part of which was not refunded on exportation. Madeira wine, not being a European commodity, could be imported directly into America and the West Indies, whose non-enumerated commodities enjoyed free trade with the island of Madeira. These circumstances had probably established the general taste for Madeira wine that our officers found throughout our colonies at the beginning of the war that began in 1755, and that they brought home to the mother country, where the wine had not previously been much in fashion. At the end of that war, in 1763 (by the 4th Geo. III, chap. 15, sect. 12), all duties except £3, 10s. could be recovered on exports of wine to the colonies, apart from French wines, whose trade and consumption national prejudice would not allow to receive any encouragement. The time between this indulgence and the revolt of our North American colonies was probably too short for any considerable change in those countries' customs.

The same act that thus favored the colonies much more than other countries in the drawbacks on all wines except French wines favored them much less in those on most other commodities. On exports of most commodities to other countries, half the old subsidy was refunded. But this law provided that none of that duty should be refunded on exports to the colonies of commodities grown or manufactured in Europe or the East Indies, except wines, white calicoes, and muslins.

Drawbacks were perhaps originally granted to encourage the carrying trade, which was thought especially suited to bringing gold and silver into the country because foreigners often paid a ship's freight in money. Yet though the carrying trade certainly deserves no special encouragement, and though the motive for this policy was perhaps exceedingly foolish, the policy itself seems reasonable enough. Such drawbacks cannot force more of the country's capital into this trade than would have gone into it of its own accord in the absence of import duties; they only prevent those duties from shutting the trade out altogether. The carrying trade, though it deserves no preference, ought not to be excluded, but left free like every other trade. It provides a necessary outlet for capital that can find employment neither in the country's agriculture or manufactures, nor in its home trade or its foreign trade for domestic consumption.

Far from losing by such drawbacks, customs revenue gains from the part of the duty that is retained. Had all the duties been retained, the foreign goods on which they are paid could seldom have been exported, and consequently could seldom have been imported, for lack of a market. The duties of which a part is retained would therefore never have been paid.

These reasons seem sufficient to justify drawbacks, and would justify them even if all duties, whether on the produce of domestic industry or on foreign goods, were always refunded on exportation. Excise revenue would indeed suffer a little in that case, and customs revenue considerably more; but such a policy would come closer to restoring the natural balance of industry, the natural division and distribution of labor, which these duties always disturb to some degree.

These reasons, however, justify drawbacks only on exports to countries that are entirely foreign and independent, not to countries in which our merchants and manufacturers enjoy a monopoly. A drawback on exports of European goods to our American colonies, for example, will not always produce greater exports than would have occurred without it. Through the monopoly our merchants and manufacturers enjoy there, the same quantity might often be sent over even if all duties were retained. The drawback can therefore often be a pure loss to excise and customs revenue without changing the trade or enlarging it in any respect. Whether such drawbacks can be justified as a proper encouragement to the industry of our colonies, or whether it benefits the mother country to exempt them from taxes paid by all their fellow subjects, will become clear later, when I discuss colonies.

Drawbacks, however, must always be understood to be useful only when the goods for whose exportation they are granted are actually exported to a foreign country, rather than secretly re-imported into our own. It is well known that some drawbacks, particularly those on tobacco, have often been abused in this way and have given rise to many frauds, injurious alike to revenue and to honest traders.

ON DRAWBACKS.

Merchants and manufacturers are not satisfied with a monopoly at home. They also want to sell as much as possible abroad. Their country has no authority over foreign nations, so it can rarely secure a monopoly there for them. They usually have to settle for asking the government for measures that encourage exports.

Of these measures, the most reasonable seem to be the ones called drawbacks, or refunds of duties. A merchant who exports domestic goods can be refunded some or all of the excise or domestic duty paid on them. This cannot cause more goods to be exported than would have been exported if there had been no duty. It does not draw more of the country's capital into that business than would go there naturally. It simply stops the duty from pushing some of that capital into other businesses. It does not upset the balance that naturally develops among the different kinds of work in society. It prevents the duty from upsetting it. It preserves, rather than destroys, the natural division and distribution of labor that is usually worth preserving.

The same applies to refunds of duties on imported foreign goods that are then re-exported. In Great Britain these refunds generally cover by far the largest part of the import duty. Under the second rule attached to the act of parliament that introduced what is now called the old subsidy, every merchant, English or foreign, could reclaim half of that duty upon export. English merchants had to export within twelve months, and foreign merchants within nine months. Wines, currants, and finished silks were the only exceptions, since they qualified for other, more favorable allowances. At the time, this act imposed the only duties on foreign imports. The deadline for claiming this and all other drawbacks was later extended to three years (by 7 Geo. I. chap. 21. sect. 10.).

Most duties introduced since the old subsidy are refunded in full when goods are exported. But there are many exceptions to this general rule. Drawbacks have become far more complicated than they were when first introduced.

For some foreign goods, imports were expected to far exceed home consumption. All duties on these goods are refunded upon export, without even keeping half the old subsidy. Before our North American colonies revolted, we held a monopoly over tobacco from Maryland and Virginia. We imported about ninety-six thousand hogsheads, while domestic consumption was thought to be no more than fourteen thousand. To help export the large remainder, all duties were refunded if it was exported within three years.

We still have nearly, though not quite, a monopoly over sugar from our West Indian islands. So if sugar is exported within a year, all its import duties are refunded. If exported within three years, all are refunded except half the old subsidy, which is still kept on most exported goods. Sugar imports considerably exceed domestic needs, but their excess is small compared with what the tobacco excess used to be.

Some goods are especially feared by our own manufacturers and cannot be imported for domestic consumption. They may, however, be imported, stored in warehouses, and exported after certain duties are paid. No part of those duties is refunded on export. Our manufacturers apparently do not want to encourage even these restricted imports. They fear that some goods will be stolen from the warehouses and compete with their own products. Only under these rules can we import finished silks, French cambrics and lawns, calicoes that are painted, printed, stained, or dyed, etc.

We do not even want to carry French goods. We would rather give up our own profit than help people we consider enemies earn any profit. On exports of all French goods, both half the old subsidy and the second twenty-five per cent. are retained.

Under the fourth rule attached to the old subsidy, refunds on exported wines amounted to much more than half the import duties then paid on them. Parliament apparently wanted to give wine-carrying trade more than the usual encouragement. Several other duties imposed then or later were also fully refundable on export: the additional duty, the new subsidy, the one-third and two-thirds subsidies, the impost 1692, and the tonnage on wine. But all these duties except the additional duty and impost 1692 had to be paid immediately in cash on import. The interest cost on so much money made it unreasonable to expect profitable wine-carrying trade. So only part of the duty called the impost on wine was refundable, and none of the twenty-five pounds the ton on French wines or the duties imposed in 1745, in 1763, and in 1778. The two imposts of five per cent. imposed in 1779 and 1781 on all earlier customs duties were fully refundable on exports of all other goods, and likewise on wine. The last duty imposed specifically on wine, that of 1780, is also fully refundable. But with so many heavy duties retained, this allowance probably could never cause a single ton of wine to be exported. These rules applied to all lawful export destinations except the British colonies in America.

The 15th Charles II, chap. 7, an act for the encouragement of trade, gave Great Britain a monopoly on supplying the colonies with all European-grown or European-made goods, including wine. Our North American and West Indian colonies had extensive coastlines where our authority was always weak. Their residents could ship their non-enumerated goods in their own vessels, first to all of Europe and later to all of Europe south of Cape Finisterre. So it is unlikely that they ever obeyed this monopoly closely. They probably always found ways to bring some cargo back from the places where they were allowed to take goods. They seem, however, to have had trouble importing European wine directly from where it was produced. Nor could they easily import it from Great Britain, where it bore many high duties that were not substantially refunded on export. Madeira wine was not a European product and could be imported directly into America and the West Indies. Those colonies could trade their non-enumerated goods freely with Madeira. These conditions probably created the widespread taste for Madeira wine that our officers found in all our colonies when the war that began in 1755 started. The officers brought that taste back to the mother country, where the wine had not previously been very fashionable. When the war ended in 1763, the 4th Geo. III, chap. 15, sect. 12 allowed refunds of all duties except £3, 10s. on wines exported to the colonies. French wines were excluded: national prejudice permitted no encouragement of their trade or consumption. There was probably too little time between this concession and the revolt of our North American colonies for their habits to change much.

The same act favored the colonies far more than other countries in its refunds on all wines except French wines. But it favored them much less on most other goods. Half the old subsidy was refunded when most goods were exported to other countries. Under this law, however, none of that duty could be refunded on European or East Indian products exported to the colonies, except wines, white calicoes, and muslins.

Drawbacks may originally have been introduced to encourage the carrying trade. Because foreigners often paid shipping charges in cash, this trade was thought especially useful for bringing gold and silver into the country. The carrying trade does not deserve special encouragement, and the reason for the policy may have been quite foolish. But the policy itself seems reasonable enough. These refunds cannot draw more of the country's capital into the trade than would have gone there without import duties. They only keep the duties from shutting it out entirely. The carrying trade deserves no preference, but it should not be excluded. Like any other trade, it should be left free. It provides a necessary outlet for capital that cannot find work in agriculture, manufacturing, domestic trade, or foreign trade supplying domestic consumption.

Far from losing money through these drawbacks, customs revenue gains from the part of each duty that is retained. If the full duties had been kept, these foreign goods could rarely have been exported, or imported in the first place, because there would have been no market for them. Then none of those duties would have been paid.

These reasons seem enough to justify drawbacks. They would justify them even if every duty on domestic or foreign goods were always refunded on export. Excise revenue would then lose a little and customs revenue much more. But such a policy would do more to restore the natural balance of industry and the natural division and distribution of labor, which these duties always disrupt to some extent.

These reasons, however, justify refunds only for exports to entirely foreign, independent countries, not to places where our merchants and manufacturers hold a monopoly. A refund on European goods exported to our American colonies, for example, will not always increase exports above what they would be without it. Because our merchants and manufacturers have a monopoly there, the same amount might often be shipped even if all duties were retained. The refund might then simply cost excise and customs revenue without changing or expanding trade at all. Whether such refunds are justified as encouragement for our colonies' industry, or whether the mother country benefits from exempting colonists from taxes paid by all their fellow subjects, will become clear when I discuss colonies later.

Finally, drawbacks are useful only when the goods for which they are given really go to another country rather than being secretly brought back into our own. It is well known that some refunds, especially those on tobacco, have often been misused this way. They have led to many frauds, harming both revenue and honest traders.