16th August, 1927
PERSONAL & CONFIDENTIAL
My dear Prime Minister,
BRITISH TRADE AND THE AUSTRALIAN TARIFF
In your letter of the 21st of April you mentioned that you thought that the effect of the Australian tariff on British trade had never been properly analysed or considered.  I gathered from your letter that you were putting one of your young men on to this subject in Melbourne but I thought that you would probably find it useful if, from this end, we also tackled the subject. There have been many delays owing to the extreme pressure of work in June and July. It is only now, in the comparative calm of August, that it has been possible to get to grips with the subject.
I am by this mail forwarding a rather comprehensive memorandum which has been prepared here. The statistical tables look extremely formidable. As your time is both limited and precious, I have also had a series of graphs made which illustrate the tables and on which I will comment in this letter. I think perhaps that if you read the memorandum which covers the statistical tables and then, if you think it worth while, pass the document over to whoever you have working on the subject in Melbourne, this may tend to accelerate the information which you have in mind.
Speaking quite generally, the effect of this scrutiny is depressing so far as British trade is concerned. The fact that since 1913 Australia has increased her share of the total British exports from 6% to over 9% is only in a small part due to increased takings by Australia of British goods but is, in the main, due to the very serious and prolonged depression British trade.
You will find in the memorandum that I have discussed at considerable length the effect of the Australian tariff on various classes of British goods. I do not think there can be any doubt that your main contention is sound, although I rather hesitate to agree with one sentence in your letter that the fostering of secondary industries in Australia necessarily increases the purchasing power of the Australian community. I think this is the case when the secondary industry encouraged is one which really adds to the national wealth but there have been, I think, many examples where Australian secondary industries have, by increasing the cost of a whole range of allied goods, increased the cost of living and probably decreased the purchasing power.
In Graph 1
Total British exports to Australia are shown as a percentage of (a) total Australian imports (b) total British exports. In the former case there is a fall from 51% to 43% and in the latter a rise from 5% to 9.5%.
Page 9 of my memorandum shows that, at 1913 price levels, Australia in 1926 only took 1,000,000 more British goods than in 1913 but the fact that so small a rise allows Australia to claim an increase of 3.5% of the total British exports shows in the clearest way the profundity of the British export trade depression. The world's population is estimated at 1,400,000,000 yet Australia with 6,000,000 takes nearly 10% of all that Great Britain sells overseas and if manufactured goods alone are considered, takes over 10% of the total.
Graph 2 deals with the cotton piece goods trade. It is not a very striking production. The latest British trade returns make, however, very interesting reading. For the first seven months of 1927, Australia became the second market in the world for Lancashire's main export, taking 109 million square yards, which is 23 millions more than the third customer-Egypt. China (including Hong Kong), normally the second market, has fallen to seventh place with a yardage purchase only a little over half that of Australia.
Graphs 6 & 7 refer to iron and steel items and these items are of especial interest and should be looked at in the statistical tables attached to my memorandum because here you can see the effect of a change from free entry to protection and preference with a resultant great advantage to British industry.
The 1927 figures show a marked increase in many items of British iron and steel exports to Australia.
Graph 9 shows British paper exports to Australia. The 1927 figures show that so far the Canadian treaty has not severely affected the British paper exports to Australia. The month of July does, however, show a pretty severe drop, which may have some significance.
Graph 10 illustrates motor chassis exports and is remarkably interesting. It was probably impossible to anticipate that the rate of progress made by the British motor manufacturers in the last twelve months would be continuous. July 1927 has been the first month to show a severe slacking of progress. In July 1927 less British motor chassis were exported to Australia than in July 1925 and only a third of the quantity exported in July 1926.
However, the total number of light motor chassis exported for the seven months January-July is satisfactory, the figures being as follows:-
1925 1926 1927
Jan. to July 2190 5956 9874
I hope you will find the memorandum, tables and graphs are a useful contribution to the general subject of the Australian Tariff and British trade.
In some degree they support my general contention that Australia having a primary (protective) and a secondary (preferential) purpose in her tariff has, in many cases, been more successful in her secondary than in her primary intention. It would be of first class importance if we could discover how far the indiscriminate protection of unsuitable secondary industries has checked the development of those which are really suitable.
Consideration of such a point might result in your feeling that Alexander's  suggestion was worth the attention of the Imperial Conference of 1929!
Yours sincerely, F. L. MCDOUGALL