15th August, 1929
PRIVATE AND CONFIDENTIAL
My dear Prime Minister,
THE VALUE OF AUSTRALIAN PREFERENCE TO GREAT BRITAIN
I cannot help feeling that the reaction in Australia against the blind acceptance of the Protectionist point of view has tended to cause a belittling of the real advantages conferred upon Great Britain by the Australian preferential tariff. This feeling is intensified when I read paragraph 92 of the report on the Tariff , Simpson  having sent me that section from the page proof.
The paragraph is headed 'The costs of Preference to United Kingdom Products', and had the argument been restricted to the consideration of what Preference costs Australia I might have had little to say, but the paragraph reads mainly as an estimate of the value of British preference. 
I particularly ask you to consider this sentence: 'Where practically all the trade in any item of goods is preferential, the value of the preference is small and may be neglected'. This statement I frankly regard as a splendid example of a priori reasoning, and of the typical attitude of academic economists in their neglect of facts. It sounds perfectly logical, and will undoubtedly be accepted by many as the truth, but facts simply prove that it is unsound. The statement is mildly qualified later in the paragraph, but ineffectively. The sound statement would have been 'Where British goods experience little or no effective competition in world markets the value of preference is small and may be neglected'. I will illustrate my point by reference to certain items in which Great Britain holds a very high percentage of Australia's imports, but where she encounters severe competition in foreign markets. In electric wires and cables Great Britain holds 95% of Australian imports, but only 40% in Argentina, 4% in Denmark and 3.6% in Holland; of telephones 75% in Australia, 30% in Argentina and 24% in Holland. In cotton piece goods Great Britain holds a predominant position in Australia, but is encountering extremely severe competition in other markets; the same remarks apply to many items of iron and steel, galvanized sheets, in which Great Britain holds 99% of the Australian imports, and only a negligible share of those into Argentina, is a particularly interesting instance. In the case of news print Great Britain held in 1927 84.2% of the Australian imports, and probably would not have sold a ton save for the preferential duty. These examples might be greatly extended. I agree that the figure of 8,000,000 as the value of Australian preference to Great Britain cannot be substantiated, but I am certain that 8,000,000 is far nearer the mark than the 1,000,000 given by the economists.
I will not further labour the point, but I do most devoutly hope that you will not give your support to this statement. Already it is certain to cause much misunderstanding, and will be quoted over here by Free Traders with unholy relish. I shall continue laboriously to ascertain the degree of competition which British goods face in World markets, for that I feel convinced is the only safe way of forming a sound appreciation of the value to Great Britain of the shelter afforded in the Australian market by the combination of tariff, administrative and voluntary Preference.
Yours sincerely, F. L. MCDOUGALL