H.—2B

and precarious. This is particularly the case where the protection afforded by the tariff is higher than is necessary to enable industries working to optimum efficiency point to succeed. It is important not to confuse total volume of output with scale of production. A given output from a small number of plants working to capacity may be economic, but the same output from twice that number of plants operating below capacity would be uneconomic. When the tendency of protection to lead to the multiplication, of an excessive number of concerns, most of which are below the optimum efficiency point, is taken into consideration, this type of argument for protection loses much of its cogency. Excessive protection, by encouraging a surplus of partially unutilizable productive power, is detrimental to the national interests. In this connection, too, regard should be had to the capital outlay for plant, the costs of operation, and the rate of obsolescence. For very heavily capitalized industries New Zealand with its limited market is not in general suitable, but there are a number of industries that admittedly can make out a case under this principle. Put in economic phraseology, a prima facie case can as a general rule be sustained for tariff protection in the case of industries subject to the law of increasing return or diminishing cost as output expands ; and, conversely, there is a presumption against tariff protection to industries subject to diminishing return or increasing cost, where expansion of output brings no appreciable economies, but may actually increase costs. Jt would appear that the timber and perhaps the wheat industry would come into this latter category, so that there is an initial presumption, on purely economic grounds, against affording them tariff protection. 0. The extent to which the industry dovetails into or co-ordinates with other industries established in the Dominion, or 'with fuel or power supplies. To the extent that it does this, and in particular makes use of local supplies of coal, electricity or other sources of power that otherwise would remain less completely utilized, this is a point, as far as it goes, in favour of granting it protection. 7. The extent to which the industry is affected by the freight and transport situation. Certain types of imports are useful bulky inward freight, and it would not be economic in the absence of strong countervailing considerations to cut this off by subsidizing local industry if the result will be to raise outward freights and penalize our export industries because of a shortage of inward cargoes. As it happens, imports likely to have this effect usually suffer a considerable natural disadvantage through their bulk and consequent freight charges. A further consideration is the cost of internal and coastal transport, which is heavy in New Zealand, and perhaps over-developed. If it could be more fully utilized by local industries that would be a national advantage. Generally to the extent that a local industry enjoys elements of natural protection such as bulk reflected in relatively high freight charges from overseas, special liability to damage, or difficulty of preservation, its claim for tariff protection is weakened. 8. The extent to which the industry presents probabilities of extension, growth, and permanence ; or caters to a temporary demand, or makes use of rapidly exhaustible local resources. If the latter, then it is clearly not suitable for tariff protection. An analogous consideration is whether it is specially liable to destructive or intermittent dumping competition from abroad. Protection by tariff should, we think, be accorded only to industries that are expected to be a permanent constituent in the national industrial life, since it is presumably granted in the national interest, and not to reward individuals. 9. The extent to which the industry is already established, or 'merely contemplated. We consider that only in exceptional circumstances should tariff protection be granted in the case of a contemplated industry. If it is desired to encourage such an industry, the bounty method or some other method may in many cases be

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