Late last year I talked briefly about how government innovation in the market can often be a very good thing. I also plugged Ha-Joon Chang’s Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. Thankfully, I’ve now had an opportunity to read a good chunk of the book, and it lays out a convincing argument that the current neo-liberal “free trade” view of economic development is in fact not at all how America developed into an economic power – or how any developed country actually industrialized. In reality, it was government protectionism via tariffs, R&D investments, restrictions on foreign trade, subsidies, and the like that allowed countries to develop into economic powers, and free trade policies that act to suppress growth in industrializing countries. After all, how can a developing country compete in a free market against someone with a technological edge?

Consequently, many developed countries advocate free-trade policies for the developing world – sometimes earnestly believing the propaganda that we developed under free-trade policies – in effect “kicking away the ladder” for the developing world, and protecting their technological edge.

After the jump, I’ve included a few lengthy excerpts from the book that underline Chang’s point. It’s an interesting and informative read, and I highly recommend it.

The first particularly interesting passage concerns the rise of the GOP – originally a Hamiltonian protectionist party – and the coincidence of American protectionism and our growth into a world economic power. In fact, many of the original GOP policies would be decried by the modern GOP as socialist.

In the end, what made it possible for the protectionists to win the presidency with Lincoln as their candidate was the formation of the Republican Party. Today the Republican Party calls itself the GOP (Grand Old Party), but it is actually younger than the Democratic Party, which has existed in one form or another since the days of Thomas Jefferson (when it was called, somewhat confusingly to the modern observer, the Democratic Republicans). The Republican Party was a mid-19th-century invention, based on a new vision that befitted a country that was rapidly moving outward (into the West) and forward (through industrialization), rather than harking back to an increasingly unsustainable agrarian economy based on slavery.

The winning formula that the Republican Party came up with was to combine the American System of the Whigs with the free distribution of public land (often already illegally occupied) so strongly wanted by the Western states. This call for free distribution of public land was naturally anathema to the Southern landlords, who saw it as the start of a slippery slope towards a comprehensive land reform. The legislation for such a distribution had be constantly thwarted by the Southern Congressmen. The Republican Party undertook to pass the Homestead Act, which promised to give 160 acres of land to any settler who would farm it for five years. This act was passed during the Civil War in 1862, by which time the South had withdrawn from Congress.

During the 1860 election campaign, the Republicans in some protectionist states assailed the Democrats as a ‘Southern-British-Antitariff-Disunion party [my italics]’, playing on Clay’s idea of the American system which implied that free trade was in the British, not American, interest. However Lincoln tried to keep quiet on the tariff issue during the election campaign, not just to avoid attacks from the Democrats but also to keep the fragile new party united, as there were some free-traders in the party (mostly former Democrats who were anti-slavery).

But, once elected, Lincoln raised industrial tariffs to their highest level so far in US history. Th expenditure for the Civil War was given as an excuse – the same way in which the first significant rise in US tariffs came about during the Anglo-American War (1812-16). However, after the war, tariffs stayed at wartime levels or above. Tariffs on manufacture imports remained at 40-50% until the First World War, and were the highest of any country in the world.

In 1913, following the Democratic electoral victory, the Underwood Tariff bill was passed, reducing the average tariff on manufactured goods from 44% to 25%. But tariffs were raised again very soon afterwards, thanks to American participation in the First World War. After the Republican return to power in 1921, tariffs went up again, although they did not go back to the heights of the 1861-1913 period. By 1925, the average manufacturing tariff had climbed back up to 37%. Following the onset of the Great Depression, the came the 1930 Smoot-Hawley tariff, which raised tariffs even higher.

Along with the much-trumpeted wisdom of the Anti-Corn Law movement, the stupidity of the Smoot-Hawley tariff has become a key fable in free trade mythology. Jagdish Bhagwati has called it ‘the most visible and dramatic act of anti-trade folly’. But this view is misleading. The Smoot-Hawley tariff may have provoked an international tariff war, thanks to bad timing, especially given the new status of the US as the world’s largest creditor nation after the First World War. But it was simply not the radical departure from the country’s traditional trade policy stance that free trade economists claim it to have been. Following the bill, the average industrial tariff rate rose to 48%. The rise from 37% (1925) to 48% (1930) is not exactly small but it is hardly a seismic shift. Moreover, the 48% obtained after the bill comfortably falls within the range of the rates that had prevailed in the country ever since the Civil War, albeit in the upper region thereof.

Despite being the most protectionist country in the world throughout the 19th century and right up to the 1920s, the US was also the fastest growing economy. The eminent Swiss economic historian, Paul Bairoch, points out that there is no evidence that the only significant reduction or protectionism in the US economy (between 1846 and 1861) had any noticeable positive impact on the country’s rate of economic growth. Some free trade economists argue that the US grew quickly during this period despite protectionism, because it had so many other favourable conditions for growth, particularly its abundant natural resources, large domestic market and high literacy rate. The force of this counter-argument is diminished by the fact that, as we shall see, many other countries with few of those conditions also grew rapidly behind protective barriers. Germany, Sweden, France, Finland, Austria, Japan, Taiwan and Korea come to mind.

It was only after the Second World War that the US – with its industrial supremacy now unchallenged – liberalized its trade and started championing the cause of free trade. But the US has never practised free trade to the same degree as Britain did during its free trade period (1860 to 1932). It has never had a zero-tariff regime like Britain. It has also been much more aggressive in using non-tariff protectionist measures when necessary. Moreover, even when it shifted to freer (if not absolutely free) trade, the US government promoted key industries by another means, namely, public funding of R&D. Between the 1950s and the mid-1990s, US federal government funding accounted for 50-70% of the country’s total R&D funding, which is far above the figure of around 20%, found in such ‘government-led’ countries as Japan and Korea. Without federal government funding for R&D, the US would not have been able to maintain its technological lead over the rest of the world in key industries like computers, semiconductors, life sciences, the internet and aerospace.

This isn’t even the tip of the iceberg. Chang provides an endless history lesson involving virtually every developed and developing country in the world, showing conclusively that you build economic superiority via ruthless protectionism of domestic industries and aggressive “free trade” with your technological and industrial inferiors. This is exactly what Britain was doing in colonial America to suppress our economic development to their benefit in England. The infamous Tea Act was a tax cut on tariffs on tea imported to America designed to undercut the production of tea in America (and the import of non-British tea). In other words, “free trade” to keep American industry suppressed and the colonies dependent on British industry.

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  • James

    Good post, the free market is a kind of god today, how exactly you counter the idea is the tough part, out of this FM myth are real consequences.

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