Over the last 2 weeks I have described how Britain and then America grew rich by first nurturing their nascent industries inside a shield of protectionist measures. Only once they had the strongest economies in the world did they promote free trade, because at that point they were going to ‘win’ the competition. Indeed, they were frequently able to impose free trade on developing nations through military might or political dominance, and in so doing have prevented many countries from following the path to industrialisation that the West followed.
These posts were as brief as I could make them, but I hope I included sufficient historical details and references to demonstrate that this account is factual. Of course, the history of these two nations over the previous 300 years will throw up endless complexity and nuance – nothing in life is ever in simple black and white. But if you step back and look at the basic pattern of the sweep of history, this dynamic is clearly visible, in amongst the many positive contributions that these nations have also made to global civilisation.
Indeed, the trouble is that in all the detail and interpretation it’s not difficult to spin a story to support whatever political narrative you support. And for the last 200 years the dominant powers spinning that narrative have been Britain and the USA (along with the rest of Western civilisation), earnestly wanting to believe in the myths of their own superiority.
The purpose of this section of the blog is to analyse these myths, why they have come to dominate global thinking, and their impact on our own ability to understand how we create an economy that provides enough for anything. But first of all, I need to clarify misconceptions that may have arisen in the account so far.
The historical fact is that protectionism has been a vital part of the economic growth of all industrialised nations. Am I, therefore, arguing against free trade and in favour of protectionism? The answer is essentially no. I am saying that free trade is not a universal panacea, and that some protectionist measures are sometimes required at specific points in economic development. What must be avoided are knee-jerk reactions that free trade (or protectionism) are always good or always bad.
The greatest scholar of free trade and protectionism is probably the German economist Friedrich List (1789-1846). List lived in the US from 1825-1830 and witnessed first-hand what was known as the “American System” – high tariffs, creation of the Second Bank of the United States to stabilise the currency, and public investment in infrastructure. Although List was already a proponent of protectionism before his time in the US, the influence of this experience can be seen in the title of his major work: The National System of Political Economy.
However, List wasn’t promoting protectionism as the answer for all nations, but rather as an essential step on a path to universal free trace. He was very specific about how and when protectionism should be used, emphasising that it be temporary, targeted and not excessive. Protectionism should be used to protect industries that are vital to economic development until they are strong enough to compete, known as the “infant industry argument” or “infant industry protection”. An UNCTAD discussion paper by Mehdi Shafaeddin, How Did Developed Countries Industrialise? states that no economy in the world, apart from Hong Kong, has achieved industrialisation without such protection.
List proposed that free trade should initially be developed with countries at a similar stage of economic development, sometimes termed symmetrical trade. List recognised that in these circumstances, free trade would strengthen these economies. Indeed, the ultimate goal of his proposals was to reach a stage of international free trade with no protectionism. But this could only be achieved when all economies had had the opportunity to nurture their industry to comparable levels of strength.
So the progressive application of this model would see the development of regional free trade agreements such as the EU in all parts of the world. The best way forward for Africa, for example, would be regional free trade agreements, and ultimately a pan-African free trade area. This area would then have a much stronger position in trade negotiations with the EU and the US. However, at present intra-African trade is a mess of individual agreements, while nations separately seek trade agreements with the dominant economic powers of the West. Similarly, the failure to development a complete South American free trade area leaves each nation in a weaker position in any intercontinental trade negotiations. (It is interesting to note in this respect that the USA is effectively a free trade area: many US states have populations and economies the size of small nations; they all have their own state governments, but they exist in a federation, with completely open borders, a single currency, and free trade between them.)
Although highly influential, List is not well-known among English-language economists. Richard Werner gives a clear summary of List’s thought in New Paradigm in Macro Economics, making the point that List is well-known in Germany and other countries, but English-speaking countries are deprived of his influence. Another good introduction to his ideas can be found in Erik Reinert’s How Rich Countries Got Rich… and Why Poor Countries Stay Poor.
So we see that List provides us with a conceptual framework in which protectionism is a useful tool in economic development, to be used wisely and judiciously, with free trade between nations as the ultimate goal. The lesson from history is that where nations have used this tool they have been able to grow, but when deprived of this opportunity they have remained poor.
But in the absence of this framework, the dominant myth in the West, and a core myth of the ideology of Western civilisation, is that free trade is always and everywhere the best approach and the reason for the economic success of the West. I will address this myth, and its roots in Ricardo’s theory of comparative advantage, next week.
