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Only Protection Can Build Developing Economies

by Ha-Joon Chang

Le Monde diplomatique (August 2003)


The World Trade Organisation is run as an oligarchy of the developed
countries, which do not even bother to pretend to be democratic. The
excluded and abused underdeveloped countries could force a change, or
even the end of the world's free trade order as we have come to know it.
This would be a blessing to the world's poor, who have been further
impoverished since the end of protected economies in the early 1980s.

Free-traders have achieved crucial victories in the past twenty years.
Since the debt crisis in 1982 and the resulting IMF-World Bank
structural adjustment programmes, many developing countries have
radically liberalised their trade. The collapse of communism in 1991
opened up a vast area of the world to free trade. During the 1990s a
number of important regional agreements, such as the North America Free
Trade Agreement (Nafta), were signed. And in 1995 the conclusion of the
Uruguay Round talks of the General Agreement on Trade and Tariffs (Gatt)
led to the birth of the World Trade Organisation (WTO). The WTO is not
yet a full-blown free trade agreement, as it still allows some tariffs,
but it has shifted the world towards free trade by reducing tariffs and
banning trade-related subsidies.

However impressive these achievements, the free-traders (mostly
developed countries) are not content. In the WTO they exert continuous
pressure to reduce tariffs even further and faster than agreed, and to
expand its jurisdiction into areas that were not in the original mandate
(such as foreign investment and competition law). In terms of regional
agreement, there is a strong push to create an area that will cover
almost all the Western hemisphere - the free trade area of the Americas
(FTAA). In pushing for further liberalisation, the free-traders believe
that history is on their side. They argue that free trade is how all
developed countries have become rich, and criticise the developing
countries for refusing to adopt this successful formula for economic
development.

This is far from the truth. When they were developing countries, those
countries now developed followed few of the policies they now recommend
to others, and especially free trade. And nowhere is this discrepancy
between historical reality and myth greater than in Britain and the
United States, the two countries supposed to have reached the summit of
the world economy through free markets and free trade. Britain is far
from a paragon of free trade. It was an aggressive follower, and in
certain areas a pioneer, of dirigiste [state-controlled] policies to
protect and promote strategic industries. These policies, though limited
in scope, date back to the 14th century (Edward III) and 15th century
(Henry VII) and relate to wool manufacturing, which was the leading
industry of the era. England was an exporter of raw wool to the Low
Countries, and British monarchs tried to promote wool manufacturing
instead by, among other things, protecting the domestic manufacturers,
taxing raw wool exports and poaching skilled workers from the Low
Countries {1}.

Between the 1721 trade policy reform of Robert Walpole, Britain's first
prime minister, and the repeal of the Corn Law in 1846 {2}, Britain
implemented a most aggressive trade policy. It used tariff protection,
export subsidies, import tariff rebates on inputs used for exporting,
export quality control by the state - policies that are now associated
with Japan and other East Asian countries. It is a little known fact
that during this period Britain protected its industries much more
heavily than other European countries, especially France, thought of as
its dirigiste counterpoint.

Britain moved significantly, though not completely, to free trade with
the repeal of the Corn Law. This is now regarded as the ultimate victory
of liberal economic doctrine over wrong-headed mercantilism, but
historians familiar with the period see it actually as an act of "free
trade imperialism" intended to "halt the move to industrialisation on
the continent by enlarging the market for agricultural produce and
primary materials" {3}. This is exactly how many key leaders of the
campaign to repeal the Corn Law, such as the politician Richard Cobden
and John Bowring of the Board of Trade, saw their campaign {4}.

Britain's technological lead, which enabled this shift to a free trade
regime, had been achieved "behind high and long-lasting tariff
barriers", as the economic historian Paul Bairoch put it {5}. For this
reason Friedrich List, the 19th-century German economist who is
(mistakenly) known as the father of the modern "infant industry"
argument - the view that underdeveloped countries cannot develop new
industries without state intervention, especially tariff protection -
argued that the British appeal for free trade was selfish. He wrote: "It
is a very common clever device that when anyone has attained the summit
of greatness, he kicks away the ladder by which he has climbed up, to
deprive others of the means of climbing up after him ... Any nation
which by protective duties and restrictions on navigation has raised her
manufacturing power and her navigation to such a degree of development
that no other nation can sustain free competition with her, can do
nothing wiser than to throw away these ladders of her greatness, to
preach to other nations the benefits of free trade, and to declare in
penitent tones that she has hitherto wandered in the paths of error, and
has now for the first time succeeded in discovering the truth" {6}.

If Britain was the first country with a major infant industry strategy,
its most ardent user was the US - Bairoch called it "the mother country
and bastion of modern protectionism" {7}. The first systematic arguments
for infant industry protection were developed by American thinkers, in
particular Alexander Hamilton, the first Treasury Secretary of the US,
and the now-forgotten economist Daniel Raymond. Friedrich List, the
supposed father of the argument, first learned about it during his exile
in the US in the 1820s. Many 19th-century US politicians clearly
understood that free trade theory was unsuited to their country, even
though this meant going against the advice of great economists such as
Adam Smith and Jean Baptiste Say, who thought that the US should not
protect manufacturing industries, and specialise in agriculture {8}.

Between the 1830s and the end of the second world war, the US had one of
the highest average tariff rates on manufacturing imports in the world.
Since it had an exceptionally high degree of natural protection due to
the high costs of transporting goods to the US at least until the 1870s,
we can say that US industries were the most protected in the world until
1945. Even the Smoot-Hawley Tariff of 1930 increased the degree of
protection in the US economy only marginally. The average tariff rate
for manufactured goods after this bill was 48%, still within the upper
region of the range of the average rates that had prevailed in the US
since the Civil War. It is only in relation to the brief liberal
interlude of 1913-29 that the 1930 tariff bill can be interpreted as
increasing protectionism, though not by much - from 37% in 1925 to 48%
in 1931.

The Civil War was fought over the issue of tariffs just as much as
slavery. The South had more to fear over tariffs than over slavery.
Abraham Lincoln was an economic protectionist who began in politics
under the charismatic politician Henry Clay {9} in the Whig party, which
advocated the "American system", based on infrastructure development and
protectionism - so named in recognition of the fact that free trade was
in the British interest. Lincoln thought blacks were racially inferior
and slave emancipation an idealistic proposal with no prospect of
immediate implementation. In response to a newspaper editorial urging
immediate slave emancipation early in the war, he wrote: "If I could
save the Union without freeing any slave, I would do it; and if I could
save it by freeing all the slaves, I would do it; and if I could do it
by freeing some and leaving others alone, I would also do that" {10}. He
is said to have emancipated the slaves in 1862 as a strategic move to
win the war rather than out of moral conviction.

It was only after the second world war, with US industrial supremacy
unchallenged, that the US liberalised its trade (although not as
unequivocally as Britain had done in the mid-19th century) and
championed free trade - again proving List's ladder metaphor right.
Ulysses S Grant, the war hero who was president of the US from 1869 to
1877, said: "For centuries England has relied on protection, has carried
it to extremes and has obtained satisfactory results from it. There is
no doubt that it is to this system that it owes its present strength.
After two centuries, England has found it convenient to adopt free trade
because it thinks that protection can no longer offer it anything. Very
well then, gentlemen, my knowledge of our country leads me to believe
that within 200 years, when America has gotten out of protection all
that it can offer, it too will adopt free trade" {11}.

Britain and the US may be dramatic examples, but the history of other
developed countries is similar. When they were trying to catch up with
the more developed countries, almost all used tariff protection,
subsidies, and other policy tools to promote their industries. Britain
and the US, the supposed homes of free trade, used tariff protection
most aggressively, not countries like France, Germany or Japan that are
usually associated with state activism. During the 19th and the early
20th centuries industrial tariffs were relatively low in France and
Germany at fifteen to twenty percent, and that of Japan was bound below
five percent until 1911 by a series of unequal treaties, which it had
been forced to sign upon opening to the world in 1853. During the same
period the US and Britain, until the 1860s, boasted average industrial
tariff rates of forty to fifty percent.

The exceptions are Switzerland and the Netherlands, countries that were
already on the frontier of technological development by the 18th century
and not much protection. The Netherlands had an impressive range of
interventionist measures until the 17th century to build up its maritime
and commercial supremacy. Switzerland did not have a patent law until
1907, (which directly contravenes today's orthodoxy about the protection
of intellectual property rights). The Netherlands abolished its 1817
patent law in 1869 on the ground that patents were politically created
monopolies inconsistent with its free-market principles - a position
that eludes most contemporary free-trade economists when they support
the pro-patent Trips (trade- related intellectual property rights)
agreement of the WTO - and did not introduce a patent law again until 1912.


Tariff protection was in many countries a key component of their
development strategies, but it was not the only, or most important, one.
There were export subsidies, tariff rebates on inputs used for exports,
conferral of monopoly rights, cartel arrangements, directed credits,
investment planning, manpower planning, research and development
supports, and the promotion of institutions to allow public-private
cooperation. All of these are commonly thought to have been invented by
Japan and other East Asian countries after the second world war, or at
least by Germany in the late 19th century, but many of them have in fact
a long history. Despite sharing the same underlying principles, there
was a considerable diversity among developed countries in the exact mix
of trade and industrial policy tools. This suggests that there is no
one-size-fits-all model for industrial development.

Those few neoliberal economists who are aware of past protectionism
argue that protectionist policies may have had some (but, they stress,
not many) positive impacts in the past but they can only do harm in a
globalised world. They argue that the superiority of free trade is
proven by the growth record of two decades of trade liberalisation being
superior to that of the preceding few decades, when protectionism was
the norm.

But if free trade is so good, we would expect economic growth to have
accelerated over the past two decades, given that there has been so much
liberalisation. Yet during the bad old days of the 1960s and 1970s, when
there was more protection, the world economy was in fact growing much
faster than now - world per capita income was growing at about three
percent a year, while during the past twenty years it has grown at only
about two percent. Per capita income growth in the developed countries
slowed from 3.2% to 2.2% between 1960 and 1980 and 1980 and 1999, while
in the developing countries it went from three percent to 1.5%. Without
the strong growth during the past two decades in China and India,
neither of which has followed the neoliberal recipe, the rate would have
been even lower.

This average growth rate does not fully convey the magnitude of crisis
that many developing countries have experienced since 1982. Economic
growth evaporated in Latin America, with the annual growth rate of per
capita income crashing from 3.1% during 1960-80 to 0.6% during 1980-99.
The crisis has been even deeper in other regions. Per capita income has
shrunk in the Middle East and North Africa (at an annual rate of -0.2%)
and in sub-Saharan Africa (-0.7%) during the past twenty years, whereas
it grew at 2.5% and two percent during 1960-80. Since the start of their
transition to capitalism, most former communist countries have
experienced the fastest falls in living standards in modern history, and
many have not yet recovered even half the per capita income level under
communism.

The neoliberal experiment has failed to deliver on its key promise,
accelerated growth, in whose name we were told to sacrifice everything
else, from equity to the environment. Despite this failure the
neoliberal view on free trade continues to be dominant thanks to a
formidable economic- political- ideological machinery, comparable in its
scale and power only to the Vatican during the Middle Ages in Europe.
Through their hold on the governments of the most influential developed
countries, especially the US and the UK, neoliberals have an enormous
influence in setting the political agenda of key international agencies
- especially the IMF, the World Bank and the WTO. Through their
influence in mainstream media all over the world, neoliberals have been
able to underplay, or even suppress, unfavourable information, including
those dismal growth figures. Through their dominance in key economics
departments, especially in the US and UK, which lead the world,
neoliberals can make sure that almost no dissenting economists are ever
hired in respectable departments.

In the developing countries the stranglehold of neoliberalism has been
even greater. The continued crisis makes it necessary for many
developing country governments to follow the policies of the IMF, the
World Bank and key donor governments, on whose support they are
dependent, even if these policies perpetuate the crisis that makes
dependence inevitable. Powerful interests in these countries benefit
from neoliberal policies - for example, exporters of primary products or
those who provide professional services to foreign firms. Alternative
policy proposals are few, as most thinkers have lost the self-confidence
to challenge the orthodoxy and others have defected to it to make a
living: not a surprising outcome when an IMF or World Bank consultancy
fee can be as great as several years' academic salary in most developing
countries. With this dominance of the political and intellectual agenda,
neoliberals have been able to dismiss critics as softies afraid of
creating short-term inequality in return for long-term greater wealth
for everyone, or as economic innumerates who do not understand what is
going on. Serious debates are avoided and dissenters ignored,
reinforcing neoliberal dominance.

What is the future of free trade? Despite what the free-traders argue,
there are many good reasons to believe that free trade between countries
with very different productivity levels may benefit the poorer countries
in the short term by providing them with bigger export markets, but it
is likely to harm long-term development by locking them up in
low-productivity activities. Clever policy-makers of countries trying to
catch up with more developed countries, from Robert Walpole and
Alexander Hamilton in the 18th century down to the Japanese and the
Korean bureaucrats of the 1960s and 1970s, understood this all too well
when they rejected free trade.

Free trade agreements that involve countries with vastly different
levels of productivity are unlikely to succeed long-term, because over
time poorer countries will realise that they are not helping
development. Free trade agreements that bind countries at similar levels
of development, such as the Mercosur (common market of the south), which
includes Brazil, Argentina, Uruguay, and Paraguay, and the Association
of South East Asian Nations (Asean) {12}, have greater possibility of
success than those that try to bind countries at different levels, such
as the FTAA. Friedrich List saw no contradiction in supporting the
German customs union (zollverein) while arguing for infant industry
protection, as he believed that the German states were sufficiently
similar in levels of development that a free trade agreement would
eventually benefit all the countries involved. The only way to make a
free trade agreement between countries at different levels of
development work is a deep integration like the European Union, which
allows significant fiscal transfers from richer countries and movement
of labour from poorer ones. But this can work only if the poor economies
are few and small relative to the rich ones, as otherwise it will make
the richer countries feel that the agreement is too costly. This is why
the enlargement of the EU is likely to stop before it reaches big,
relatively poor countries such as Turkey and Ukraine.

What about the WTO? It is not yet a free trade agreement as it still
gives some scope for industrial protection by developing countries. But
there is now a strong push towards further reduction in industrial
tariffs, exemplified by the recent US proposals in effect to abolish all
tariffs by 2015. If this succeeds, the potential of the WTO to thwart
the effort of developing countries will be even greater than that of the
proposed FTAA or even Nafta (for Mexico), as it involves countries with
even bigger productivity gaps than the regional agreements. The WTO may
not be a free trade agreement in the conventional sense, but it
constrains policy areas that conventional agreements do not cover, such
as intellectual property rights, control over foreign investment and
government procurement procedures. The WTO can make economic development
of poorer member countries even more difficult than conventional free
trade agreements, which only restrict the use of tariffs and quotas.

For now most developing countries want to stay in the WTO as a second,
or even third, best option, as it allows them to have some voice in the
running of world trade (as the organisation is one-country-one-vote, at
least in theory). It also gives them some protection from bilateral
pressures for liberalisation from developed countries, especially the
US, which is more willing to use such pressures than other developed
countries. But there is increasing dissatisfaction among the developing
countries, which may lead to change: while it is ostensibly democratic,
the WTO is in fact run as an oligarchy of the developed countries.
Powerful countries have the implicit power to coax and threaten weaker
countries, but that is a common problem with any democracy of agents
with unequal powers. However, in the WTO powerful countries do not even
bother with the charade of democracy, as can be seen in the Green Room
meetings, to which the representatives of developing countries are not
invited and from which they may be barred if they show up. The result
has been a policy agenda (and implementation) grossly biased towards the
interests of powerful countries.

If the WTO increasingly deprives the developing countries of vital
policy tools while imposing the interests of powerful countries on them,
they may leave en masse. Or they may put to use the democratic
decision-making structure of the WTO to the full and try to renegotiate
its basic parameters. If this happens, powerful countries, especially
the unilateralist US, may decide to leave the WTO rather than risking a
defeat in the vote. Either way, it will mean the end of the free trade
order as we know it. That may not be a bad thing, given its recent
dismal record.

Endnotes:

{1} In a now-almost-forgotten book, A Plan of the English Commerce
(1728), Daniel Defoe, merchant, politician, and the author of Robinson
Crusoe, describes how the Tudor monarchs, especially Henry VII
(1485-1509) and Elizabeth I (1558-1603), transformed England from a
country that relied chiefly on the export of raw wool into the most
formidable wool manufacturing nation in the world through deliberate
state intervention.

{2} These laws, voted in 1815 by a parliament under the influence of the
land-owning aristocracy, in spite of the opposition of industrialists
and the urban middle classes, imposed very high tariffs on wheat imports.

{3} Charles Kindleberger, "Germany's Overtaking of England, 1806 to
1914" in Economic Response: Comparative Studies in Trade, Finance, and
Growth, Harvard University Press, Cambridge, Massachusetts, 1978.

{4} Cobden argued that: "The factory system would, in all probability,
not have taken place in America and Germany. It most certainly could not
have flourished, as it has done, both in these states, and in France,
Belgium, and Switzerland, through the fostering bounties which the
high-priced food of the British artisan has offered to the cheaper fed
manufacturer of those countries", The Political Writings of Richard
Cobden, 1868, as cited in Erik Reinert, "Raw Materials in the History of
Economic Policy" in G Cook, editor, The Economics and Politics of
International Trade, Volume 2, Routledge, London, 1998.

{5} Paul Bairoch, Economics and World History - Myths and Paradoxes,
Wheatsheaf, Brighton, 1993.

{6} Friedrich List, The National System of Political Economy, Longmans,
Green, and Co, London, 1885.

{7} Paul Bairoch, op cit.

{8} Adam Smith: "Were the Americans, either by combination or by any
other sort of violence, to stop the importation of European
manufactures, and, by thus giving a monopoly to such of their own
countrymen as could manufacture the like goods, divert any considerable
part of their capital into this employment, they would retard instead of
accelerating the further increase in the value of their annual produce,
and would obstruct instead of promoting the progress of their country
towards real wealth and greatness". An Inquiry into the Nature and
Causes of the Wealth of Nations, 1776, Random House, New York, 1937.

{9} Henry Clay was a leading force in the American Colonisation Society;
he conceived the idea of founding a national home in Africa for freed
slaves, from which Liberia derived its name in 1820.

{10} John Garraty and Mark Carnes, The American Nation - A History of
the United States, 10th edition, Addison Wesley Longman, New York, 2000.

{11} Ulysses S Grant, cited in AG Frank, Capitalism and Underdevelopment
in Latin America, Monthly Review Press, New York, 1967.

{12} The ten members of Asean are Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Only Singapore is a truly developed country (Brunei's wealth is solely
based on oil) and it is too small to dominate regional trade.
_____

Ha-Joon Chang teaches at the faculty of economics and politics,
University of Cambridge, United Kingdom. He is author of Kicking Away
the Ladder: Development Strategy in Historical Perspective (Anthem
Press, London, 2002).

http://www.globalpolicy.org/globaliz/econ/2003/08freetradehistory.htm


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