Daily Archives: December 18, 2010

Has “free trade” ever been practised?

Between  1860  and  1914 Britain operated  the  best  approximation  to “free-trade”  the world has seen.  In the period 1840-1870 not only did she by  degrees open her markets to all regardless of  whether   other  countries reciprocated,  but the size of the British state was so tiny that  the  distortions  of government expenditure   and  taxation  were  minuscule compared  with the present day.   But   achieving  the  best  approximation to “free trade”   was not difficult to achieve because no other  country  of any size  has ever seriously attempted  it  for  any length of time. 

For a quarter or a century or so, Britain got away with the ill-effects of being  a  reckless  “free trader”   whilst  other  major  countries remained protectionist to varying degrees. She escaped the consequences for three prime reasons: Britain’s industrial dominance,  long distance transport  of bulk goods remained  cumbersome and expensive  and   the fact that America and Europe were  strangely slow to follow  Britain’s example and industrialise.

 That  all  changed  in the  1870s.  Bulk transport  was  becoming  much easier  and cheaper.  Railways –  ironically more often than not  built with British  capital and technical expertise – had begun  to  have  a considerable   influence  on  the continent and  in  America  and  were beginning  to  snake across Australia and South America.  Perhaps  most importantly  the  age  of the  practical  steamship  and  refrigeration arrived.   Manufactured goods,  food and raw materials could  now  move around  the  world in  volumes which dwarfed anything  which  had  gone before.   British farmers were especially badly hit when  the  Americas and Australasia flooded the British market with food and wool. To these developments,  and arguably in part as a consequence of  them, there was a widespread retreat into a deep protectionism in the  1870s, most notably by the USA and Germany. Britain failed to respond to these developments by guarding her own markets.

 The  period  of  1870-1914 saw the  predictable  results  of  Britain’s quixotic  refusal  to  guard  her markets  when  all  about  her   were assiduously  doing so:  she lost her general  industrial  predominance, well nigh  destroyed  her farmers and failed to  dominate  vital   new industries, such  as the chemical,  which at one time she  had  led  – Britain produced the first synthetic dye (Perkin 1856) and  the  first synthetic plastic  (Parkes  1855).   Two  of  the  most   enthusiastic protectionists, the  USA  and  Germany, became  the  first  to  exceed Britain’s GDP.

Bismarck  summed  up  what had happened in a speech  in  1882  when he said:”I  believe the whole theory of free trade to  be  wrong…England abolished  protection  after she had benefited from it to  the  fullest extent. That  country used to have the  strongest  protective  tariffs until  it became so powerful under their protection that it could  step out of those barriers like a gigantic athlete and challenge the  world. Free  trade  is  the weapon of the strongest nation,  and  England  has become  the  strongest nation in the world owing to  her  capital,  her iron,   her  coal,  and  her  harbours and  owing  to  her  favourable geographically position.  Nevertheless,  she protected herself  against foreign  competition with her exorbitant protective tariffs  until  her industries became so powerful.”

But  even the “free-trade”  Britain practised  was far  from  complete. Government contracts were generally  given to British companies.  Ditto municipal contracts.  Moreover,  there was a strong sense of patriotism in the country which, as with the present  day Japanese,  mitigated the effects of free-trade.  Nor,  of course,   was there a WTO,  EU  or any other body  to  question and interfere  with   the  internal  economic workings  of Britain  such  as taxation,  interest  rates  or  working conditions.

 British  “free trade”  was further complicated by the existence of  the Empire   and  a  widespread  imperial  sentiment  which   created   the opportunity  and the desire to trade with members of the Empire  rather than the rest of the world.  It does not do to over-egg the effects  of this because  British  trade  with  the  world  outside  the   Empire, especially the  USA,  always  remained  strong,   but  it  undoubtedly significantly distorted British trade.

“Free trade” today

 If “free trade” was a gigantic gamble for an industrially, commercially and politically  dominant  Britain in 1850,   it is vastly riskier  for any country now.   Transport even after the arrival of railways and the steamship was still expensive,  slow and cumbersome compared with now. The electric telegraph was the height of sophistication.  Most parts of the  world  could not engage in international trade on their own  terms because  they  were colonies,  under the practical control  of  foreign powers or unindustrialised.

Today physical transport is fast and cheap. In place of  the telegraph, we have the internet.  Many countries have industrialised.  The age  of formal empires is over.

But there is more than political and technological change which makes a difference  between our own time and the last outbreak of “free  trade” mania.   The  “free trade”  being advocated now is doctrinaire  to  the point of idiocy, namely the god of comparative advantage (the idea that each nation  should  concentrate  on those  products  which  are  most profitable  and forget the rest) is to be applied to  everything,  even (in  the EU) to all public contracts,  including those  for  weaponry. Childishly doctrinaire as they were as they played with their  untried intellectual toy, even the most extreme “free traders” in the 1830s and 1840s saw that some parts of the economy could not be reasonably opened to competition  for strategic reasons,   military supplies  being  the prime case.

Let us suppose that we had a perfect “free trade”  world now,   a world in which  there were no tariffs or quotas or embargoes or  “standards” to meet; that all the artificial restraints on trade were removed; that no government subsidized productive employment in any way and all  that remained  to differentiate countries were market decided labour  rates, carriage  costs   and the cost of nonproductive public  works  such  as justice and  the army. What then?

The consequences would be extremely dangerous  for the West. Farmers in the  First  World  would  be on their knees  and   mass  production  of virtually  anything in general demand would  quickly become  impossible because whatever a company’s efficiency,   it simply would not be  able tocompete with labour which  was a tenth or less of the cost  of  its own native  workforce.   All such countries could do is  try  to  make high-value goods.  Moreover, even if the redundant working populations of the First World could find alternative employment, which is dubious, their countries would be left utterly  at the mercy of those who now produced their food and most  of the manufactured goods they consumed.

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