Does “free trade” deliver greater prosperity? The lessons of economic history

Free traders base their case primarily on the increase in prosperity which they believe will only come through increased global trade. The general answer to that claim is that Man does not live by bread alone. Moreover, even if there is a general rise in the global product at present, it does not necessarily follow that the same or better result could not be achieved by other means.  The experience of all industrialised countries to date is that industrialisation is best achieved – perhaps can only be achieved by protecting the national economy. Indeed, there is a powerful logic in the idea that developing nations today require protection more than the early industrialising states  because  the early industrialising  nations  had  little competition.

But even if it could be shown indubitably that the global product is increased more by “free trade” than by protection, it does not follow that it is in a particular country’s interest to adopt free trade. Consider the position in a national market which operates “free trade” within that market, but protects its trade and industry from foreign competition. Companies go bust if they do not compete. But successful companies take their place and continue to provide employment at broadly similar rates of pay. The logic of global “free trade” is that countries which cannot compete will go bust and not be replaced by others in the domestic market. There will be no replacement jobs within the bankrupt country because the successful competitor is abroad.

The most lethal ammunition to discharge at “free traders” is the fact that no country in the history of the world has industrialised successfully without very strong protectionist measures being in place. That includes the first industrial nation, Britain, which spent a couple of cosy centuries behind the Navigation Acts, the first of which was passed in 1651, before becoming a free trader. Not only that, but Britain only adopted “free trade” principles after she had become heavily industrialised and did so at a time when the country was still the dominant industrial power in the world by a long chalk and her exports were more or less guaranteed to sell in foreign markets.

Before Britain dropped her old colonial protectionist system in the mid 19th Century,  she had industrialised in the modern sense from scratch and expanded her GDP massively. Perhaps most impressively she had managed to continue to largely feed herself without the price of corn going sky high, despite the fact that the UK population almost doubled between 1801 (the first Census) and the repeal of the Corn Laws in 1846.

As described above, Britain’s experience during her most committed “free trading” period was one of declining market share and commercial and industrial dominance while rigid protectionists such as Germany and the USA experienced massive growth. Of course, Britain could not hope to remain so dominant but her decline was remarkably rapid.  In 1870 Britain was the richest country by GDP in the world: by 1914 both Germany and the USA  had larger GDPs.  Moreover, by religiously adopting open markets, for capital as well as goods and services, Britain seriously distorted her economy. Vast capital exports resulted in underinvestment in Britain and foreigners manufacturers and traders took full advantage of Britain’s open doors. The result was that  by the

Great War in 1914 her farmers were on their knees and  modern industries such as the chemical and  pharmaceutical were  sadly undeveloped because of foreign competition (this distortion of the economy was soon to be a great national embarrassment during wartime when  many industries were found to be inadequate to replace imported goods).

Here is a German voice from 1913: “By its free trade policy England has been more useful to us than its numerous political machinations have been harmful to us. Where would our sugar industry – one of the first items to help us in our economical rise – have been today, or our textile and iron industries, had it not been for the free markets of England? Nowhere: we should have been entirely without our new German capital, our financial resources. On the back of free tradeEngland we  grasped  at  and  secured  our economical world-power….Industrial and political supremacy go together. Warships are machines, and the nation which succeeds in attracting the  centre of capital is the nation that can afford to build most. The present rulers of England represent the fourth generation of dictators to the world. It will not be easy for them to give up the role of ‘primus inter pares’”. (Prof von Schulze-Gaevernitz quoted – p347 -in The fall of protection 1840-50 by Bernard Holland)

Britain limped on with “free trade” after the Great War until 1931 when the secular religion was abjured, at least temporarily, during the Great Depression. Although unemployment remained high by historical British standards until WW2, the British economy behind protectionist barriers recovered quickly compared with most of the rest of the world. Most interestingly, the newer high-tec industries such as the motor, chemical and electrical recovered and grew fastest following their protection.

From 1945 to the mid eighties of the last century at least,  Britain continued in an essentially protectionist system, as did the rest of the world. The world economy grew strongly during the period despite the protection.  Even within the EU the “free market” mania did not really get under way until the Single European Act of 1985.

It is true that since protectionist barriers have come down over the past 20 years economic growth has been strong in the First World, but then it has been strong behind protectionist barriers  and, indeed, with state direction of the domestic market. Germany under Hitler in the 1930s recovered amazingly quickly, despite the fact that the Nazis pursued an economic course which was probably as close to autarky as it is possible for a major modern state to bear. Imports and exports were regulated according to what was perceived to be necessary to make Germany strong through self-sufficiency. What Hitler did not do was attempt to run industry directly. Instead, the Nazis allowed private enterprise to run commerce and industry whilst directing what was produced and supplied.

All of that tells us three things: that “free trade” is not necessary for rapid economic growth, that state regulation of the domestic market and international trade is not a recipe for disaster and that being a “free trader” when the rest of the world is not reciprocating is a mug’s game.

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