One of the most inexcusable things about America's ongoing economic decline by means of free trade is how clear the historical portents are. For example, we are today treading the same path trodden by a nation that Americans know reasonably well: Great Britain. It is easy to forget that until about 1850, Britain, not the U.S., was the world's leading economic power. But then, of course, they blew it. There were, of course, many causes of this decline, but free trade was undoubtedly a major one.
Britain, like the U.S. and every other developed nation, initially rose from agricultural backwardness by way of mercantilism, the opposite of free trade. As late as the beginning of the 19th century, Britain's average tariff on manufactured goods was roughly 50 percent, the highest of any major nation in Europe. And even after Britain embraced free trade in most goods, it continued to tightly regulate trade in strategic capital goods, such as the machinery for the mass production of textiles, in order to forestall its rivals. Even the famed Adam Smith -- who made his living as a customs collector! -- was only in favor of free trade after Britain had consolidated its industrial power through protectionism.
Free trade in Britain began in earnest with the repeal of the Corn Laws in 1846, which amounted to free trade in food, Britain's major import at the time. ("Corn," in the usage of the day, meant all grains.) The general election of 1852 was taken for a plebiscite on the question, and free trade began inexorably to restructure the British economy from without. Repealing the Corn Laws was a momentous step because this removed the last major constraint on Britain's transformation, along the lines of its then-comparative advantage in manufacturing, into the world's first industrial society, where most workers would be factory workers, not farmers: how to feed so many factory workers?
To some extent, the objective of the Corn Laws was simply to feed a bulge in population (almost a tripling in the previous 100 years) on a small island with limited agricultural potential. Competition with the prairies of North America eventually devastated Britain's old rural economy and the aristocracy that had lived off its agricultural rents, but so committed was Britain to free trade that this price was accepted as in no other nation. Britain's rulers expected that free trade would result in their country dominating the emerging global industrial economy due to its head start, sidelining its trading partners into agriculture and raw materials. They expected their lead in shipping, technology, scale economies and financial infrastructure to be self-reinforcing and thus last indefinitely.
If the rest of the world had been content to be played for fools, this strategy might have worked. Instead, it enjoyed a brief window of plausibility in the 1850s and 1860s, which were the zenith of classical liberalism (of which free trade was a part) in Europe generally. Then things started to sour. For one thing, this zenith of free trade coincided with a prolonged Europe-wide depression, which started to lift as protectionism began to take hold. More fundamentally, the British plan for universal free trade stumbled as the United States and the rest of Europe declined to accept their inferior allotted roles in the global trading system.
In Germany and the United States especially, people accused Britain of favoring free trade for other countries and only after having secured its own position through protectionism. The influential German economist Friedrich List (1789-1846), a student of America's own Alexander Hamilton, called this "kicking away the ladder." As one British Lord said in Parliament:
Other nations knew, as well the noble lord opposite, and those who acted with him, that what we meant by free trade, was nothing more nor less than, by means of the great advantages we enjoyed, to get the monopoly of all their markets for our manufactures, and to prevent them, one and all, from ever becoming manufacturing nations.
So despite British preaching, free trade was falling apart. Britain practiced it unilaterally in the vain hope of imitation, but the United States emerged from the Civil War even more explicitly protectionist than before, Germany under Bismarck turned in this direction in 1879, and the rest of Europe followed. During the 1880s and 1890s, tariffs went up in Sweden, Italy, France, Austria-Hungary and Spain. There was good reason for this: they worked. A recent study by the Irish economist Kevin O'Rourke shows a clear correlation between protection and economic growth rates in Europe in the 1875-1914 period.
The United States brought to global competition continental economies of scale and a more aggressively commercial culture than Britain. Germany brought industrial paternalism that delivered an efficient workforce and a prescient understanding that science-based industry was the wave of the future -- quintessentially in optics, chemical engineering, and the electrical industries. Both nations forged ahead under protectionism. Britain's economy still grew, but inexorably lagged: from 1870 to 1913, industrial production rose an average of 4.7 percent per year in the U.S., 4.1 percent in Germany, but only 2.1 percent in Britain. In the melancholy words of one commentator:
The industries that formed the core of the British economy in the 19th century, textiles and steel, were developed during the period 1750-1840 -- before England abandoned mercantilism. Britain's lead in these fields held for roughly two decades after adopting free trade but eroded as other nations caught up. Britain then fell behind as new industries, using more advanced technology, emerged after 1870. These new industries were fostered by states that still practiced mercantilism, including protectionism.
But despite the mounting failure of its great strategic gamble, Britain stuck to free trade abroad and a laissez faire absence of industrial policy at home. Fundamentally, the country was lulled by the Indian summer of its industrial supremacy -- it was surpassed economically by the U.S. only around 1880 -- into thinking that free trade was optimal as a permanent policy. The clarity of British thinking was not helped by the fact that certain vested interests had fattened upon free trade and established a grip upon the levers of power that was hard to break. The British establishment, seduced by the City of London's financiers, turned towards wealth manipulation rather than wealth creation, a story familiar to us on Wall Street today.
Britain's decline did not go unnoticed at the time, either at home or abroad. Neither did the underlying problem: in the 1906 words of Member of Parliament F.E. Smith, later famous as a friend of Winston Churchill:
We give to our rivals a free market of 43,000,000 persons in the United Kingdom to add to their own free market. Thus the United States possess an open market of 82,000,000 persons in the United States, plus an open market of 43,000,000 persons in Great Britain, making, altogether, 125,000,000. Similarly, Germany possesses an open market of 43,000,000 in Great Britain. As against this, we possess only such residual of our open market of 43,000,000 as the unrestricted competition of foreign nations leaves unimpaired.... We call ourselves free traders, but we have never secured free trade for ourselves; we have merely succeeded in enlarging the area within which our protectionist competitors enjoy free trade.
Some British politicians set out to do something about the problem. The great crusader to abolish free trade was the Conservative Parliamentarian Joseph Chamberlain (1836-1914), father of the more famous Neville. As he put it in a major speech in 1903:
I believe that all this is part of the old fallacy about the transfer of employment... It is your fault if you do not leave the industry which is failing and join the industry which is rising. Well -- sir, it is an admirable theory; it satisfies everything but an empty stomach. Look how easy it is. Your once great trade in sugar refining is gone; all right, try jam. Your iron trade is going; never mind, you can make mouse traps. The cotton trade is threatened; well, what does that matter to you? Suppose you tried dolls' eyes... But how long is this to go on? Why on earth are you to suppose that the same process which ruined sugar refining will not in the course of time be applied to jam? And when jam is gone? Then you have to find something else. And believe me, that although the industries of this country are very various, you cannot go on forever. You cannot go on watching with indifference the disappearance of your principal industries.
The British turn-of-the-last-century debate eerily echoes the free trade debate in America today. It was an era like our own, with new technologies like the steamship and the telegraph ushering in fears of what a borderless global economy might bring. The political fate of a weakening superpower with global responsibilities was bound up in fears of its economic decline. Consider these familiar-sounding agenda items from a conference of Britain's Trades Union Congress: "the need to deal with competition from the Asian colonies" and "the need to match the educational and training standards of the United States and Germany."
The same accusations made in the United States today flew back and forth. Free traders were accused of viewing economics solely from the consumer's point of view and of favoring short-term consumption over long-term producer vitality. Protectionist concern for producer vitality was tarred as mere cover for special interests. It was debated whether protectionism stifled competition by excluding foreigners or preserved it by saving domestic competitors. It was debated whether the country was living off its past capital. It clearly was: by the late 19th century, Britain ran a chronic deficit in goods and only managed to balance its trade by exporting services as shipper and banker to the world and by collecting returns on past overseas investments. Free traders were accused of abstractionism; in the words of one book at the time:
The free trader hardly professes to base his opinions on experience; he is content to adduce illustrations from actual life of what he believes must happen.
Those words could have been written yesterday! The trustworthiness of British economists, ideologically mortgaged to the free-trade tradition of classical political economy, was questioned. Free traders denied the existence of a crisis on the grounds that the nation's sunrise industries were doing well (some were, but not enough to replace the sunset industries being lost). The two sides preened themselves on their cosmopolitanism and their patriotism, respectively.
In hindsight, the protectionists had the stronger case, but were outfought by the superior rhetorical and political skill of their rivals. The vested interests and experienced political tacticians were mostly on the free-trade side -- which included half of Chamberlain's own Conservative party, which split on the question. Free traders were defending a status quo bound up in concepts of economic liberty believed essential to British national identity, concepts that struck at the heart of what made Britons different from statist Continental Europeans. And free trade's opponents made no attack upon the economic theory behind free trade, beyond blankly denying its validity. This made it impossible for them to construct a case against free trade strong enough to pull it up by its roots.
Chamberlain struggled to enact a tariff from 1903 to 1906, when his party fought a general election, largely on this very issue. The divided Conservatives lost to the free-trade Liberal party. Their next chance came in 1923 and they lost again, this time to the free-trade Labour party. Thanks to the Great Depression, Britain finally abandoned free trade in 1931. But by then it was too little, too late. Although protectionism buffered Britain against the Depression somewhat, it was far too late to redeem the nation's position as a leading economic power. Today, outside the City of London's financial center, the one-time Workshop of the World, which generated a third of global industrial production in 1870, is an economic asterisk.
Ian Fletcher is the author of Free Trade Doesn't Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at email@example.com.