Saturday, 25 September 2010

Protection in Historical Perspective

From A.P. Thirlwall and Penélope Pacheco-López, Trade Liberalisation and The Poverty of Nations Cheltenham: Edward Elgar Publishing, 2008)
Protection in Historical Perspective

The best historical description of the role of protection in the early industrialisation phase of the now-developed countries is given by Ha-Joon Chang, the Cambridge economist, in three fascinating books: Kicking Away the Ladder: Development Strategy in Historical Perspective (2002); Why Developing Countries Need Tariffs? (2005); and Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World (2007). In this section we rely heavily on the evidence in these books.

The current developed countries of the world, including Britain, the United States and the countries of continental Europe and Scandinavia did not develop their economies on the basis of free trade. On the contrary, they heavily protected their domestic industries, and also did their utmost to prevent the countries that they colonised from competing with them. Britain started to protect and foster industries as early as the late 15th century when Henry VII took the deliberate decision to challenge the successful woollen manufacturing industry of Belgium and Holland, which was reliant on the export of British wool. He taxed the

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export of raw wool and banned export of some types of unfinished cloth in order to encourage processing at home. Henry VIII continued the protectionist policy, and by the middle of the reign of Elizabeth I, Britain had sufficient processing capacity to ban the export of wool entirely, which ruined the cloth industry of the Low Countries. Britain first became rich on its woollen industry nurtured by the State. Serious protection of new manufacturing industries started with Robert Walpole in 1721, using tariffs, subsidies, tariff rebates on imported inputs and other protective devices – all of which are deemed to be damaging to developing countries today. In the early 19th century, Britain imposed some of the highest tariff rates on manufactured goods in the world, averaging 45–55 per cent.

Britain also prevented its colonies from producing manufactured goods. William Pitt the Elder, the British Prime Minister from 1766 to 1768, is quoted by Friedrich List (1885) as saying that ‘the colonies should not be permitted to manufacture so much as a horsenail’. All sorts of devices were resorted to in the 18th century to keep the colonies as producers of primary commodities, giving subsidies to production, and reducing tariffs on raw material imports into Britain. A law passed in 1699 forbade the export of processed wool products from the English colonies, including Ireland. In 1700, all cotton goods from India were prohibited. In the 1720s, Walpole gave export subsidies and abolished import duties on raw materials produced in the American colonies so that their comparative

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advantage stayed in primary products. Some manufacturing activities were even prohibited, such as high value-added steel products in America. The use of tariffs by the colonies was either banned or, where used for revenue purposes, a tax was imposed on the industry concerned to neutralise its competitive advantage. In other countries not colonised by Britain, ‘unequal treaties’ were signed which took away the tariff autonomy of the countries and set ‘binding’ tariffs that countries could not exceed, typically about 5 per cent in countries such as Brazil, China, Japan, Siam (now Thailand) and Persia (now Iran). With regard to Europe, Britain also tried to protect itself against competition, although to less effect. The export of some types of machinery embodying new technology was banned, and for over sixty years from 1719 to 1782 there was a ban on the emigration of skilled labour from Britain. Those who defied the ban, and did not return within six months, had their possessions confiscated and citizenship withdrawn.

Britain’s industrial revolution gathered momentum in the mid-18th century, when protection still prevailed. It would be a rewriting of history, therefore, to argue that Britain started its development process on the basis of free trade. Britain did not start dismantling its structure of protection until the repeal of the Corn Laws in 1846, but by then it had already attained technological superiority over all other countries in the world. From then on, Britain preached free trade, but as List (1885) remarked, such preaching was like ‘kicking away

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the ladder’ up which one has climbed oneself so that no-one else can reach the top. List comments:

It is a very common clever device that where anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitan doctrine of Adam Smith, and the cosmopolitan tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Any nation which by means of 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 throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tone that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth. (pp. 295–6)

The United States followed Britain’s protectionist route at the end of the 18th century, contrary to Adam Smith’s advice in the Wealth of Nations. Here is what Smith had to say:

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. (pp. 347–8)

If the United States had followed Adam Smith’s advice, it would have remained an economic

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backwater for a long time, instead of becoming the richest industrialised country in the world. In the 19th century, the US economy was the fastest growing in the world, and also the most protectionist. Paul Bairoch (1993) has described the United States as ‘the mother country and bastion of modern protectionism’. It was the US Treasury Secretary, Alexander Hamilton in 1791, who first coined the term ‘infant industry’, and who first argued the case for industrialisation by protection using tariffs, subsidies and other means, recognising that without protection it would be impossible for America to compete against more advanced countries, notably Britain. List, in his classic book The National System of Political Economy, first published in German in 1841, claims that he first learnt the infant industry argument for protection while in exile in the US in the 1820s. The US first imposed tariffs on industrial goods in 1789. Protection continued to increase in the 19th century and by 1870, import tariffs accounted for more than 50 per cent of the value of imports. Protection continued in the early 20th century, and was even strengthened in the 1930s with the ‘Smoot–Hawley’ tariff which raised the average tariff on manufactured goods to nearly 50 per cent. According to Bairoch (1993) no other country implemented a more protectionist policy to promote its industry than the United States. Only after the Second World War did it start to liberalise its trade, having already established industrial supremacy, and was able to ‘kick away the ladder’, as Britain had done a century earlier.

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German industrial policy in the 19th century was heavily influenced by the views of List. He believed that import duties should not only be used to protect industry but also to promote it, supported by the State. Germany’s average tariff rate on industrial goods was not as high as in the US, but the German State actively promoted industry by ‘assigning monopoly rights, establishing industrial cartels, providing export subsidies, importing industrial experts and skilled labour, establishing large banks and making large investments in coal production and railway and road construction’ (Skarstein, 2007).

Japan was prevented from using tariffs up to 1911 because of the ‘unequal treaties’ signed, as referred to earlier. But after 1911, Japan embarked on a comprehensive development strategy, a major part of which included substantial tariff protection, combined with subsidies to key (infant) industries and State investment in infrastructure. Just before the First World War, Japan’s average tariff on manufactured imports was 30 per cent. The protectionist stance continued after the Second World War, with tariffs on car imports, for example, of nearly 40 per cent. Protectionism in the 1950s and 1960s was combined with the highest GDP growth rate of any country in the world. If Japan had listened to the free-traders, it would have no industrial base.

The average tariff rates on manufactured goods for selected developed countries in their early stages of development are shown in Table 1.1.

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Notice the very high tariff rates for the UK and US in 1820, the continued high rates in the US up to 1950, and the relatively high rates in France, Germany and Italy too. These are much higher rates that the average nominal tariff on imports of manufactures into today’s developing countries.

Average tariff rates for developed countries fell dramatically after 1950, but it is interesting to note that five of the six fastest growing countries during the ‘golden age’ of growth 1950–73 were still the highest tariff countries: Japan (8.05 per cent), Italy (4.95 per cent), Austria (4.90 per cent), Finland (4.25 per cent) and France (4.05 per cent). Germany was the only fast growing country in this period with the lowest tariffs.

The historical record tells the same story. O’Rourke (2000) takes ten of today’s developed countries over the period 1875–1914 and shows a positive relation between tariff rates and GDP growth, controlling for other factors influencing growth. Clemens and Williamson (2001) examine 35 developed and developing countries over the period 1875–1908 and 1924–34 and also find a positive relation between the level of tariffs and growth. Vamvakidis (2002) takes the inter-war period 1920–40 and finds a positive relation between tariff rates and growth across 22 countries (although not for the period 1870–1910). Studies of more recent years show the same positive relation between levels of trade restrictions and growth, controlling for other variables. Yanikkaya (2003) takes more than 100 countries over the period

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1970–97 and finds that both tariffs and export taxes seem to be associated with faster growth. He concludes: ‘these results . . . provide support for the infant industry case for protection and for strategic trade policy’. And Rodrik (2001) asserts: ‘cross national comparisons of the literature reveals no systematic relationship between a country’s average level of tariff and non-tariff restrictions and its subsequent economic growth rate. If anything the evidence for the 1990s indicates a positive (but statistically insignificant) relationship between tariffs and economic growth’ (italics in the original).

It can be said with some confidence that tariffs never harmed economic progress in the countries now developed. On the contrary, they ‘climbed the ladder’ on the back of tariffs and other protectionist devices. All we know is that as countries get richer they dismantle trade restrictions, not that they get richer because they liberalise trade. The issue for developing countries today is not whether to protect, but how to protect in order to ensure the dynamic efficiency of its nascent industrial activities.

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References:

Bairoch, P. (1993), Economics and World History – Myths and Paradoxes (Brighton: Harvester Wheatsheaf).
List, F. (1885), The National System of Political Economy, translated from the original German edition published in 1841 by Sampson Lloyd (London: Longmann, Green and Company).
O’Rourke, K. (2000), Tariffs and Growth in the Late 19th Century, Economic Journal, April.
Rodrik, D. (2001), The Global Governance of Trade: As If Development Really Mattered (New York: UNDP).
Skarstein, R. (2007), Free Trade: A Dead End for Underdeveloped Countries, Review of Political Economy, July.
Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (London: George Routledge and Sons).
Vamvakidis, A. (2002), How Robust is the Growth – Openness Connection: Historical Evidence, Journal of Economic Growth, March.
Yanikkaya, H. (2003), Trade Openness and Economic Growth: A Cross-Country Empirical Investigation, Journal of Development Economics, October.

4 comments:

Anonymous said...

I recommned this discussion between Ha-Joon Chang and some free traders at the Financial Times. Chang has excellent arguments and evidence, whereas the free traders come off as more like a bunch of religious cultists.

fellist said...

Cheers for that.

danielj said...

Thanks very much for this! The American Protectionist Society is way slime on resources.

As always, keep up the excellent work.

name789 said...

Andrew Jackson to Dr. Colman, April 26th, 1824.
http://www.yamaguchy.com/library/download/jackson24.htm

Thomas Jefferson to Benjamin Austin, January 9, 1816.
http://www.yamaguchy.com/library/jefferson/austin.html
"We must now place the manufacturer by the side of the agriculturist."