Man of Letters

“The Anti-History of Free Trade Ideology” by William R. Hawkins

We ask, would not every sane person consider a government to be insane which, in consideration of the benefits and the reasonableness of a state of universal and perpetual peace, proposed to disband its armies, destroy its fleets, and demolish its fortresses? But such a government would be doing nothing different in principle from what the popular school requires from governments when, because of the advantages which would be derivable from general free trade, it urges that they should abandon the advantages derivable from protection.

This statement by Friedrich List in his 1844 book The National System of Political Economy sets out the basic difference in assumption about the way the world works held by free traders and nationalists. While free traders such as the French economist Jean-Baptiste Say, author of the classical paradigm “Say’s Law of Markets,” believed that “All nations are friends in the nature of things,” their opponents on the Right considered economics a vital foundation of national strength in a world where international competition decided not just the fate of business enterprises but that of entire societies. The nineteenth century saw an intense debate between these points of view in Europe; a debate that generated most of the theories and lines of argument used, consciously or unconsciously, by those engaged in debate over American trade policy in the late twentieth-century. Free trade was then rooted in the then new school of classical liberalism of England and France. Nationalist thought drew on the ancient practices of mercantilism enlivened by the insights from contemporary American and German thinkers, though all nations had adherents of both doctrines.

A bust of the German economist Friedrich List. List emigrated to the United States and admired its national model of political economy under the American System.

Friedrich List is the best-known “nationalist” writer. Forced into exile from his native Wurtemberg because of his advocacy of industrialization and a commercial union of many states that then compromised Germany, List came to the United States at the suggestion of General Lafayette who introduced him tod Andrew Jackson, Henry Clay, James Madison, and other national leaders. List found in the previous works of Alexander Hamilton a line of reasoning similar to his own. His pen was soon employed supporting U.S. policy of protective tariffs against protests from British manufacturers who then dominated world markets. He saw in the United States the best model for economic progress and joined several groups promoting science and industry. Returning to Europe as an American diplomat, he promoted railway projects in Germany and joined the battle over trade policy with a barrage of articles and pamphlets culminating in The National System of Political Economy, a massive work that pitted history and realpolitk against the abstract theories and idealism of the classical liberals.

The New World Order: Old News

The basic flaw in liberal theory according to List was that it “has assumed as being actually in existence a state of things which has yet to come into existence. It assumes the existence of a universal union and a state of perpetual peace.” This is an overstatement, but it still speaks to the main point in dispute. The liberals did not so much assume that the world had turned peaceful, as they expected the world to turn peaceful as a result of the interdependence fostered by free trade. The British radical Richard Cobden, for example, claimed that commerce was “the grand panacea” and that under its influences “the motive for large and mighty empires, for gigantic armies and grand fleets would die away.” The French economist Frederic Bastiat argued that “Free trade means harmony of interests and peace between nations,” and went on to state that “we place this indirect and social effect a thousand times above the direct or purely economic effect.” It was not a global economy that the liberals were advocating. Trade on a world scale had been conducted for several centuries by the liberals came on the scene. It was a new world order that the liberals desired. Free trade was merely a means to that end.

“Columbus Taking Possession of the New World,” 1492. Painting published by L. Prang and Company, Boston, 1890.

Trade between Europe and Asia predates the discovery of America. However, most historians think the start of a truly worldwide economic system at the end of the fifteenth century when maritime explorers discovered both the New World and the sea-route around the horn of Africa into the Indian Ocean. Both of these discoveries were largely motivated by a desire to control trade and markets. The advance of the Ottoman Turks in the Eastern Mediterranean, particularly the capture of Constantinople in 1453, forced the Genoese merchants out of the lucrative trade in silks and spices brought westward by caravans from Asia. Genoese sailors and capitalists needed a way to circumvent not only the Turks but also their Venetian rivals by finding a new route to Asia. They found it working with Portugal and Spain. The personification of this strategy was Christopher Columbus, a Genoese captain sailing for the Spanish crown in an attempt to find an Atlantic route to Asia to compete against the Portugese route around Africa.

This was dominated by a school of political economy known as mercantilism. Under this philosophy, governments encouraged trade and manufacture in order to create both a prosperous national economy and a powerful nation-state. Precise measures and objectives varied with time and circumstance. Policy needed to be flexible, but the strategic goal was consistent; if the nation’s merchants and industrialists were productive and able to dominant large markets, then the governments had a strong material base to support their position by diplomacy and, if need be, by war.

An imaginary seaport with a transposed Villa Medici, painted by Claude Lorrain around 1637, at the height of mercantilism

The opening of the new trade routes to the East and of entire continents in the West brought great prosperity to Europe and America while introducing substantial progress to Asia, but it did not bring peace. Wars both military and commercial were fought for control of the new wealth and resources with the winners able to expand the size and scope of their operations.

After each series of global wars, there arises for a time what can be called a liberal school of thought that argues the time is ripe for a new world order that will put the age-old conflicts for wealth and power behind it. These movements are always strongest in the victorious countries whose enemies have, for the moment, vanished. Success leads some to believe that peace and prosperity can be maintained without further effort. The time has come, they claim, to enjoy the fruits of victory rather than make continued sacrifices for the future; the morally repugnant methods of national advancement can be safely abandoned in pursuit of more enlightened goals.

“David Hume,” Painting by Allan Ramsay, featured in Scottish National Portrait Gallery.

The colossal wars of the eighteenth century, which were offshoots of the dynastic struggles and the balance of power in Europe, brought complaints from progressive thinkers. In England David Hume claimed that nations were mere “accidents of battles, negotiations and marriages.” He denounced mercantilist practices for strengthening the state at the expense of individuals, for promoting wars, and for seeking to cripple the economic advancement of rival nations. Like other intellectuals, he considered himself a cosmopolitan. His love for French culture led him to opose his own country’s efforts in the Seven Years War (the war that pushed France out of North America) and to claim that there was “nothing over equal in absurdity and wickedness as our present patriotism.”

Across the channel, Voltaire complained of policies that enabled nations to “destroy each other at the extremities of Asia and America.” Such activities make us “enemies of the human race” he cried. Both Hume and Voltaire became free traders to promote world peace. Hume constructed a simple model of price adjustments based on the flow of precious metals that would automatically bring trade into balance without the need for government controls. However, like later theories that offer devaluation as a cure for trade deficits, Hume did not adequately consider that trade could be conducted in terms of property and productive assets and not just in goods and services. Those who profit from a trade surplus generate surplus capital that can be used not only to build up their own economies but also to dominate the finances of other states.

This was an old practice even when Hume wrote, and one that still worries practical statesmen. Indeed, in Hume’s model a trade surplus is actually harmful in that it promotes both price inflation and low interest rates that drive out capital. Yet the recent history of Hume’s day proved him wrong. Those who had run trade surpluses with Spain had prospered, while Spain had declined despite the output of its gold and silver mines in the Americas. Hume was less than half right. He saw the price revolution as Spanish treasure moved through the European economy. But he missed the energizing effect this movement had on Spain’s trading partners; an effect the surplus nations wanted to maintain, and their rivals wished to emulate. British merchants were always complaining that the influx of capital to Holland from its trade surplus allowed Dutch merchants to borrow at half the interest rate charged in London.

Misperception and Decline: Spain and Holland

In the short run, Spain could consume but it could not produce which, in the long-run, proved fatal to its standing as a great power and as an advanced society. That Spanish leaders were deluded by a false sense of prosperity is portrayed in this boast of Alfonzo Nunez de Castro in 1675:

Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade; Italy and Flanders their linens. . . so long as our capital can enjoy them, the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody.

Yet by 1675 Spanish per capita income had been falling in absolute terms for perhaps half a century. And though absolute decline probably bottomed out in the 1680s, relative decline continued as other nations grew faster than sluggish Spain. Today it is often forgotten that Spain was once the most wealthy and powerful state in Europe and America.Spanish imports were double its exports and the precious metals became scarce within weeks of arrival of the treasure fleets, as the money flowed to Spain’s creditors. What industry there was, along with banking and shipping, was in the hands of foreign owners. As a modern historian Jaime Vicens Vives has concluded, “this was one of the fundamental causes of the Spanish economy’s profound decline in the seventeenth century, maritime trade had fallen into the hands of foreigners.” He concluded that the “opening of the internal market to foreign goods” produced a “fatal result.” Spain’s exports were at the same time under heavy pressure by competitors in third country markets. A nation that cannot control its domestic market will seldom be able to sustain itself in foreign markets which are inherently more vulnerable and unstable.

The Dutch played a major role in undermining Spanish power, but would soon fall prey to the mercantilist policies of England and France. The of great power enjoyed by the United Provinces in the seventeenth century did not last into the next. Simon Schama’s recent study of the Dutch at the height of their power is entitled The Embarassment of Riches, but by the mid-1700s a different image was conveyed by visitors to major Dutch ports. James Boswell wrote from Utrecht in 1764, “Most of their principal towns are sadly decayed, and instead of finding every mortal employed, you meet with multitudes of poor creatures who are starving in idleness. Utrecht is remarkably ruined.”Once against it was shown that those who rely on trade rather than on the strength of their own productive capacities have built their castles on sand. C.R. Boxer, the premier modern historian of the Dutch commercial empire, has described the process of its decline:

When the protectionists measures adopted by neighboring countries from the time of Cobert onwards effectively stimulated the consumption of their own manufactured goods at the expense of Dutch exports, the Dutch industrialists could not fall back on an increased internal demand, nor was it possible to greatly increase their sales in the tropical dependencies. Moreover, the Dutch industries had originally been primarily finishing industries for the products of other countries. . . but in the course of time these countries made sufficient technical progress to undertake these finishing processes themselves.

“The Battle of Leghorn,” 4 March 1653. Painting by Reinier Nooms.

The Dutch also lost control of the fisheries to foreign competition and their ship-building industry decline as yards of other nations expanded with the aid of government subsidies and navigation acts that restricted foreign carriers. As the Dutch economy stagnated, tax rates were increased to cover expenses — a short-run expedient that further slowed economic activity. As historian Charles Wilson has noted, “The growing competition of rising economies like England and France and the increasing burden of taxes and costs was reflected in the absolute decline in former great centres of industry.”At the end of the seventeenth century, the United Provinces could send one-hundred warships to sea manned with twenty-four thousand sailors and marines. The Dutch Stadtholder, William of Orange, could become king of England in 1688. A century later, the Dutch could send to sea only seventeen warships with three-thousand men and the country had become a mere pawn in the struggle between the new world powers of England and France.

Ricardo & Company: Classic Liberals

To the classical liberals, the rise and fall of nations and the profound impact of such changes on the lives of ordinary people are of little interest. As David Ricardo (whose theory of comparative advantage is still a mainstay of free trade argument) stated in 1813, “parliaments have something more to do than furnish ministers with the means of preserving the greatness and glory of the country.” England was at war with Napoleon and Ricardo, a member of the British House of Commons, was arguing against financing the war with debt as proposed by the Chancellor of the Exchequer. Ricardo favored the “pain” of direct tax rather than a sinking fund to finance military operations because “when the pressure of the war is felt at once, without mitigation, we shall be less disposed to engage in an expensive contest.” He felt it his duty to see that “the resources of the country are not misapplied by the arrogant and ambitious of our government or used for purchases of ambition, rapine, and desolation.” He was quite the dove, which put him the mainstream of liberal opinion.

“The Battle of the Saintes” (1782); a painting by Thomas Whitcombe, 1782. On the right, the French flagship, the Ville de Paris, in action against HMS Barfleur.

Ricardo believed gain from trade to be so great that nations would continue to trade with one another even in time of war. Thus England did not have to worry about being dependent on foreign imports and raw materials, since these flows would not be interrupted. This was an odd argument given that Napoleon had attempted to isolate England from European trade invoking the Continental System. The Royal Navy had, of course, long blockaded France. The desire to destroy trade was so great in both Paris and London that in 1812 Napoleon invaded Russia to force compliance with the Continental System, and the U.S. declared war on England in part because of British depredations on American shipping. In this commercial warfare, Napoleon failed because his armies were not as successful in dominating Europe’s ports as the Royal Navy was in dominating the seas.Nor did the future confirm Ricardo’s optimism. The strategy of striking at the foundation of the opponent’s economy, using everything from U-Boats and strategic bombing to guerrilla raids and economic sanctions, became increasingly popular as the importance of production and the balance of power increased.The conflicts of the French Revolution and Napoleon lasted a quarter-century, and in their wake came calls for a new world order. The principles for this order were laid out by Immanuel Kant in his tract Perpetual Peace, written in 1795 while the wars were still in their early stages. “There is only one rational way in which states coexisting with other states can emerge from the lawless condition of pure warfare.” Argued Kant:

Just like individual men, they must renounce their savage and lawless freedom, adapt themselves to public coercive laws and thus form an international state (civitas gentium), which would necessarily continue to grow until it embraced all the peoples of the earth.

Immanuel Kant, 1790

Kant acknowledged that the time was not ripe for such a radical transformation, but he did not believe that a “gradually expanding federation likely to prevent war” was possible. It would be necessary to prevent states from engaging in acts of imperialism, intervening in the internal affairs of others, maintaining standing armies, employing spies, or using public debt to finance war. And, of course, “free trade” was to be promoted to bind people together as individuals practicing peaceful exchange. These have been basic tenets of both classical (libertarian) and modern (welfare) liberalism ever since.The nineteenth century liberals drew on Adam Smith, depicting The Wealth of Nations (1776) as a work of doctrinaire free trade thinking. They were only partially correct. Smith did, in standard liberal fashion, denounce the “capricious ambitions of kings and ministers” and the “mean rapacity, the monopolizing spirit of merchants and manufactures” who prospered under mercantilism. Yet he did not take the final leap into cosmopolitan-pacifist ideology common to those further to the left. He thought “the art of war is certainly the noblest of all arts,” and that England must be prepared for war because “a wealthy nation is of all nations the most likely to be attacked.” In a famous passage, Smith wrote that “defense, however, is of much more importance than opulence,” a statement which any mercantilist would agree.

Adam Smith’s Mercantile Interests

An engraving of Adam Smith, English economist and Customs Official, famous for his treatise An Inquiry into the Nature and Causes of the Wealth of Nations (1776), famous for positing the international division of labor, giving credence to modern free trade theory, nevertheless expressed reservations in favor of a national program of political economy.

On the topic of the Navigation Acts, the centerpiece of British policy, Smith wrote that the “defense of Great Britain depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.” Smith also approved of paying bounties on the fisheries because they increased the supply of sailors and ships. He likewise approved of paying bounties for the production of naval stores in the American colonies and prohibiting the export of naval stores from the colonies to anywhere outside of the British Empire. Such regulations made the empire less dependent on the importation of strategic goods from foreign sources.Smith also felt that England was justified in using tariffs and other restrictions in retaliation for policies used by others to block British exports. Only if confronted by trade wars could foreign states be persuaded to negotiate reciprocal agreements to liberalize trade, Smith contended.British historian Corelli Barnett, in his book The Collapse of British Power, criticizes Smith because “he could not foresee that national defense would not come to depend just on seaman and naval stores, but on the total industrial and economic capabilities.” This complaint is not entirely justified, inasmuch as Smith left the door open for an expanded application of mercantilist doctrine when he wrote:

It may be advantageous to lay some burden upon foreign imports for the encouragement of domestic industry, when some particular industry is necessary for the defense of the country. . . It is of importance that the kingdom depend as little as possible upon its neighbors for the manufactures necessary for its defense.

“Iron and Coal,” 1855–60. Painting by William Bell Scott illustrates the rise of coal & iron working in the Industrial Revolution & the heavy engineering projects they made possible.

The dynamics of the Industrial Revolution, which was just getting start in Smith’s day, quickly expanded the horizons of the security planning. More than inventions and factories were involved; a system evolved that depended on the integration of a wide range of economic activity. This industry depended on raw materials and power supplies; on one sector’s manufacturing the inputs for other sectors; on greatly improved transportation, and on an organized effort of education and research aimed at maintaining the flow of new technologies. A mass market was needed to support mass production. Also needed was a government that could maintain order, since the disruption of one vital sector could cripple the entire economy. Thus an advantage would occur to any system that could be unified under a single national or imperial authority. The continent-spanning United States is a perfect example of a society with such an advantage, for it has never had to rely on external trade to any great extent.

Wealth Consumption Vs. Creation

Each new wave of the Industrial Revolution has accelerated this trend, not only in the defense industry but in the economy as a whole. The 1991 Persian Gulf War proved again the importance of technological superiority on the battle field. American security depends on American industry maintaining its lead in a broad range of fields and production processes. Federal spending for weaponry does not provide a level of demand wide enough or deep enough to support technological preeminence for the economy as a whole. Commercial demand must do this both to keep domestic living standards and employment up during peacetime, and to provide an industrial base that can be mobilized in time of large-scale war.

As economists Stephen S. Cohen and John Zysman argued in their 1987 book Manufacturing Matters:

America must control the production of those high-tech products it invents and designs—and it must do so in a direct and hands-on way. . . First, production is where the lion’s share of the value added is realized. . . This is where the returns needed to finance the next round of research and development are generated. Second and most important, unless [research and development] is tightly tied to manufacturing of the product. . . R&D will fall behind the cutting edge of incremental innovation…High tech gravitates to the state-of-the-art producers.

This 1776 painting by Joseph Wright of Derby illustrates Eighteenth century ideas of scientific discovery, progress and invention in Great Britain.

That this is true has been documented by professors Richard Florida (Carnegie Mellon) and Martin (University of California-Davis) in their recent book The Break-Through Illusion. U.S. leadership in basic science and start-up technologies is not translated into mass production as readily as in Japan because of the nonintegrated nature of American business. The isolation of basic R&D in small shops in the Silicon Valley or other high-tech corridors also allows foreign firms the shot at acquiring American breakthroughs as U.S. companies in an open market auction. In recent years hundreds of small, high-tech concerns have been bought out by foreign firms.With over a century and a half of modern industrial experience, it is odd that so many commentators have yet to grasp the extent of integration, or the long-run, dynamic nature of technological progress. Free trade advocates continue to cling to the largely static models derived at the very dawn of the Industrial Revolution, when the idea of rapid progress on today’s scale was unknown. This explains the continued popularity of Ricardo’s comparative advantage concept where a slight price difference at a given point in time is considered adequate cause to abandon an entire field of production and its future development in favor of imports.

Early industrialised region at Barmen in the Wupper Valley, 1870, in the the present-day state of North Rhine-Westphalia. Painting by August von Wille.

List rejected this notion asking “Who would be consoled for the loss of an arm by the knowledge that he had nevertheless been able to buy his shirts forty percent cheaper?” He thus drew the vital distinction between consumption and production; between the use of wealth and the creation of wealth. In the long run, “The power of producing wealth is infinitely more important than wealth itself,” he argued.

American businessman have been roundly criticized for short-term thinking; for being more concerned with making the annual report look good than considering where the firm will be ten years from now; for being more concerned with current profits than long-term market share as is the practice with many of America’s overseas rivals. This can in part be blamed on the practice with many of America’s overseas rivals. This can in part be blamed on the kind of thinking, espoused by Ricardo and the other classical economists, which permeates business schools and business publications. Businessman may also feel financial pressure to behave in this manner; but those in government have no such excuse. National leaders have a duty to think strategically. They have been entrusted to make policy for a country whose existence is presumed to be perpetual. By its actions, government should work to counter the pressures that foster short-sighted thinking the private sector, as is the case in those foreign states renowned for their success in the world market.

Hatred of Government or Sovereignty?

“Liberty Leading the People,” commemorating the July Revolution of 1830, which toppled King Charles X of France. Painting by Eugène Delacroix, 1830.

At the core of classical liberalism is hatred for government. It is this anti-statist bias that attracts so many modern conservatives to its creed. It should be noted, however, that in the nineteenth century the bloated and intrusive welfare state which conservatives deplore had not been instituted. National security was the main activity of kings and cabinets. It was military preparedness, great power diplomacy, and empire building that liberalism attacked in language that would warm the heart of any New Leftists. In classical liberal circles, according to historian Bernard Semmel, “Strategy, any plan for exerting or projecting military or naval power, was ipso facto wrong.”

Those modern conservatives who adopt classical liberal doctrine in the belief that they have discovered the legacy left by a school of allies should ponder the actual priorities of those nineteenth-century activists. As Semmel observes, by the end of the century the Radicals were abandoning laissez-faire to embrace new social programs in an effort to win votes away from the conservatives who were promoting a program of national renewal:

They acted to block labor support for a neo-mercantilist Tory policy by promising such reforms as age-old penisions and sickness and unemployment benefits. . . to enlist the interest of the trade unions against the alternative use of available tax revenues for armaments.

The same pacifist motives were at work among French liberals. Jean-Baptiste Say felt that in regard to national security “far from protecting it, a great military apparatus is what most jeopardizes it.” He held to the fashionable view that fleets and armies invited wars rather than deterred them. Back in England, James Mill thought that war is where “the ruling few always profit at the expense of the subject many,” but he believed the days of strife were over. Writing in 1821, Mill claimed:

There is, in present advanced state of the civilized world, in any country having a good government and a considerable population, so little chance of civil war or foreign invasion, that, in contriving the means of national felicity, but little allowance can be rationally required of it.

Any problems remaining, Mill would refer to an international court of arbitration. Like nearly all liberals, Mill believed that while a nation could have economic connections anywhere in the world, it had no legitimate political or security concerns outside its own borders.

Economics was to be separated from politics, wealth from power. Free trade meant non-political trade; a commerce of peoples replacing the rivalry of nations. Jeremy Bentham, for example, wanted to replace “offensive and defensive treaties of alliance” with “treaties of commerce and amity.” Thomas Paine, finding that “war is the system of Government on the old construction. . . Man is not the enemy of Man,” listed among his revolutionary proposals that all warships be converted into merchant vessels. J.B. Say called for an end to the diplomatic corps, arguing that “it is not necessary to have ambassadors. This is one of the ancient stupidities which time will do away with.” They should be replaced by consols whose function would be to promote free trade.

These changes were advanced as part of the process of liberating individuals from external constraints on their actions. Liberals viewed people as equal individuals, not as members of particular national states. Civil society’s only valid activity was the protection of individual rights; the nation-state had no independent status or mystical nature to which individuals owed any allegiance or duty that entailed any sacrifice to narrow self-interest. There would only be no national interests, indeed no international relations — only “citizens of the world” going about their private affairs. Yet for the general population it was certainly a delusion to believe that as individuals they could still triumph if the nation they inhabited failed. An expanding society provides far more opportunities for individual advancement whether in business, science, the arts, or publicservice than does a society in decay. History is filled with stories of the decline and fall of nations, empires, and even entire civilizations. These have not been considered liberating experiences to be recommended to others.

Many liberals believed that their ideal world could be brought into existence merely by an act of will. Frédéric Bastiat, who is Ronald Reagan’s favorite economist and whose works are still popular with modern libertarians, argued in 1849 that France should be a model for the world by adopting free trade and disarming unilaterally. “I shall not hesitate to vote for disarament,” he proclaimed, “because I do not believe in invasions.” Bastiat continued:

If the emperor Nicholas should venture to send 200,000 Muscovites, I sincerely believe that the best thing we could do would be to receive them well, to give them a taste of the sweetness of our wines, to show them our stores, our museums, the happiness of our people, the mildness and equality of our penal laws, after which we should say to them: Return as quickly as possible to your steppes and tell your brothers what you have seen.

Bastiat did not bother to mention how he would get the Russians to return to their steppes if they did not wish to go. Nor was this academic question given France’s problems over the next century with “visiting” Germans.

Cobden and the Setting of the British Sun

Depiction of Richard Cobden; a replica painting by Giuseppe Fagnani, 1865.

Bastiat was influenced by Richard Cobden, the leading champion of free trade in England and a tireless worker in the anti-imperialist and anti-war movements. Indeed, in 1842 he stated, “It would be well to engraft free trade agitation upon the peace movement. They are one and the same cause.” A “Little Englander,” he hoped that free trade would destroy the British Empire as each colony and dominion formed stronger economic ties outside the empire than within it. “The Colonial System,” he argued in 1835, “can never be gotten rid of except by the indirect process of free trade which will gradually loosen the bonds which unite our colonies to us by a mistaken notion of self-interest.” Under free trade, Cobden opined, the colonies:

. . . will be at liberty to buy whereever they can buy cheapest, and to sell in the dearest market. They must be placed in the same predicament as if they were not part of His Majesty’s dominions. When, then, will be the semblance of a plea for putting ourselves to the expense of governing and defending such countries?

By the end of the century, this liberal argument had come full circle with writers such as Norman Angell arguing that the empire should be liquidated because it is no longer paid for itself, as other nations enjoyed an ever larger share of its trade.

An illustration manifesting imperial solidarity and patriotism within the British empire.

As an economic determinist, Cobden would not have understood the ties of heritage and culture that rallied people in Canada, Australia, New Zealand, India, South Africa and the United States to England’s side in two world wars. Yet free trade took its toll on the strength of the British and imperial economy; for under its sway, even though “the sun never set” on the world’s largest empire, London never integrated its holding into a balanced and secure based for economic expansion. By the dawn of the twentieth century, only one-fourth of the imports into the British Isles came from the overseas empire. Meanwhile, the United States supplied more steel to the empire than did England (an important statistic given that 60 percent of British investment in the empire was in railroad construction, a major user of steel). Indeed, prior to World War I, both the United States and — more significantly from a political standpoint — Germany surpassed England as industrial powers, by developing large and protected domestic markets augmented by advantageous trade agreements. Despite the rhetoric of liberals, the record shows that no nation reached the first rank of industrial power, or managed to stay there by adopting free trade.

“Free Trade England Wants the Earth.” Pro-Republican Party Judge magazine depicts US protectionism shielding the country from the British free trade spider’s grasp, Oct. 27, 1888.

The industries that formed the core of the British economy in the nineteenth century, textiles and steel, were developing 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 technologies, emerged after 1870. These new industries were fostered by states that still practiced mercantilism, including protectionism. In the late 1800s, Britain ran large and consistent deficits in merchandise trade. It came to rely on revenues from shipping, insurance, and banking, and on income from overseas investments rather than industrial exports to keep the current accounts in black.By the 1880s, even some liberals were worried; prominent commercial lawyer and judge, Lord Penzance, asked: “Will the lion always possess his share? Does that not depend on how he conducts himself?” He went on to warn:

The advance of other nations into those regions of manufacture in which we used to stand either alone or supreme, should make us alive to the possible future.  Where we used to find customers, we now find rivals. . . prudence demands a dispassionate inquiry into the course we are pursuing, in place of a blind adhesion to a discredited theory. 

Hamiltonomics

Portrait of “Alexander Hamilton” by John Trumbull, 1804.

Across the Atlantic, American statesmen had a different agenda than the classical liberals. Their goal was not to fragment an empire but to build one; to unite thirteen former colonies into a nation that could expand across a continent and develop its abundant resources. One of the seminal documents of American history is the “Report on Manufactures” written in 1791 by Alexander Hamilton, Secretary of Treasury in President George Washington’s administration. In it, Hamilton laid out the economic foundation of the new republic: balanced growth between the industrializing north and the agricultural south. Each section would be the best customer of the other. “Ideas of contrariety of interests between the Northern and Southern regions of the Union are as unfounded as they are mischievous” he declared. “Mutual wants constitute one of the strongest links of political connection.”The Constitution embodies this thinking. Article 1, section 10 removes the power to regulate interstate commerce from the states, thus creating a large internal market free of local barriers. This had been the dream of the seventeenth-century mercantilist Jean-Baptiste Colbert for France, but he had been unable to overcome the resistance of provincial interests. IT was the dream of Friedrich List for Germany. And it is the dream of those who have put together the Europe 1992 economic union. Yet creating a large market is not an end in itself; it is to serve as a based for economic growth by the nation’s business community and workforce. The Founders knew what Swiss historian Gabriel Ardant has generalized for all Western nation-states:

We must not conceal the fact that the awareness of belonging to a nation depends to a degree upon the satisfaction that individuals derive or hope to derive from community life. In this respect, in contemporary industrial societies, we must attribute a very great importance to economic growth.

In pursuit of economic growth, Article 1, section 8 gives Congress the Power to regulate commerce with foreign nations, including the enactment of tariffs on imports. Section 9, however, prohibits the levying of taxes on exports. The clear purpose of treating imports and exports differently is that the former are to be controlled, the later encouraged. James Madison, speaking at the constitutional convention, defended tariffs as necessary for “revenue, domestic industry and to provide equitable regulations from other countries.” All three of these functions have been observed in recent years.

Hamilton’s report advocated a protective tariff, fearing that without import controls the southern states would turn to England and France for industrial goods rather to northern states. The lure of foreign trade with Europe could pull the Union apart. This nearly happened in the Civil War when the Confederacy turned to its overseas trading partners for aid. There was a wide-spread belief that “King Cotton” was so vital to the British textile industry that London would intervene only Richmond’s behalf. Britain did provide aid to the Confederacy that brough them to the brink of war until Union victories persuaded them that the rebellion was a lost cause. Interestingly, Cobden and his fellow liberals opposed British aid to the Confederacy on moral grounds, lecturing unemployed textile workers about how the abolition of slavery in the Southern states was worth the disruption of their jobs by the Union blockade on cotton shipments.

It was only after the war that Hamiltonian strategy of a protected domestic market was fully implemented and the south was integrated into the national economy.

That foreign trade is still a divisive element is demonstrated by the fact today a majority of American state governments maintain “economic development” offices in Tokyo where deals are negotiated on the basis of supposed state or local advantages even though such agreements may undermine the future of the U.S. national economy as a whole. In the absence of a comprehensive national policy, Tokyo has been able to play states and local communities against each other, winning huge concessions in taxation, financing and public services — gaining American subsidies for Japanese expansion.

Hamilton had read Adam Smith, but he did not believe free trade served the needs of the United States. Even before the revolution was over, he had written his famous “Continentalist” essays in which he stated, “There are some who maintain that trade will regulate itself [but] this is one of those speculative paradoxes. . . rejected by every man acquainted with commercial history.” Richard B. Morris in his biography of Hamilton observed that his “brand of conservatism meant holding to the tried and proven values of the past, but not standing still. . . He could scarcely allow government to stand inert while the economy stagnated or was stifled by foreign competition.”

Another of Hamilton’s biographers, Forrest McDonald has argued that:

While rejecting laissez-faire, however, Hamilton was emphatic in his commitment to private enterprise and the market economy. Primarily this commitment was moral, not eocnomic. Hamilton believed that the greatest benefit of a system of government-encouraged private enterprise was spiritual — the enlargement of the scope of human freedom and enrichment of the opportunities for human endeavor. 

The Scourge of Napoleon,” was illustrated by the father of the modern political cartoon was James Gillray (1756-1815), and makes light of the balance of powers game between Great Britain and France as they sought to carve spheres of influence for themselves.

Thomas Jefferson initially opposed Hamilton’s trade and industrial policies. As an agrarian, Jefferson was quite content to let the factory system, he envisioned in terms of dirty smokestacks and urban slums, stay in Europe. Writing in 1785, Jefferson said, “Were I to indulge my own theory, I should wish (our states) to practice neither commerce nor navigation but to stand, with respect to Europe, precisely on the footing of China. We should avoid wars and all citizens would be husbandman.” Not a wise choice of comparison given that China would soon be carved into foreign spheres of influence by the industrial powers. Jefferson as President had attempted to implement several of the fashionable liberal notions about foreign affairs. he laid up most of the Navy, replacing what had been the best built and most heavily armed frigates in the world with tiny coastal gunboats which he thought were less provocative. He reduced the diplomatic corps. When British warships impressed American seaman he resorted to economic sanctions in the belief that the benefits of free trade were so great, denying them to an enemy would force concessions. Jefferson changed his views. Writing to J.B. Say, Jefferson argued for a new industrial policy including tariffs.

The prohibiting duties we lay on all articles of foreign manufacture which prudence requires us to establish at home, with the patriotic determination to use no foreign articles which can be made within ourselves without regard to difference in price, secure us against a relapse into foreign dependency.

An elder Thomas Jefferson despite his youthful zeal for free trade, conceded his preference for a program of national economy to include tariffs, after the wartime experience during the War of 1812 and the problem presented by economic dependence upon foreign powers and the United States’ lack of military preparedness. This was a notable political concession to his foe Hamilton.

The Hamiltonian program became a party line of the Whigs before the Civil War and the Republican Party afterwards. “By the election of 1880 protectionism virtually equaled Republicanism,” states historian Tom E. Terrill in his book The Tariff, Politics and American Foreign Policy 1874-1901:

The GOP, which included champions of industrialization and spiritual heirs of Hamilton and Clay among its factions, naturally took up protection. . . The Grand Old Party could respond more positively to the needs of industry.

Theodore Roosevelt – Official White House portrait by John Singer Sargent

At the beginning of the twentieth century, as the United States became the world’s leading industrial power, Theodore Roosevelt exclaimed, “Thank God I’m not a Free Trader.” And Henry Cabot Lodge wrote an approving biography of Hamilton claiming that Hamilton’s case for a protective system in support of “industrial independence and the establishment and diversification of industry” had never been overthrown. In contrast, the Democratic Party has been home of a succession of groups hostile to industry: populists, socialists, environmentalists. In the nineteenth century, the Democrats tried to sell free trade on the grounds that imports would lower prices for the working man. However, the GOP held the votes of industrial labor because workers knew that they had to earn their pay before they could worry about how to spend it. Woodrow Wilson raised the peace issue when he made free trade the third of his “Fourteen Points” proposed to create a new world order after World War I. However, his efforts were not persuasive either at home or abroad.

As the first true “war of production,” World War I served to confirm the validity of mercantilism for most practical statesmen. Even in England, the home of free trade ideology, a serious rethinking of policy was triggered by the war. In 1917, the Imperial War Cabinet adopted a resolution calling for a system of trade preference within the British Empire, arguing that:

The time was arrived when all possible encouragement should be given to the development of imperial resources, and especially to making the Empire independent of other countries in respect of food supplies, raw materials and essential industries. With these objects in view the Conference expresses itself in favour of: (1) a system by which each part of the Empire. . . will give specially favourable treatment and facilities to the produce and manufacturers of other parts of the Empire.

However, after seventy years of free trade, England’s decline had progressed too far to be reversed, though some improvement was possible. In 1913, 80 percent of the imports of the British Isles came from outside the Empire. By 1938 this foreign share had been reduced to 61 percent. And non-Empire imports had been cut from 22 percent of England’s GNP in 1913 down to 10 percent by 1938. Yet England still found its industrial base inadequate in the face of revived threat from Germany under Hitler. With the support of American finance and industry, England would have found itself bankrupt in 1942.

Today’s New Mercantilism

Boris Yeltsin makes a speech from atop a tank in front of the Russian parliament building in Moscow, U.S.S.R., Monday, Aug. 19, 1991. (AP Photo)

This discussion of the historical roots of today’s free trade philosophy is relevant on practical as well as intellectual grounds. As the British economic historian Charles Wilson has noted, the move towards a new mercantilism has accelerated in most of the world, the result being the “tendency of international trade to revert to conditions which in some ways resemble those of the seventeenth century rather than those of the nineteenth.” The oil shocks of the 1970s started this trend, but it has been reinforced by the aggressive commercial policies of Japan and the East-Asian “mini-dragons,” and has been further advanced by the the formation of the giant, united European economic bloc. The collapse of communism in Eastern Europe has opened a new world of intense competition between American, West European and Asian firms which cannot be isolated from their political-diplomatic ramifications.

A symbol of Singapore, the Merlion was first created in 1964. Photo Credit: Erwin Soo

The object is not to suspend trade, but to manage it in ways that support the advancement of the national economy. Just as arms controls agreements do not automatically produce peace and security; trade agreements do not automatically produce jobs and profits. It is all in the details.

The wise policymaker knows that the game of international economics in the fullest meaning of the term. While there can be mutual gains from particular transactions, trade overall can be very asymmetrical in its effects, producing losers as well as winners. In a whole host of strategic economic sectors, the expansion of one nation’s market share comes at the expense of the share held by its rivals. Since no people can live beyond their ability to produce, the battle is for control of the most productive industries and for a position from which future technological advances can be made. The United States, with the world’s largest domestic market, a skilled work-force, and an established techno-industrial base, has every inherent advantage in this global contest. It only needs leaders in government who understand that the game is being played for very high stakes.

Of most concern to the United States has been the rise of Japan as a high-tech industrial rival that has also converted its trade surpluses into a substantial financial position in world capital markets and in banking. The policies of Japan’s giant trading companies are reminiscent of those formed during the mercantilist era when statesmen like the French minister Jean-Baptiste Colbert compared his Grandes compagnies to “armies” attacking economic foundations of rival nations. Colbert believed that, “commerce is a perpetual and peaceable war of wit and energy among nations.” His use of the word “peaceable” is somewhat misleading; Colbert’s mercantilism served a very militant policy of expansion under Louis XIV.

Photo Credit: Flickr Creative Commons / Andrew Mehri.

The penetration of the American market by Japanese products once again demonstrates the success of mercantilist practice against free trade theory. Charles F. Doran, an international relations professor at John Hopkins University, has noted that, “Japanese trading success is dependent upon access to markets more open than its own.”

Japan's giant trading companies concentrated the bulk of their operations at home; the jobs they created were Japanese jobs; the income they generated were taxed by the Japanese government. . . Part of the miracle of post-war Japanese economic growth was attributable to the capacity of Japanese trading company to transaction, through trade, profits and jobs from abroad to the home economy.

Having established the firm domestic base, Japanese businessmen were then able to expand into other overseas operations. The main factor that explains the success of this strategy is the free trade policy followed by the U.S. in the 1980s. Over the 1981-87 period, Japan’s overall current account balance moved from a deficit of $11 billion to a surplus of $87 billion. Of that $98 billion swing, over half is attributed to the expansion of the U.S.-Japanese merchandise trade deficit from $10 billion to $60 billion. The U.S. has the most open market in the world and Tokyo rushed to exploit it. As a 1990s Brookings Institution report on Japan’s Unequal Trade concluded, “Evidence from a variety of measures identifies Japan as a nation with a peculiar trading pattern. . . Japan simply does not import manufactured goods.” In 1988 Japan’s trade surplus in manufactured goods was $178 billion. The report’s author, Edward P. Lincoln dismisses the “creative attempt” by Japan’s apologists to attribute the pattern to comparative advantage, finding that:

The examples of barriers both formal and informal and the incidence of negotiating problems with Japan are so widespread that a conclusion of normality is difficult to sustain.

Unfortunately, Lincoln’s suggested remedy is for Washington to persuade Japan to surrender its advantages by adopting free trade! Such is the liberal mindset. Would it not make more sense for the U.S. to adopt a successful strategy than to expect Japan to knowingly adopt a failed one?

This is what separates the Brookings analysis from that of Professor Doran. Doran’s primary concern is not trade but the process of the rise and fall of nations. It is not so much the dollar value of the U.S. trade deficit, but the concentration of imports in strategic and high-tech fields such as computers, machine tools, and vehicles. Like most students of this process, he concluded that “Economic considerations have to a large extent determined both the periodicity and the amplitude of the power curves of states.”

The collapse of nations and civilizations is usually thought of in terms of cataclysmic events such as defeat in war. Yet such dramatics are only the climax of a much longer process; the result of decades of gradual economic decline often accompanied by domestic turmoil or political paralysis. The formal shifts in territory and institutional dominance are merely the surface phenomenon that ratify the underlying balance of power. The more decisive changes take the form of indirect control of external resources and industry, land and people through trade and investment — the factors that create the balance of power.

Japan has developed strong trade ties with South American nations such as Brazil and Peru and through Japanese-owned and operated subsidiary corporations, it extracts agricultural foodstuffs, raw materials and other resources to feed its manufacturing base in Japan in much the same way the old imperial powers held colonies.

The term “commercial empire” is far from obsolete. In the 1980s, Japanese government circles began to talk about creating a “Comprehensive Security System” to control the sources of raw materials, food, and fuel that Japan imports. Yoko Kitazawa, writing for a 1990 United Nations university project on Pacific Basin development, concluded that the plan “aims at achieving its objective by integrating the overseas investment structure of Japanese enterprises into a totally Japanese-centered system.” The plan involves moving basic processing industries to Third World states, mainly in Asia, to take advantage of cheap labor, local resources and lax pollution standards. World demand has slowed for these industries since the 1970s, so Japan’s strategy is to cut costs to maintain a competitive edge in America and Europe. Final product processing, where the real profit is made, will remain in Japan. The steel industry will also stay in Japan as it is tightly integrated with the automobile, shipbuilding, and electric power industries. Also remaining in Japan will be the new high technology export industries which the government actively support and protect.

This poster capture the spirit of Japanese designs on South America with an eye towards Brazil.

Another key element of this plan is to break Japan’s dependence on American food imports by shifting to Japanese-owned farms in Brazil, Indonesia, and other third world countries, thus removing a source of U.S. economic leverage. This is a plan based very much on the age-old precepts of mercantilism: an industrial structure and international division of labor set not by the ‘invisible hand’ of the free market, but by the strategic planning in Tokyo to insure that the largest gains will go to Japanese firms and that these gains will be secure from outside interference. Kitazawa has termed this a “counter-revolutionary new international economic order.”

There is no comparable American consensus on the nation’s future economic strategy, let alone a plan of action. Leaders in government, business and the media cannot seem to get beyond the desire for a “level playing field.” Yet this term trivializes the issue. this is not some schoolyard game where it doesn’t matter who wins or loses. It is a struggle to control the world’s wealth and resources, markets and territory; to provide for future generations and for the security of the nation. By defining the issue as one of fairness rather than outcome, the free traders have already steered thought into a dead-end channel.

The objective is not either to stifle or promote trade. Trade is a means, not an end in itself. Every great nation has engaged in trade; but those that have benefited have used trade to enhance the strength of their own economy. They have not surrendered their soveriegnty to the traders; they have managed trade so as to advance their own interests in the face of rivals who are trying to do the same. The composition and direction of trade is thus more important than its volume.

This is how the balance of power turns. New powers arise which eventually convert their economic gains into political and military power. The older power then suddenly finds that it no longer has the strength to prevail against overt challenges. Such a change in the balance of power is seldom due to the energetic actions of the challenger alone. More often than not the challenger’s victory was only made possible by the failure of the older power to respond while it was still in a dominant position. The leaders of the older power were either blind to the developing threat, preoccupied with internal affairs (or simply apathetic to external events); or so overly optimistic in their assessment of the margin of safety available that they failed to act until it was too late. Leaders are seldom so irresponsible as to simply not care about the outcome of such contests, though that is the reckless advice being pushed today by the free trade lobby.

The Conservatives’ Puzzle

The Uruguay Round was the final act of multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade (GATT), spanning from 1986 to 1994 and embracing 123 countries as “contracting parties”.

Free traders never learn from history because they intend to transcend the past. Their doctrine is based on ideology, not analysis or experience. It is a leap of faith predicated on the notion that world has or is about to assume a new order. A “world without borders” will replace “nationalistic fetishes” to use two frequent liberal phrases. Yet a review of the last five centuries reveals that those making this prediction have been proven wrong time after time. Free trade is a true sophistry; an idea that sounds plausible in theory but which proves fallacious in practice. It has been consistently associated with the decline of nations at the hands of their more cunning rivals. Yet its appeal continues because its advocates, like the ancient Sophists, couch their rhetoric in terms of unlimited progress and a basic revolution in human affairs. But wise and practical statesmen should know the difference between dreams and reality.

Unfortunately, the [George H.W.] Bush administration is pushing hard for free trade as part of yet another “New World Order” that will supposedly break with the past constraints. This policy, minus the slogan, was actually implemented under the Reagan administration with results which have so far been ominous. It was pushed by Secretary of State George Schultz and Treasury Secretary James Baker, both of whose backgrounds are rooted in a transnational corporate culture. They were backed by many libertarian academics who flocked to Washington in the 1980s. Shultz often explained that “trade liberalization. . . has sharply reduced the importance of national borders in economic affairs.” Shultz, Baker and other spokesman filled their speeches and state papers with references to “the global economy” as if the world were already unified as a single harmonious system.

That such naive statements could usher forth an administration that had shown such a profound understanding of the ideological and military aspects of the Cold War aptly demonstrates the fallacy of treating economics as an autonomous variable in the world system. The disturbing question is why so many conservatives, who otherwise consider themselves nationalists and realists, accept such statements if couched in economic terminology when they would reject them out of hand in any other context — recognizing their roots instantly as utopian and dangerous.

It remains a fool’s gamble to bet that this time the free traders finally got it right. A sober look at the world reveals a globe divided into competing nation-states showing considerable political, cultural and ideological diversity. Nationalism, often supported by militant religious feelings, continues to be a powerful factor. The Persian Gulf War showed not only the continuing clash of national interest and the utility of armed force, but also that wars are still fought for economic objectives, in this case control of oil. Economics cannot differ fundamentally from the broader political environment which defines how the world is organized. There is no global economy, only an international economy as has been the case for centuries. For U.S. policy to continue along free trade lines in a world that scorns its assumptions is to risk more than the country can afford to lose.