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LIBERALISATION IN THE SELF-INTEREST

The pioneers of free trade and the champions of dismantling trade barriers have always made sure that their own economies would stand to gain. Otherwise, they would protect their own industries and, if necessary, simply change the rules of the game.

By Someshwar Singh


February 1999

Geneva: Over the centuries, the fundamentals of international trade do not seem to have changed.

The pioneers of free trade and the champions of dismantling trade barriers have always made sure that their own economies would stand to gain. Otherwise, they would protect their own industries and, if necessary, simply change the rules of the game.

Only the ultimate weapons of coercion have changed - the brute force of cannons has been replaced by the civilised power of dollar-loans which can bail indebted economies out of their mess.

That is the gist of the message in a recent UNCTAD (United Nations Conference on Trade and Development) discussion paper, 'How did developed countries industrialise? The history of trade and industrial policy: The cases of Great Britain and the USA', by Mehdi Shafaeddin.

Through these two case studies, the paper contends that it is a fallacy that early industrialisers could have developed their industrial sector without infant industry protection. In fact, in all cases, to develop their industries, they went through an infant industry protection phase and heavy government intervention in the foreign sector.

The United States was the motherland of infant industry protection not only at the intellectual level but also in actual fact. In the case of Great Britain, despite the fact that the industrial revolution contributed to rapid industrialisation, its industrial sector benefited from trade protection and other forms of government intervention in the trade flow through the Navigation Act and by means of political and military power, says Shafaeddin.

Not only 'the modern protectionist school of thought was actually born in the United States', but 'it was also the mother country and the bastion of modern protectionism'. The protection lobby was so strong in the United States in the 19th century that a Pennsylvanian legislator referred to 'man' as 'an animal that makes tariff speeches'.

Moreover, government intervention in both cases was not confined (although it was more significant) to foreign trade. The governments intervened in the domestic economy - particularly in the United States - directly and indirectly, to assist capital accumulation, institutional development and infrastructural build-up and to provide training, research and development. In neither case can trade policy alone explain industrial and export success.

In both countries, capital accumulation, infrastructure and institutional development played a significant role. In both cases, as also in France and Germany, agricultural development - often helped by protection and other forms of government intervention - was accompanied and facilitated by the process of industrial development.

While high domestic savings was crucial in financing their capital accumulation, in both countries foreign investment played a noticeable role at the early stages of their industrial development.

Yet, in all countries, even when the industrial sector was mature, protection was used as a means of bargaining power in bilateral trade negotiation and trade treaties.

The process of infant industry protection, which lasted a couple of centuries in Great Britain, was shortened considerably to around 100 years in the case of the United States (where it began with cotton cloth, iron and wool).

In the case of Great Britain, the protection process started with wool and cotton products and iron, later extending to other metals, leather, shipbuilding and fisheries and subsequently to flax and silk.

Local production was usually protected vis-a-vis imports. For example, imports of silk and cotton were prohibited from India, which had advantages over Great Britain in terms of raw materials and working experience. The protection included not only quantitative restrictions but also penalties on consumption.

In the United States, the case for infant industry protection was made in 1791, in the famous report by Hamilton to the Congress. Hamilton argued that 'since international trade is not free, Europe is more advanced in manufacturing and its industries enjoy government aids, which contributes to the destruction of new industries in other countries'; that 'if the United States followed free trade, it would suffer from "unequal exchange" because competition with established manufacturers of other nations on equal terms is impracticable'; and that 'it is for the United States to consider by what means they can render themselves least dependent on the combinations, right or wrong, of foreign policy'.

Interestingly, many developing countries make the same point today.

But then they are labelled as going against the powerful and benign forces of globalisation and market reforms which, in the unforeseen long term, are assumed to benefit the people - however hard and tough, or even painful, the immediate adjustments may be. Many of the developing countries that either have gone through or are going through economic crisis - Indonesia, Malaysia, Thailand, South Korea, Russia and Brazil - are today exactly in that predicament.

The paper notes that all other industrial countries have developed their manufacturing industries through infant industry protection and government intervention. For example, after its unification (Zollverein) Germany, which started in the 1820s, began protecting its industries in the 1840s. Protection was reinforced in the 1850s and early 1860s. By 1913, at the start of the First World War, Germany was one of the three main industrial powers after the United States and Great Britain. The history of protection in France is somewhat similar to that of Germany, but France started earlier.

Great Britain secured its industrial leadership and began to liberalise its international trade in the mid-19th century. At the time, English GDP and exports were growing fast and the economic success of the country was attributed to free trade, not to its previous infant industry protection and government intervention. To secure markets abroad, the government also advocated liberal trade policies in other countries. To persuade other countries towards liberalisation, three measures were taken.

The first was signing a trade treaty with France with the inclusion of an MFN (Most Favoured Nation) clause whereby Great Britain gained access to other European countries. Secondly, the so-called 'unequal treaties' were imposed on developing countries of the time from 1810-1850, forcing them to eliminate all import duties. Thirdly, all colonies were forced to give free access to all products of the mother country and even to give preferences to products of the mother country in their public procurement.

To open up markets elsewhere, the government also attempted to impose retaliatory import duties on manufactured goods through the 'Fair Trade League' initiated in 1861. The League was used as an instrument of reciprocity. Finally, when a trade treaty was not accepted by a country easily, it was imposed on it by war. An example is the Opium War of 1839-1842, aimed at making the vast Chinese territory available to British trade.

Thus, the forced trade liberalisation of the 19th century clearly benefited Great Britain, the major industrial country of that time, but at the same time it resulted in the de-industrialisation of those developing countries possessing some industrial base (e.g. India) and delayed the industrialisation of others.

The recent trade liberalisation that developing countries must undertake, dictated by structural adjustment programmes (SAPs), has to a large extent similar characteristics, according to the author. Many developing countries, even though independent, have not had a mature industrial base and have been in a very weak position because of their debt burden, which led to a crisis in the early 1980s.

Despite their shortage of foreign exchange, exacerbated by the worldwide economic depression, they were persuaded, or forced, to open up their markets, basically benefiting the industrial countries, which were their main source of supply of manufactured goods.

Arguments in favour of trade liberalisation were confused to such an extent that even the economic and export success of East Asian NICs (newly industrialised countries) was attributed to their recent trade liberalisation rather than to their previous policies of infant industry protection and government intervention. In fact, some also deny that governments of these countries had intervened severely in the process of industrialisation and export expansion.

On that basis, universal trade liberalisation was advocated to all developing countries.

However, the pressure on developing countries to liberalise was laid mainly indirectly through international financial institutions which imposed conditionalities attached to their lending. 'Unequal treaties' of the 19th century were replaced by 'unequal loan agreements' and 'letters of understanding'. If a country refused to comply, it would be denied loans by the international financial institutions and also the commercial banks. These banks often link their lending, or syndicate lending, to prior agreement of the applicant under the umbrella of SAPs.

However, selective trade liberalisation has beneficial effects, the paper points out, particularly for those developing countries which have developed their industrial base but need to become competitive. Nevertheless, the impact of premature, universal, and uniform trade liberalisation on some developing countries in recent years is similar to that of the 19th century: many of those with a fragile industrial base became de-industrialised; most of those whose industrial base was negligible suffered from delayed industrialisation. - Third World Network Features

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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