by Bruce Bartlett
The author is a senior fellow at the National Center for Policy Analysis.
The current debate over "free" versus "fair" trade and the effects of open markets on America's economy often takes place on a theoretical level or from biased parochial circumstances and concerns. Yet a serious examination of 500 years offers one unambiguous lesson for the debate. Countries that pursue freer trade policies prosper while those that close markets face privation and de cline. The experiences of the Nether lands, Great Britain, the United States, Japan, and Germany all support that conclusion. This chapter examines those experiences.
Prelude to Trade
The economy of the Roman Empire was characterized by trade over roads and on ships throughout the Mediterranean region. The collapse of Rome meant a collapse of trade. In Medieval Europe agricultural production on self-sufficient feudal estates was primarily for local consumption, which prevented the efficient exploitation of natural resources and the division of labor.1 Living standards for most peasants were barely above subsistence. A bad crop often meant mass starvation. Life was truly nasty, brutish, and short. When small towns did develop, guilds in the various crafts set limits on market entry as well as on the quantity and kinds of goods produced; the purpose was to keep prices high and to corner markets.
The Netherlands
The Netherlands was one of the first countries that, from necessity, again took up trade as a route to prosperity. The Dutch inhabited a small land that possessed few natural resources. To survive, the citizens imported wool, tin, and copper from Germany and England, and developed export industries to pay for imports. The Dutch turned to artisanship and industry at a time when the rest of Europe was still con strained by ancient guild regulations.2 The situation led to clearly defined and protected private property rights, a necessary foundation for the country's future economic growth.3
Transition to Freedom
The transition from medieval regulation to renaissance freedom in the Netherlands was not without problems and painful episodes. The historian Henri Pirenne de scribed the process in which artisans resisted but ultimately accepted the opening of markets at the end of the 12th century:
They made every effort to crush outside competition as completely as possible. Ghent, Bruges and Ypres laid their surrounding neighborhoods under an extraordinary régime of industrial exclusiveness. Military expeditions were organized to search the villages and destroy any tools for the manufacture of cloth. The industry of the small towns was strictly controlled by the large ones, who in the name of pretended "privileges," which were only an abuse of force, prevented them from imitating their own species of woolen goods.
This protectionism gone mad did not, however, prevent the industry of the towns from falling into decay. . . . Towards the end of the fourteenth century it was obvious that this short-sighted policy was condemned.4
Subsequently, the Netherlands developed into the commercial center of Europe. Shipping and ship building grew, giving Amsterdam, the capital, control of the Baltic grain trade, as well as naval supplies and other heavy goods. That led to Amsterdam's becoming the central commodity market of Europe, a development that required expertise in finance, insurance, and related businesses. Scarcity in any part of Europe was quickly and accurately reflected in higher prices on the Amsterdam bourse and higher freight charges, factors that added to the city's prosperity.5
Religious tolerance also helped the country.6 Religious refugees from all over Europe, such as French Huguenots, made Amsterdam their home, adding enormously to the vitality of the city and its prosperity.7 The demands of trade also promoted pacifism and restricted the growth of government. As Cambridge professor Charles Wilson put it, "The welfare of a merchant republic was not compatible with the caprice inseparable from monarchy which would subordinate trade to politics, diplomacy, fiscalism, war."8
Holland as Hong Kong
The demands of trade also restricted the growth of mercantilism.9 Unlike other countries in Europe at that time, the Netherlands did not prohibit the export of coin and bullion, did not protect domestic industries, and essentially maintained a pure free-trade policy. According to Wilson, "Balance-of-trade doctrine . . . which was strongly attached to the idea of retaining local raw materials for profitable manufacture and export, protecting local manufactures, encouraging industrial techniques and the like, found little response from a people for whom such considerations were, in the nature of things, largely irrelevant."10 By the 17th century, the Dutch were the richest people on earth.11 Their country served as a model for advocates of free markets and religious tolerance in England and the United States.
Fall from the Pinnacle
However, the Dutch position at the pinnacle was soon eroded by expanding government and protectionism. By the late 1600s, taxes and tariffs began to creep upward. That had the two-fold effect of diminishing trade and raising wages, as workers demanded more money to compensate them for the increased cost of living.12 Skilled workers and commerce gradually moved to new locations, such as Hamburg, where taxes and tariffs were lower. By the end of the 1700s, the Netherlands even abandoned its traditional neutrality, quickly suffering major defeats in war with England. It was then finished as a world power.13
The rise of the Netherlands was based on free trade. The Dutch were the first to throw off the regulations and restrictions that were the hallmarks of medieval economies. Further more, the country's decline came from a reversal of that policy, the adoption of protectionism, and the growth of government that ultimately stifled the creativity and industry of the Dutch people.
Great Britain
As the Dutch were removing medieval restrictions on trade in the 16th century, England was beginning to open its market as well. In the early part of the century, usury laws were no longer enforced, restrictions on the export of unfinished cloth were relaxed, and certain differential duties were abolished. Enforcement of remaining trade restrictions was also generally reduced. The result, according to historian F. J. Fischer, was "one of the great free trade periods in modern English history."14
Unfortunately, the initial era of free trade was short-lived. By the latter half of the 16th century trade restrictions were reimposed to protect domestic industry from the effects of a depression caused by government currency policy. However, by 1604 the House of Commons again moved toward free trade as the impact of the depression faded.15
17th-Century Market Closings
The end of the 17th century saw another revival of protectionism. Between 1690 and 1704 the general level of duties on imports quadrupled. That level was generated primarily by the need for revenue; nevertheless, the effect was to transform the tariff system into one that was, in practice, protectionist.16 Furthermore, in France at that time, Jean Baptiste Colbert, minister to King Louis XIV, was attempting to raise government revenue and make the country self-sufficient through restrictions on imports, including those from England, and through industrial policy. That encouraged English retaliation.
Also contributing to the growth of protectionism was the spread of mercantilist ideas from writers in England such as Thomas Mun. Those mistaken doctrines have an all-too-modern characteristic. For example, one maintained that prosperity came from accumulating gold and silver bullion, and a country could best do that by exporting more than it imported.17 Many policymakers even today tout the supposed virtues of a positive balance of trade.
Adam Smith's Revolution
In the decades after the 1776 publication of Adam Smith's The Wealth of Nations, free trade wholly won the intellectual battle.18 Smith demonstrated how freedom to trade and the resulting division of labor benefited all parties involved. However, the remnants of mercantilism were extensive, as were restrictions on domestic trade dating back to the Middle Ages. Thus, hard battles would still be necessary to establish free trade.
Among the most important trade restrictions still operating at the beginning of the 19th century were the Navigation Acts and the Corn Laws. The principal Navigation Act, dating back to 1660, required English ships, manned by English sailors, to be used for most trade with England or its colonies. The Corn Laws, dating from 1670, imposed protectionist duties on the import of corn, to keep domestic corn prices high and encourage domestic production.
The free-trade campaign began in 1820 and concluded with the repeal of the Corn Laws in 1846 and of the Navigation Acts in 1849.19 The principle of freedom to trade was cemented by the Anglo-French Commercial Treaty of 1860.20 From then until World War I, Great Britain practiced a largely free-trade policy.
The Economic Giant
Free trade was a logical outcome of the free-market policies. As Great Britain's economy grew, it needed more imports, especially as materials for manufacturing and food for the tables of a growing population; the country also needed markets for its products. During this period Great Britain was the world's wealthiest and most powerful nation. Historian Paul Kennedy described the situation:
Between 1760 and 1830, the United Kingdom was responsible for around two-thirds of Europe's industrial growth of output, and its share of world manufacturing production leaped from 1.9 to 9.5 percent; in the next thirty years, British industrial expansion pushed that figure to 19.9 percent, despite the spread of new technology to other countries in the West. Around 1860, which was probably when the country reached its zenith in relative terms, the United Kingdom produced 53 percent of the world's iron and 50 percent of its coal and lignite, and consumed just under half of the raw cotton output of the globe. With 2 percent of the world's population and 10 percent of Europe's, the United Kingdom would seem to have had a capacity in modern industries equal to 40-45 percent of the world's potential and 55-60 percent of that in Europe. . . . It alone was responsible for one-fifth of the world's commerce, but for two-thirds of the trade in manufactured goods. Over one-third of the world's merchant marine flew under the British flag, and that share was steadily increasing. It was no surprise that the mid-Victorians exulted at their unique state, being now . . . the trading center of the universe.21
The reversal of Great Britain's free-trade policy began as a reaction to Germany, which imposed a protectionist tariff in 1879 under pressure from its big businesses.22 The situation soon led to adoption of protectionist measures throughout Europe.23 Although Great Britain initially resisted the protectionist trend, by the turn of the century it, too, began to adopt such measures. Joseph Chamberlain was the leading advocate of the policy of limiting free trade to the nations within the British Empire, while imposing protection against those out side.24 Lillian Knowles described the change in policy:
The period from 1886 to 1914 witnessed a great change in English policy. It is the period of abandonment of laissez-faire in colonization, commerce, industry and agriculture. Great Britain began to modify her cosmopolitan ideas of free trade and laissez-faire, and to concentrate on developing trade within the British Empire.25
In 1897, Great Britain renounced its treaties with Germany and Belgium that had prevented the country from giving preferences to its colonies. However, the major break with free trade came in 1915 when the government imposed tariffs of 33 1/3 percent on motor cars and parts, musical instruments, clocks, wristwatches, and movie film. Subsequent legislation broadened the list of items subject to protectionist tariffs.26
The abandonment of free trade during World War I coincided with the beginning of Great Britain's economic decline. Freedom to trade had been the strongest pillar of Britain's general free-market policy. When that pillar fell, the doorway opened to socialist measures of all kinds. British history in the 20th century is essentially one of almost continually expanding government control of the economy, and an equal decline in Great Britain's power and influence in world affairs.27
The United States
Some protectionists contend that the United States grew economically strong and prosperous because of trade barriers. But America has experienced several phases in its trade history. It is more accurate to say that the country grew in spite of import restrictions.
From Colony to Republic
British trade policy toward the American colonies was mercantilistic. The mother country expected to gain materially from all colonial trade. The Navigation Acts, as noted earlier, generally required that all colonial trade be conducted on British ships manned by British sailors. Also, certain goods had to be shipped to Great Britain first before they could be sent to their final destination. The country's mercantilist policies were a major burden on the colonies.28 In that way, British protection ism was a significant cause of the Revolution.
Having achieved independence, however, many Americans advocated protectionist policies similar to those they had earlier condemned.29 Alexander Hamilton, the principal advocate of import restrictions, based his proposals on the alleged needs of infant industries. As he wrote in his "Report on Manufactures" (1791):
The superiority antecedently enjoyed by nations who have preoccupied and perfected a branch of industry, constitutes a more formidable obstacle . . . to the introduction of the same branch into a country in which it did not before exist. To maintain, between the recent establishments of one country, and the long-matured establishments of another country, a competition upon equal terms, both as to quality and price, is, in most cases, impracticable. The disparity . . . must necessarily be so considerable, as to forbid a successful rival ship, without the extraordinary aid and protection of government.30
The First Wave of Protectionism
Although Congress adopted the first tariff in 1789, its principal purpose was to raise revenue. Rates went from 5 percent to 15 percent, with an average of about 8.5 percent. However, in 1816 Congress adopted an explicitly protectionist tariff, with a 25 percent rate on most textiles and rates as high as 30 percent on various manufactured goods. In 1824, protection was extended to goods manufactured from wool, iron, hemp, lead, and glass. Tariff rates on other products were raised as well.
That first wave of protectionism peaked in 1828 with the so-called Tariff of Abominations. Average tariff rates rose to nearly 49 percent. As early as 1832 Congress began to scale back tariffs with further reductions enacted the following year. In 1842, tariffs were again raised; but by 1846 they were moving downward, and further lowered in 1857. Following the 1857 act, tariffs averaged 20 percent.31
Failed Tariff Policies
Economist Frank Taussig, in a thorough examination of those tariffs, found that they did nothing to promote domestic industry. "Little, if anything, was gained by the protection which the United States maintained" in the first part of the 19th century, he concluded. That finding considerably questioned the validity of the infant industry argument. "The intrinsic soundness of the argument for protection to young industries therefore may not be touched by the conclusions drawn from the history of its trial in the United States, which shows only that the intentional protection of the tariffs of 1816, 1824, and 1828 had little effect," Taussig said.32
Thus, the early experience of the United States confirms the weakness of the idea that protection can aid infant industries. In practice, so-called infant industries never grow competitive behind trade barriers, but, instead, remain perpetually underdeveloped, thus requiring protection to be extended indefinitely. As Gottfried von Haberler put it:
Nearly every industrial tariff was first imposed as an infant-industry tariff under the promise that in a few years, when the industry had grown sufficiently to face foreign competition, it would be removed. But, in fact, this moment never arrives. The interested parties are never willing to have the duty removed. Thus temporary infant-industry duties are transformed into permanent duties to preserve the industries they protect.33
It is also important to note that the adverse effects of tariffs in 19th century America were more than offset by the economic activity that constituted the western expansion across the continent. Some 20 million immigrants came to the United States in that century. Also, much economic growth came from transportation, farming, mining, and construction of infrastructure. In effect, the United States was a giant, continental-size free-trade zone, from the Atlantic to the Pacific--the equivalent of the distance from Madrid to Moscow.
Following the Civil War, some tariff liberalization occurred, mainly assuming the form of exempting items from duties, rather than reducing tariff rates. As Figure 1 illustrates, until that time, duties had covered a large percentage of imports, as shown by the close relationship between the tariff rate on all imports and that on dutiable imports only. But after the Civil War, those rates began to diverge sharply.
Turn-of-the-Century Tariffs
In the election of 1888, Republicans called for tariffs to protect American manufacturing. Benjamin Harrison's defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. An interesting aspect of the 1890 debate over the tariff is that protectionists abandoned any pretense that high tariffs were needed to protect infant industries. Even mature industries, they argued, needed protection. They further argued that high tariffs were needed to reduce the Treasury's surplus. They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.34
Protectionist tariffs remained the bedrock of economic policy of the Republican Party for the next 20 years. Indeed, Republicans were so intent on passing the Payne-Aldrich tariff in 1909 that President William Howard Taft supported the 16th Amendment to the U.S. Constitution creating a federal income tax as the political price for Democratic support of the tariff.35 That has to have been one of the worst deals in history -- a lose-lose situation if ever there was one.
The Underwood tariff of 1913, passed early in the administration of President Woodrow Wilson, liberalized trade somewhat. But as soon as the Republicans reassumed power after World War I, they raised tariffs again. The Fordney-McCumber tariff of 1922 generally increased tariff rates across the board. However, it also gave the President power to raise or lower existing tariffs by 50 percent.
Deepening Depression
The infamous Smoot-Hawley tariff of 1930 was the last outrage inflicted by the Republican protectionists. Rates on dutiable imports rose to their highest levels in over 100 years. Increases of 50 percent were common and some rates went up 100 percent. Table 1 indicates how much tariffs in creased during the 1920s as a result of both the Fordney-McCumber and Smoot-Hawley tariffs. A recent analysis estimates that the Smoot-Hawley tariff, on average, doubled the tariffs over those in the Underwood Act.36
Economists and historians continue to debate how important the Smoot-Hawley tariff was in causing the Great Depression.37 Whatever the degree, the effect certainly was adverse and the tariff was certainly bad policy. As Figure 2 indicates, world trade virtually collapsed following passage of the Smoot-Hawley tariff. Thus, if that tariff was not the single cause of the Great Depression, it certainly made a bad situation worse.
The Free-Trade Path
Politically, at least, in the long term the memory of the Smoot-Hawley tariff has kept Americans committed to a free-trade policy. For more than 60 years, a guiding principle of U.S. international economic policy has been that tariffs and other trade barriers should be reduced, that trade wars must be avoided at all costs, and that the best way to achieve those goals is through multilateral negotiations. Thus, the United States took the lead in establishing the General Agreement on Tariffs and Trade that reduced global tariffs in the decades following World War II, and spearheaded major GATT rounds of multilateral trade liberalization, including the Kennedy Round, Tokyo Round, and Uruguay Round.
In recent years, the free-trade consensus has begun to weaken. One must look back to 1929 to find protectionist rhetoric as heated as that commonly heard today. Throughout most of the postwar era, protectionists were embarrassed to call themselves protectionists. Today, however, prominent politicians such as Republican presidential candidate Pat Buchanan and Senator Ernest Hollings (D-S.C.) wear the label proudly.38 Yet protectionist policies have not been the source of America's economic strength. And American policy, fortunately, remains largely directed toward free trade.
Japan
One reason for the weakening of the free-trade consensus in the United States is the perception that Japan has prospered by using protectionism and government support of industry. But good economic policy, not protectionism, deserves the credit. Protectionism held back Japan's development for centuries, whereas free trade is what has made that country a world economic power.
Weakness from Protectionism
During the Tokugawa period, from the 17th through the 19th centuries, the era of shogun rule, Japan was almost totally isolated from the outside world. Although they had some limited contact with the Dutch and Portuguese, the Japanese were forbidden to travel abroad or even build oceangoing ships. Thus, Japanese feudalism lasted hundreds of years after its collapse in Europe, and industrialization there was nascent long after the Indus trial Revolution in the West.39
In 1853, the U.S. government dispatched Commodore Matthew Perry to force open a trading port for resupplying American ships traveling to and from China. The spectacle of officers of an American warship in Tokyo Bay, dictating policy to a weak Japan, clarified for many of that country's leaders that isolation was no longer an option. To become an economic and political power, able to defend its interests, Japan had to become more economically integrated with the rest of the world. The result was a gradual opening, culminating in the Meiji Restoration in 1868, which overthrew the shogunate and restored power to the Japanese emperor.
Strength through Trade
Trade played an important role in Japanese economic development after the restoration. Although foreigners initially dominated trade, the Japanese quickly learned how to compete; they imported technology and methods and rapidly incorporated them into Japanese industry.40 It is important to remember that by the late 1800s, Japan practiced almost totally free trade. That was because treaties with foreign powers generally prohibited any restraint on trade and because the government was not heavily involved in the economy.41
Even as Japan turned more protectionist and became increasingly militarized after World War I, growth was still primarily based on private initiative. Looking at the Japanese economy between 1868 and 1938, William Lockwood concluded:
A study of the whole process of economic development in modern Japan leads to the conviction that the real drive and momentum lay in large measure outside the realm of national political ambition and State activity. At most the latter only accelerated a process of industrialization which was latent in the whole conjuncture of forces at work. . . . Aside from routine government services, indeed, State undertakings provided only a negligible share of the national product. Furthermore, the real economic growth of Japan took place chiefly in those areas of private activity which owed least to political subsidy and support.42
Protectionist Wars
With the Depression in the 1930s, Japan witnessed world markets closing and the imperial giants, Great Britain and France, attempting to confine trade within their empires. In reaction, Japan recognized the need to conquer its own empire to ensure access to markets and sources of raw material. It invaded Manchuria in 1931 and China in 1937. In response to the American embargo on oil sales to protest such imperial policies, Japan recognized the need to invade Indonesia and other parts of Asia. That led to its attack on Pearl Harbor and America's consequent entry into World War II.
MITI's Failures
After the war, Japan retained many controls on trade and investment. The Ministry of International Trade and Industry (MITI) was given broad power to use those controls to benefit domestic industry. Japan's great economic success after the war prompted many observers to conclude that MITI and its strategy of targeting industries through industrial policy was the key to Japan's success.43 Closer examination, however, casts doubt on that conclusion. In a 1976 study, Philip H. Trezise, for example, found that:
MITI did, of course, engage in an extraordinary amount of legal and extra-legal guidance, assistance, and intervention in the Japanese private sector during a period in which the economy's growth performance was exceptionally strong. The policies espoused by the MITI -- import protection, controls on foreign investment and on purchases of foreign technology, financial aid to selected industries through government lending institutions, selective tax incentives, and administrative leadership to prevent excesses in investment and production -- did not in any case prevent the economy from going forward at a rapid pace. It is a good deal less clear that these policies provided the consistent and positive -- to say nothing of overwhelming -- contribution to economic growth that has been attributed to them.44
Since the time of that study, doubts about the role of MITI in Japan's prosperity have grown. Among MITI's failures are the following:
In the early 1950s, MITI sought to eliminate all auto companies other than Toyota and Nissan; it believed that having more than two was inefficient. Fortunately for the Japanese economy, MITI's effort failed.45
Also in the early 1950s, MITI refused to allow Sony to import transistor technology. Although Sony was eventually able to reverse MITI's policy, it was forced to wait two years before being able to do so--all because a single MITI bureaucrat thought Sony lacked the skill to develop the technology.46 Instead, MITI gave aid to two other firms making soon-to-be-obsolete vacuum tubes.47
A 30-year effort to develop a nuclear breeder reactor ended in failure after at least $5 billion was poured into the project.48
A widely touted effort launched in 1982 to develop a "fifth generation" computer ended in 1992 after it became clear that the computer industry had moved in a completely different direction than the one MITI had envisioned.49
A major effort to develop high-definition television failed when the system that MITI targeted with $1.2 billion in handouts turned out to be obsolete.50
Other failures include plans to develop a nuclear-powered merchant ship, suppression of the cable television industry in Japan in favor of a satellite system, a remote-controlled oil-drilling rig, and a nuclear-power blast furnace for steel-making.51 A thorough empirical analysis, for the Harvard Institute of Economic Research, of all major Japanese industrial policy projects concluded that government subsidies had no effect on the success or failure of the projects.52 MITI is now viewed as a declining institution that must thoroughly reinvent itself or cease to exist.53
To be sure, Japan retains a large trade surplus with the United States, but economists now generally attribute that to macro economic forces rather than Japanese trade barriers or industrial policy. In a nutshell, Japan saves "too much" and the United States saves "too little." Thus, Japan's excess saving is "exported" to the United States, leading to a surplus in Japan's trade account.
Japan may never become a complete free trader, but even at its worst it was never as protectionist as many American trade hawks believed.54 In reality, Japan's economic success is largely attributable to good economic policy. Historically taxes have been low, especially on capital. Savings rates were high and budget deficits were low. Although Japanese businesses have, to a certain extent, been protected from foreign competition, domestic competition is fierce. Inflation has remained low and property rights are secure.55 Those are sufficient reasons for Japan's economic success.
Germany
American protectionists also look to Germany for a model. Pat Buchanan, for example, cited the work of German protectionist Friedrich List in support of his views.56 However, an examination of German history, as well as a deeper reading of List, does not confirm the efficacy of protectionism as a path to prosperity.
Protectionism's Toll
First, it is important to remember that as of the early 19th century, Germany was at best little more than a loose confederation of independent principalities. Prussia and Austria were the largest of them. From an economic viewpoint, the major problem was the existence of numerous trade barriers, erected by the German states, that prevented the development of large-scale industry and inhibited the growth of German political influence. The extraordinarily high tolls on the rivers of Germany were important barriers. Until the development of rail roads, river traffic was virtually the sole means of transporting large quantities of goods. A British traveler to Germany in 1820 described the toll system in the following way:
There are no less than twenty-two tolls on the Weser [river] betwixt Münden and Bremen, seven of which belong to the sovereign of Hannover. . . . At every toll every vessel is stopped and her whole cargo examined. On an average, more than one hour is employed at each toll to examine each vessel; so that every one loses one whole day in passing between these two towns. This is mere waste, a loss of time to all the parties, more injurious probably than the duties which the merchants have also to pay. . . . It is said that the expense of collecting the tolls equals the receipts.57
Freer Flow of Goods
It is in the context of extreme disunity and its hindrance of trade that one must interpret List's views. Although he favored protection against imports from outside Germany, he was adamant about abolishing all trade barriers, including tolls, within Germany itself.58 Eventually, List's view prevailed with the establishment of the German customs union, the Zollverein, in 1833. By 1854, virtually every German state had joined the union. In other words, the economic enterprise among the Germanic states for most of the 19th century was the creation of a huge free-trade area in the center of Europe. This effort was capped by the unification of Germany under Prussian leader Otto von Bismarck in 1871. For that result, List is revered in Germany as one of the fathers of unification.
List favored protection primarily for political reasons--to further the cause of German unification. Insofar as he had an economic rationale for restricting imports, it was based on the now-discredited infant industry argument. But protection, in List's view, was never to be permanent, only temporary. In every other respect, List was generally in favor of a free market.59
Restored Restrictions
Until 1879, Germany's tariffs were generally quite low. However, in that year Germany adopted a protective tariff policy for the first time. Although protectionism was promoted by the usual special interests, such as the iron and steel industry, it was held in check by the large agricultural sector which held generally free-trade views and which required open world markets to sell its products. What tipped the political balance toward protection was the central government's need for revenue. At least that was Bismarck's stated reason for supporting higher tariffs.60
Ironically, the spread of protectionism elsewhere ultimately forced Germany to moderate its tariffs. Beginning in 1891, Germany negotiated reciprocal trade agreements that substantially lowered tariffs on many imports, in return for reductions in tariffs on German exports. However, the new tariff of 1902 set limits on the government's ability to mitigate tariffs through bilateral agreements, by setting nonnegotiable tariff floors for many goods.
World War I brought a breakdown in trade between Germany and its European enemies. The Depression led to a break down in the world trading system. Furthermore, Hitler's rise to power in 1933 brought the explicit fascist principle of economic self-sufficiency and a belief that international trade was controlled by capitalists and Jews who profited at Germany's expense. Thus, Germany remained a high tariff country, to the end of World War II.
At the end of the war, the allied occupation simply maintained all the Nazi economic controls. Trade was virtually prohibited except under control of the occupation forces. Thus, trade was primarily inhibited by direct controls, rather than tariffs.
Opened Again
In 1948 Ludwig Erhard, then Economics Minister for West Germany, engineered a major reform of the entire German economy virtually overnight. Although its best-known feature was currency stabilization, other key elements were tax reform, trade liberalization, and regulatory reform. Later, Erhard explained that he had no choice but to be radical, for whereas allied permission was required to change any regulation, none was required simply to remove them.61 The results were astonishing. Henry Wallich described what happened the day after the currency reform and the lifting of price controls took effect:
On June 21, 1948, goods reappeared in the stores, money resumed its normal function, black and gray markets reverted to a minor role, foraging trips to the country ceased, labor productivity increased, and output took off on its great upward surge. The spirit of the country changed overnight. The gray, hungry, dead-looking figures wandering about the streets in their everlasting search for food came to life.62
Although the Marshall Plan continues to get much of the credit for the German revival, the surge in growth in fact predated the arrival of any Marshall Plan aid. When that plan did become operational, moreover, one of its most important aspects was the little-known fact that aid was contingent on the opening of trade. It is important to remember that 16 different countries in Europe received Marshall Plan aid. That aid was primarily used to finance imports and exports among those countries that formed the Organization for European Economic Cooperation (fore runner to the present Organization for Economic Cooperation and Development). Thus, the Marshall Plan's primary impact on stimulating European prosperity after the war was in breaking down barriers to trade.63
Subsequently, Erhard continued to liberalize German trade. He believed that trade was an important engine of growth. He also believed that opening the German economy to external competition was critical in making German industry more competitive.64
Germany has never adhered to a pure free-trade policy, but it has maintained a more open trade policy than any other country in Europe in the postwar era. For example, in the early 1980s Germany restricted the import of a significantly smaller number of items than any other country did. Whereas Germany restricted the import of 47 items, France and Italy each restricted more than 500.65 Germany also spearheaded the break down of trade barriers and the institution of free trade within the European Union in 1992.
Conclusion
This chapter has aimed to show that, generally, nations rise to power and wealth through free trade and decline when protectionism takes over. Although none of the nations reviewed has ever practiced pure free trade, all had relatively open economies during the periods that coincided with their golden ages. Furthermore, those nations often deemed to exemplify successful growth through protectionism, Germany and Japan, do not in fact fit the model.
Notes
1 See Robert Latouche, The Birth of Western Economy (New York: Harper & Row, 1966); N. S. B. Gras, "The Growth of Rigidity in Business during the Middle Ages," American Economic Review 30, no. 1, part 2 (March 1940): 281-89; J. H. Clapham, "Commerce and Industry during the Middle Ages," Cambridge Medieval History, vol. 6 (New York: Macmillan, 1929), pp. 473-504; P. Boissonnade, Life and Work in Medieval Europe, trans. Eileen Power (New York: Harper & Row, 1964).
2 Steven Epstein, Wage Labor and Guilds in Medieval Europe (Chapel Hill: University of North Carolina Press, 1991).
3 Douglass C. North and Robert Paul Thomas, The Rise of the Western World (New York: Cambridge University Press, 1973), pp. 132-45.
4 H. Pirenne, "The Place of the Netherlands in the Economic History of Medieval Europe," Economic History Review 2, no. 1 (January 1929): 38-39.
5 Violet Barbour, Capitalism in Amsterdam in the Seventeenth Century (Baltimore: Johns Hopkins University Press, 1950), pp. 18-27.
6 Jan deVries, "On the Modernity of the Dutch Republic," Journal of Economic History 33, no. 1 (March 1973): 191-202.
7 Barbour, Capitalism in Amsterdam, pp. 12-16.
8 Charles Wilson, "Trade, Society and the State," Cambridge Economic History of Europe, vol. 4 (New York: Cambridge University Press, 1967), p. 531.
9 For a review of mercantilist doctrines, see Eli F. Heckscher, Mercantilism, revised ed., 2 vols. (New York: Macmillan, 1955); D. C. Coleman, ed., Revisions in Mercantilism (London: Methuen, 1969).
10 Wilson, "Trade, Society and the State," pp. 532-33.
11 See Simon Schama, The Embarrassment of Riches (Berkeley: University of California Press, 1988).
12 Adam Smith, The Wealth of Nations (New York: Random House, 1937), pp. 826-27, 857.
13 Charles Wilson, "The Economic Decline of the Netherlands," Economic History Review 9, no. 2 (May 1939): 111-27; idem, "Taxation and the Decline of Empires, an Unfashionable Theme," in Economic History and the Historian: Collected Essays (New York: Praeger, 1969), pp. 116-25.
14 F. J. Fisher, "Commercial Trends and Policy in Sixteenth-Century England," Economic History Review 10, no. 2 (November 1940): 101.
15 Ibid., p. 117.
16 Ralph Davis, "The Rise of Protection in England, 1689-1786," Economic History Review 19, no. 2 (August 1966): 306-307.
17 Wilson, "Trade, Society and the State," pp. 498-518; Laurence Bradford Packard, "International Rivalry and Free Trade Origins, 1660-78," Quarterly Journal of Economics 37, no. 3 (May 1923): 412-35. See also W. J. Ashley, "The Tory Origins of Free Trade Policy," Quarterly Journal of Economics 11 (July 1897): 335-71; R. W. K Hinton, "The Mercantile System in the Time of Thomas Mun," Economic History Review 7, no. 3 (1955): 277-90.
18 C. R. Fay, "Adam Smith, America, and the Doctrinal Defeat of the Mercantile System," Quarterly Journal of Economics 48 (February 1934): 304-16; Alfred F. Chalk, "Natural Law and the Rise of Economic Individualism in England," Journal of Political Economy 59 (August 1951): 332-47.
19 J. A. Thomas, "The Repeal of the Corn Laws, 1846," Economica 9 (April 1929): 53-60; J. H. Clapham, "The Last Years of the Navigation Acts," English Historical Review 25 (July & October 1910): 480-501, 687-707.
20 Arthur Louis Dunham, The Anglo-French Treaty of Commerce of 1860 (Ann Arbor: University of Michigan Press, 1930).
21 Paul Kennedy, The Rise and Fall of the Great Powers (New York: Random House, 1987), p. 151.
22 Helmut Böhme, "Big Business Pressure Groups and Bismarck's Turn to Protectionism, 1873-79," The Historical Journal 10, no. 2 (1967): 218-36.
23 Paul Bairoch, "European Trade Policy, 1815-1914," Cambridge Economic History of Europe, vol. 8 (New York: Cambridge University Press, 1989), pp. 69-83.
24 Ibid., pp. 83-88.
25 L. C. A. Knowles, The Industrial and Commercial Revolutions in Great Britain during the Nineteenth Century, 4th ed. (New York: E. P. Dutton, 1926), p. 147.
26 Charles Kindleberger, "Commercial Policy between the Wars," Cambridge Economic History of Europe, vol. 8 (New York: Cambridge University Press, 1989), pp. 162-63.
27 Keith Hutchison, The Decline and Fall of British Capitalism (New York: Scribner's, 1950); Charles Kindleberger, World Economic Primacy, 1500-1990 (New York: Oxford University Press, 1996), pp. 137-48.
28 Larry Sawers, "The Navigation Acts Revisited," Economic History Review 45, no. 2 (May 1992): 262-84.
29 Alfred Eckes noted the contrast between the public free trade rhetoric of the Founding Fathers and their private protectionism. Alfred E. Eckes Jr., Opening America's Market: U.S. Foreign Trade Policy since 1776 (Chapel Hill: University of North Carolina Press, 1995), pp. 1-20.
30 Alexander Hamilton, Papers on Public Credit, Commerce and Finance (Indianapolis: Bobbs-Merrill, 1957), pp. 204-205.
31 United States Tariff Commission, The Tariff and Its History (Washington, D.C.: U.S. Government Printing Office, 1934), pp. 70-75.
32 F. W. Taussig, The Tariff History of the United States, 8th ed. (New York: G. P. Putnam's Sons, 1931), pp. 61, 63.
33 Gottfried von Haberler, The Theory of International Trade (London: William Hodge, 1936), p. 281. More recent studies confirm the failure of infant industry protection. See Robert E. Baldwin, "The Case against Infant-Industry Tariff Protection," Journal of Political Economy 77, no. 3 (May/June 1969): 295-305; Anne O. Krueger and Baran Tuncer, "An Empirical Test of the Infant Industry Argument," American Economic Review 72, no. 5 (December 1982): 1142-52.
34 Harold U. Faulkner, Politics, Reform and Expansion, 1890-1900 (New York: Harper & Row, 1959), pp. 106-109.
35 Arthur A. Ekirch Jr., "The Sixteenth Amendment: The Historical Background," Cato Journal 1, no. 1 (Spring 1981): pp. 172-74.
36 Mario J. Crucini, "Sources of Variation in Real Tariff Rates: The United States, 1900-1940," American Economic Review 84, no. 3 (June 1994): 737.
37 Barry Eichengreen, "The Political Economy of the Smoot-Hawley Tariff," Research in Economic History 12 (1989): 1-43; idem, "Did International Economic Forces Cause the Great Depression?" Contemporary Policy Issues 6 (April 1988): pp. 90-114; Eckes, Opening America's Market, pp. 100-39; B. Bruce-Briggs, "The Myth of the Hawley-Smoot Tariff," Congressional Record, July 14, 1987, pp. S 9873-76; Robert Bartley, "Toying with Depression," Wall Street Journal, September 5, 1985; Alan Reynolds, "What Do We Know about the Great Crash?" National Review, November 9, 1979, pp. 1416-21; Jim Powell, "Protect and Destroy," Audacity (Winter 1993), pp. 38-47.
38 Buchanan has even defended the Smoot-Hawley tariff and made protectionism the bedrock of his presidential campaign. See Pat Buchanan, "Ghostbusting the Smoot-Hawley Ogre," Washington Times, October 20, 1993; Richard Berke, "Candidates Clash over Trade Issues Heading into Vote," New York Times, February 20, 1996; Susan Dentzer, "The Buchanan Trade Winds," U.S. News & World Report, February 26, 1996, p. 31. For recent views of other open protectionists, see Ernest Hollings, "Protectionist and Proud of It," Washington Post, March 17, 1996; idem, "No More Uncle Sucker," New York Times, March 26, 1991; Alfred E. Eckes, "Who Says Republicans Are Free Traders?" New York Times, February 27, 1996; Robert Kuttner, "Protectionism: In the Right Dose, a Cure," Washington Post, July 7, 1992.
39 W. J. Macpherson, The Economic Development of Japan, 1868-1941 (New York: Cambridge University Press, 1987), pp. 17-23; Takatoshi Ito, The Japanese Economy (Cambridge: MIT Press, 1992), pp. 7-11.
40 Mataji Miyamoto, Yotaro Sakudo, and Yasukichi Yasuba, "Economic Development in Preindustrial Japan, 1859-1894," Journal of Economic History 25, no. 4 (December 1965): 551-57.
41 William W. Lockwood, The Economic Development of Japan (London: Oxford University Press, 1955), pp. 539-43.
42 Ibid., pp. 574-75.
43 Chalmers Johnson, MITI and the Japanese Miracle (Stanford: Stanford University Press, 1982).
44 Philip H. Trezise, "Politics, Government, and Economic Growth in Japan," in Hugh Patrick and Henry Rosovsky, eds., Asia's New Giant: How the Japanese Economy Works (Washing ton, D.C.: Brookings Institution, 1976), p. 793.
45 Johnson, MITI, p. 277.
46 Trezise, "Politics, Government and Economic Growth," p. 798.
47 Time, August 1, 1983, p. 38.
48 David Sanger, "Japan's Nuclear Fiasco," New York Times, December 20, 1992.
49 Andrew Pollock, "'Fifth Generation' Became Japan's Lost Generation," New York Times, June 5, 1992; T. R. Reid, "Japanese Government Ends Development of Computer," Washing ton Post, June 2, 1992.
50 Andrew Pollock, "Under Pressure by Industry, Japanese Re treat on HDTV," New York Times, February 24, 1994.
51 Carla Rapoport, "Great Japanese Mistakes," Fortune, February 13, 1989, pp. 108-11; Karl Zinsmeister, "The Great Industrial Policy Hoax," Wall Street Journal, March 10, 1993; David Hamilton, "A Nuclear Fleet Sinks into a Money Pit," Wall Street Journal, March 11, 1994.
52 Richard Beason and David E. Weinstein, "Growth, Economies of Scale, and Targeting in Japan (1955-1990)," Harvard Institute of Economic Research Discussion Paper no. 1644 (June 1993). See also Richard Beason and David Weinstein, "The MITI Myth," The American Enterprise (July-August 1995), pp. 84-86; "Picking Losers in Japan," Economist, February 26, 1994, p. 69.
53 Scott Callon, Divided Sun: MITI and the Breakdown of Japa nese High-Tech Industrial Policy (Stanford: Stanford Univer sity Press, 1995).
54 Gary Saxonhouse, "What Is All This about 'Industrial Targeting' in Japan?" The World Economy 6, no. 3 (September 1983): 254-55.
55 James Gwartney, Robert Lawson, and Walter Block, Economic Freedom of the World, 1975-1995 (Vancouver: Fraser Institute, 1996), pp. 166-67; Bryan T. Johnson and Thomas P. Sheehy, 1996 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation, 1996), pp. 187-89.
56 Bob Davis, "To Buchanan, Nations That Succeed Do So with Plenty of Tariffs," Wall Street Journal, February 22, 1996. Buchanan apparently learned about Friedrich List from another protec tionist, James Fallows, who wrote glowingly of him in his book, Looking at the Sun (New York: Pantheon, 1994), pp. 179-95. List's principal work is The National System of Political Economy (Fairfield, N.J.: Augustus M. Kelley, 1991). That book was originally published in 1841.
57 Sidney Pollard and Colin Holmes, Documents of European Economic History, vol. 1, The Process of Industrialization, 1750-1870 (New York: St. Martin's Press, 1968), pp. 99-100. Heckscher reported that tolls could easily add up to 90 percent of the value of shipments; Mercantilism, vol. 1, p. 68.
58 Pollard and Holmes, Documents, pp. 365-69.
59 Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), pp. 504-505.
60 W. O. Henderson, The Rise of German Industrial Power (Berke ley: University of California Press, 1975), p. 218; Sidney Pollard and Colin Holmes, Documents of European Economic History, vol. 2, Industrial Power and National Rivalry, 1870-1914 (New York: St. Martin's Press, 1972), pp. 191-96.
61 Ludwig Erhard, Prosperity through Competition (New York: Praeger, 1958), p. 14.
62 Henry C. Wallich, Mainsprings of the German Revival (New Haven: Yale University Press, 1955), p. 71.
63 Ronald I. McKinnon, "The Marshall Plan's True Purpose," Wall Street Journal, July 16, 1991; M. M. Postan, An Economic History of Western Europe, 1945-1964 (London: Methuen, 1967), p. 98.
64 Ludwig Erhard, Germany's Comeback in the World Market (Lon don: George Allen & Unwin, 1954); Herbert Giersch, Karl-Heinz Paqué, and Holger Schmieding, The Fading Miracle: Four Decades of Market Economy in Germany (New York: Cambridge University Press, 1992), pp. 106-16.
65 The Federal Republic of Germany, Occasional Paper no. 64 (Washington, D.C.: International Monetary Fund, 1989), p. 86.
Freedom to Trade: Refuting the New Protectionism is Copyright © 1997 by the Cato Institute. All rights reserved.
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