The Myth Of Free Trade: Anglo-american Industrialization Dynasty

It is generally believed that removing trade barriers will increase the welfare of the trading parties concerned, and trade liberalization or even free trade is a sure way for developing countries to reduce poverty and achieve economic prosperity. Indeed, the policy recipe known as the"Washington consensus"has invariably included such recommendations as market opening and deregulation. Underlying this liberalist economic school of thought is a widely accepted belief that it was Adam Smith, the acknowledged protagonist of liberalism, who laid the foundation of the British industrial supremacy, and, more broadly, the modern rise of the western world has been due to free trade and laissez faire. Such a liberalist mindset has also found its way into the academic and policy-making circles in China.However, nothing could be farther from the truth. The liberalist economic thinking including its interpretation of history is an erroneous and misleading theorization. The author of this dissertation has made an empirical survey into the history of the British and American industrial development over several centuries to falsify the liberalist claims. Sufficient evidence proves that, contrary to what is expected of the free trade doctrine, both Britain and America engaged in long-term and highly protectionist trade practices during their industrialization, and it was only after trade protection had afforded them predominant industrial supremacy that they turned to free trade. The main findings of the dissertation are as follows:The prevailing notion that liberalist economic theories and practices enabled Britain to attain its industrial supremacy is not proved by facts. Free trade did not motivate the British industrial revolution. Instead, it was the industrial supremacy nurtured in protection that canonized the free trade doctrine. With virtually no intellectual originality, Adam Smith, together with his free trade doctrine in particular, came to be hallowed decades after his death chiefly because the British now needed a new leverage for pursuing their national interests. In turning into an ideology, the free trade doctrine witnessed its defects overlooked or deliberately covered with grave consequences for peoples outside Britain.Woolen industry grew into the staple industry in Britain thanks to the persistent restrictions placed on free export of the British wool and free import of foreign woolen products. Likewise, the British linen and silk industries got developed through an"artificial"process of import substitution, even though Britain had no comparative advantage whatsoever in these fields. As to the cotton industry that finally catapulted Britain into the industrial revolution, it started up and prospered wholly behind the walls of prohibitions and high tariffs also in obvious defiance of the principle of comparative advantage. It is therefore logical to conclude that the British industrial revolution was actually begotten by trade protectionism, although it has often been argued otherwise by liberalists.Though conventionally idealized as the"first industrial nation"that modernized in an organic way, Britain in fact rose from an underdeveloped state and by inorganic means. Three revolutions can be identified with its emergence. They are: the revolution in economics that provided mercantilism, a sophisticated policy tool of trade protection, wealth accumulation, industrial promotion, state intervention and power expansion all combined; the revolution in primordial industrial upgrading driven by a massive inflow of advanced technology and equipment, skilled labor, etc. from the Continent, reflecting the dynamic interactions in the European system of multi-states; and the revolution in finance, accelerated by the Dutch contribution, that enhanced remarkably the British state capabilities.The British policy shift to free trade in the first half of the 19th century was not any result of intellectual enlightenment. Instead, it was a natural outcome of the industrial supremacy that Britain now enjoyed, aimed at establishing an international hierarchical order centering on Britain and serving the British interests. However, the era of free trade in Europe was short-lived, since a great depression followed the wave of free trade, and one country after another resorted to protection, which did save them from economic difficulties and closed their gap with Britain. Meanwhile, free trade expanded to other parts of the world, but as some sort of forced liberalism coming with the British gun-boats, free trade only meant colonialist and imperialist exploitations of the weak.As an offspring of Britain in the heyday of mercantilism, America, after its independence, quickly embarked upon a road of protectionism unparalleled in terms of its high tariff level and long-term consistency. Alexander Hamilton should be given adequate credit for formulating this"American system"characterized by trade protection and state intervention as well. Before the Civil War, and especially after it, American industries ranging from textiles to steel underwent some period of effective protection, which enabled the country to overtake leading European powers. Only after it had gained overwhelming competitive advantage in most key industries did America begin to embrace the free trade doctrine in the first half of the 20th century. The American experience demonstrates once again that free trade and protectionism are but two means, used interchangeably to serve the end of enhancing industrial competitiveness.The glaring discrepancy between the free trade theory and the Anglo-Saxon practice can be accounted for by flaws in the theory itself. Various assumptions employed in the free trade theorization constitute the Achilles'heel of the doctrine, making it hardly applicable to the real-world situation. Historically, valid cases have been made against free trade on grounds of terms of trade, infant industry, increasing returns, domestic distortions, imperfect competition, etc. All these challenges, in exposing loopholes of the free trade doctrine, point to one conclusion, just as the Anglo-Saxon experience does, that for any country with potentials, the Royal road to plenty and power is not free trading on the principle of comparative advantage, but increasing international competitive advantage through dynamic and constant industrial upgrading.