4/5/11 - no free trade

In today's excerpt - although the United States is now an advocate of free trade among nations, during its infancy it relied on high tariffs to protect its emerging industries. In fact, the United States, Britain and virtually all of today's other wealthy countries used protectionism and subsidies to promote their infant industries, converting to a preference for free trade as those industries achieved dominance:

"Hamilton is [on the $10 bill] because, unbeknown to most Americans today, he is the architect of the modern American economic system. Two years after becoming Treasury Secretary in 1789 at the outrageously young age of thirty-three, Hamilton submitted to the Congress the Report on the Subject of Manufactures, where he set out the economic development strategy for his young country. In the report, he argued that 'industries in their infancy', like the American ones, need to be protected and nurtured by government before they can stand on their own feet. Hamilton's report was not just about trade protectionism—he also argued for public investment in infrastructure (such as canals), development of the banking system, promotion of a government bond market—but protectionism was at the heart of his strategy. Given his views, were Hamilton finance minister of a developing country today, he would have been heavily criticized by the US Treasury Department for his heresy. His country might even have been refused a loan from the IMF and the World Bank.

"The interesting thing, however, is that Hamilton was not alone in this. All the [founding fathers found pictured on U.S. currency] would have met with the same disapproval from the US Treasury, the IMF, the World Bank and other defenders of the free-market faith today. ...

"On the $5 bill, we have Abraham Lincoln, a well-known protectionist, who during the Civil War raised tariffs to their highest level ever.' On the $5o bill, we have Ulysses Grant, the Civil War hero-turned president. In defiance of the British pressure on the USA to adopt free trade, he once remarked that within 2oo years, when America has gotten out of protection all that it can offer, it too will adopt free trade'.

"Benjamin Franklin did not share Hamilton's infant industry doctrine, but he insisted on high tariff protection for another reason. At the time, the existence of almost-free land in the US made it necessary for American  manufacturers to offer wages around four times higher than the European average, as otherwise the workers would have run away to set up farms (this was no idle threat, given that many of them were farmers in their previous lives). Therefore, Franklin argued, the American manufacturers could not survive unless they were protected from low-wage competition—or what is known as 'social dumping' today—from Europe. ...

"During the mid eighteenth century, Britain moved into the woollen manufacturing industry, the high-tech industry of the time that had been dominated by the Low Countries (what are Belgium and the Netherlands today), with the help of tariff protection, subsidies, and other supports that Prime Minister [Robert] Walpole and his successors provided to the domestic woollen manufacturers. The industry soon provided Britain's main source of export earnings, which enabled the country to import the food and raw materials that it needed to launch the Industrial Revolution in the late eighteenth and the early nineteenth centuries. Britain adopted free trade only in the 1860s, when its industrial dominance was absolute. In the same way in which the US was the most protectionist country in the world during most of its phase of ascendancy (from the 1830s to the 1940s), Britain was one of the world's most protectionist countries during much of its own economic rise (from the 1720s to the 185os)."


Ha-Joon Chang


23 Things They Don't Tell You About Capitalism


Bloomsbury, New York


Copyright 2010 by Ha-Joon Chang


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