Adam Smith understood that Walpole’s policies were becoming obsolete. Without them, many British industries would have been wiped out before they had had the chance to catch up with their superior rivals abroad. But once British industries had become internationally competitive, protection became less necessary and even counter-productive. Protecting industries that do not need protection any more is likely to make them complacent and inefficient, as Smith observed. Therefore, adopting free trade was now increasingly in Britain’s interest. However, Smith was somewhat ahead of his time. Another generation would pass before his views became truly influential, and it was not until 84 years after The Wealth of Nations was published that Britain became a genuine free trading nation.
By the end of the Napeolenic Wars in 1815, four decades after the publication of The Wealth of Nations, British manufacturers were firmly established as the most efficient in the world, except in a few limited areas where countries like Belgium and Switzerland possessed technological leads. British manufacturers correctly perceived that free trade was now in their interest and started campaigning for it (having said that, they naturally remained quite happy to restrict trade when it suited them, as the cotton manufacturers did when it came to the export of textile machinery that might help foreign competitors). In particular, the manufacturers agitated for the abolition of the Corn Laws that limited the country’s ability to import cheap grains. Cheaper food was important to them because it could lower wages and raise profits.
The anti-Corn Law campaign was crucially helped by the economist, politician and stock-market player, David Ricardo.Ricardo came up with the theory of comparative advantage that still forms the core of free trade theory. Before Ricardo, people thought foreign trade makes sense only when a country can make something more cheaply than its trading partner. Ricardo, in a brilliant inversion of this commonsensical observation, argued that trade between two countries makes sense even when one country can produce everything more cheaply than another. Although this country is more efficient in producing everything than the other, it can still gain by specializing in things in which it has the greatest cost advantage over its trading partner. Conversely, even a country that has no cost advantage over its trading partner in producing any product can gain from trade if it specializes in products in which it has the least cost disadvantage.With this theory, Ricardo provided the 19th-century free traders with a simple but powerful tool to argue that free trade benefits every country.
Ricardo’s theory is absolutely right – within its narrow confines. His theory correctly says that, accepting their current levels of technology as given, it is better for countries to specialize in things that they are relatively better at. One cannot argue with that.
His theory fails when a country wants to acquire more advanced technologies so that it can do more difficult things that few others can do – that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo’s theory is, thus seen, for those who accept the status quo but not for those who want to change it.
The big change in British trade policy came in 1846, when the Corn Laws were repealed and tariffs on many manufacturing goods were abolished. Free trade economists today like to portray the repeal of the Corn Laws as the ultimate victory of Adam Smith’s and David Ricardo’s wisdom over wrong-headed mercantilism.[19] The leading free trade economist of our time, Jagdish Bhagwati of Columbia University, calls this a ‘historic transition’.[20]
However, many historians familiar with the period point out that making food cheaper was only one aim of the anti-Corn Law campaigners. It was also an act of ‘free trade imperialism’ intended to ‘halt the move to industrialisation on the Continent by enlarging the market for agricultural produce and primary materials’.[21] By opening its domestic agricultural market wider, Britain wanted to lure its competitors back into agriculture. Indeed, the leader of the anti-Corn Law movement, Richard Cobden, argued that, without the Corn Laws: ‘The factory system would, in all probability, not have taken place in America and Germany. It most certainly could not have flourished, as it has done, both in these states, and in France, Belgium and Switzerland, through the fostering bounties which the high-priced food of the British artisan has offered to the cheaper fed manufacturer of those countries’.[22] In the same spirit, in 1840, John Bowring of the Board of Trade, a key member of the anti-Corn Law League, explicitly advised the member states of the German Zollverein (Custom Union) to specialize in growing wheat and sell the wheat to buy British manufactures.[23] Moreover, it was not until 1860 that tariffs were completely abolished. In other words, Britain adopted free trade only when it had acquired a technological lead over its competitors ‘behind high and long-lasting tariff barriers’, as the eminent economic historian Paul Bairoch once put it.[24] No wonder Friedrich List talked about ‘kicking away the ladder’.
The best critique of Britain’s hypocrisy may have been written by a German, but the country that best resisted Britain’s ladder-kicking in terms of policy was not Germany.Nor was it France, commonly known as the protectionist counterpoint to free-trading Britain. In fact, the counterbalance was provided by the US, Britain’s former colony and today’s champion of free trade.
Under British rule, America was given the full British colonial treatment. It was naturally denied the use of tariffs to protect its new industries. It was prohibited from exporting products that competed with British products. It was given subsidies to produce raw materials. Moreover, outright restrictions were imposed on what Americans could manufacture. The spirit behind this policy is best summed up by a remark William Pitt the Elder made in 1770. Hearing that new industries were emerging in the American colonies, he famously said: ‘[The New England] colonies should not be permitted to manufacture so much as a horseshoe nail’.[25] In reality, British policies were a little more lenient than this may imply: some industrial activities were permitted. But the manufacture of high-technology products was banned.
Not all Britons were as hard-hearted as Pitt. In recommending free trade to the Americans, some were convinced that they were helping them. In his Wealth of Nations, Adam Smith, the Scottish father of free market economics, solemnly advised the Americans not to develop manufacturing. He argued that any attempt to ‘stop the importation of European manufactures’ would ‘obstruct instead of promoting the progress of their country towards real wealth and greatness’.[26]
Many Americans agreed, including Thomas Jefferson, the first secretary of state and the third president. But others fiercely disagreed. They argued that the country needed to develop manufacturing industries and use government protection and subsidies to that end, as Britain had done before them. The intellectual leader of this movement was a half-Scottish upstart called Alexander Hamilton.
19
Willy de Clercq, the European commissioner for external economic relations during the late 1980s, intones that ‘[o]nly as a result of the theoretical legitimacy of free trade when measured against widespread mercantilism provided by David Ricardo, John Stuart Mill and David Hume, Adam Smith and others from the Scottish Enlightenment, and as a consequence of the relative stability provided by the UK as the only and relatively benevolent superpower or hegemon during the second half of the nineteenth century, was free trade able to flourish for the first time’. W. de Clercq (1996), ‘The End of History for Free Trade?’ in J.Bhagwati & M.Hirsch (eds.),
20
J. Bhagwati (1985),
21
C. Kindleberger (1978), ‘Germany’s Overtaking of England, 1806 to 1914’ (chapter 7) in
22
The passage is from
23
See D. Landes (1998),
24
Bairoch (1993), p. 46. One French Commission of Inquiry in the early 19th century also argued that ‘England has only arrived at the summit of prosperity by persisting for centuries in the system of protection and prohibition’. Cited in W. Ashworth (2003),
25
As cited in List (1841), p. 95. Pitt is cited as the Earl of Chatham, which he was at the time.
26
The full quotation is: ‘Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.’ Adam Smith (1776),