[Ed: Continued from Part IV which was published yesterday here , as well as Part III, Part II and Part I.]

The Holy Grail of “free traders” is comparative advantage. This is a first rate example of a neat and emotionally satisfying (to a certain type of mind) intellectual idea which bears little relation to reality. The idea is that every country concentrates on making what it is best at and the overall global product rises because of increased efficiency. Even in theory this is rather dubious because it ignores every other aspect of society than a narrow view of economic relationships and assumes tacitly that a comparative advantage will last. David Landes in his The Wealth and Poverty of Nations (Little, Brown and Co. 1998) cites the instance of the Englishman John Borrow, who in 1840 urged the states of the German Zollverein to concentrate on growing wheat, and sell it to buy British manufactures and comments: “This was a sublime example of economic good sense: but Germany would have been the poorer for it. Today’s comparative advantage… may not be tomorrow’s.”

The truth is that any definition of “free trade” is as subjective as that of a “free market”. It has no natural boundaries because the implications of both ultimately embrace the whole of human material endeavour and there are no true natural variables on which to base a definition – even those which might at first glance appear to be objectively and naturally set, such as wages and prices, are determined by matters other than the market, for example tax regimes and welfare provision.

Has “free trade” ever been practised?

Between 1860 and 1914 Britain operated the best approximation to “free-trade” the world has seen. In the period 1840-1870 not only did she by degrees open her markets to all regardless of whether other countries reciprocated, but the size of the British state was so tiny that the distortions of government expenditure and taxation were minuscule compared with the present day. But achieving the best approximation to “free trade” was not difficult to achieve because no other country of any size has ever seriously attempted it for any length of time.

For a quarter or a century or so, Britain got away with the ill-effects of being a reckless “free trader” whilst other major countries remained protectionist to varying degrees. She escaped the consequences for three prime reasons: Britain’s industrial dominance, long distance transport of bulk goods remained cumbersome and expensive and the fact that America and Europe were strangely slow to follow Britain’s example and industrialise.

That all changed in the 1870s. Bulk transport was becoming much easier and cheaper. Railways – ironically more often than not built with British capital and technical expertise – had begun to have a considerable influence on the continent and in America and were beginning to snake across Australia and South America. Perhaps most importantly the age of the practical steamship and refrigeration arrived. Manufactured goods, food and raw materials could now move around the world in volumes which dwarfed anything which had gone before. British farmers were especially badly hit when the Americas and Australasia flooded the British market with food and wool.

To these developments, and arguably in part as a consequence of them, there was a widespread retreat into a deep protectionism in the 1870s, most notably by the USA and Germany. Britain failed to respond to these developments by guarding her own markets.

The period of 1870-1914 saw the predictable results of Britain’s quixotic refusal to guard her markets when all about her were assiduously doing so: she lost her general industrial predominance, well nigh destroyed her farmers and failed to dominate vital new industries, such as the chemical, which at one time she had led – Britain produced the first synthetic dye (Perkin 1856) and the first synthetic plastic (Parkes 1855). Two of the most enthusiastic protectionists, the USA and Germany, became the first to exceed Britain’s GDP.

Bismarck summed up what had happened in a speech in 1882 when he said: “I believe the whole theory of free trade to be wrong… England abolished protection after she had benefited from it to the fullest extent. That country used to have the strongest protective tariffs until it became so powerful under their protection that it could step out of those barriers like a gigantic athlete and challenge the world. Free trade is the weapon of the strongest nation, and England has become the strongest nation in the world owing to her capital, her iron, her coal, and her harbours and owing to her favourable geographical position. Nevertheless, she protected herself against foreign competition with her exorbitant protective tariffs until her industries became so powerful.”

But even the “free-trade” Britain practised was far from complete. Government contracts were generally given to British companies. Ditto municipal contracts. Moreover, there was a strong sense of patriotism in the country which, as with the present day Japanese, mitigated the effects of free-trade. Nor, of course, was there a WTO, EU or any other body to question and interfere with the internal economic workings of Britain such as taxation, interest rates or working conditions.

British “free trade” was further complicated by the existence of the Empire and a widespread imperial sentiment which created the opportunity and the desire to trade with members of the Empire rather than the rest of the world. It does not do to over-egg the effects of this because British trade with the world outside the Empire, especially the USA, always remained strong, but it undoubtedly significantly distorted British trade.

[To be continued tomorrow.]

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