The founding myth of the dominant nations is that they achieved their industrial and technological superiority through free trade. Nations which are poor today are told that if they want to follow our path to riches, they must open their economies to foreign competition. They are being conned.
Almost every rich nation has industrialised with the help of one of two mechanisms now prohibited by the global trade rules. The first is “infant industry protection”: defending new industries from foreign competition until they are big enough to compete on equal terms. The second is the theft of intellectual property. History suggests that technological development may be impossible without one or both.
Britain’s industrial revolution was founded upon the textile industry. This was nurtured and promoted by means of ruthless government intervention. As the development economist Ha Joon Chang at the University of Cambridge has documented, from the 14th Century onwards, the British state systematically cut out its competitors, by taxing or banning the import of foreign manufactures and banning the export of the raw materials (wool and unfinished cloth) to countries with competing industries.1 The state extended similar protections to the new manufactures we began to develop in the early 18th Century.
Only when Britain had established technological superiority in almost every aspect of manufacturing did it suddenly discover the virtues of free trade. It was not until the 1850s and 1860s that we opened most of our markets.
The United States, which now insists that no nation can develop without free trade, defended its markets just as aggressively during its key development phase. The first man systematically to set out the case for infant industry protection was Alexander Hamilton, the first Secretary of the US Treasury. In 1816 the tax on almost all imported manufactures was 35%, rising to 40% in 1820 and, for some goods, 50% in 1832.2 Combined with the cost of transporting goods to the US, this gave domestic manufacturers a formidable advantage within their home market.
Protectionism was arguably a more immediate cause of the American civil war than the abolition of slavery. High tariffs helped the northern states, which were industrialising rapidly, but hurt the southern states, which remained heavily dependant on imports. The Republicans’ victory was the victory of the protectionists over the free traders: in 1864, before the war ended, Abraham Lincoln raised import taxes to the highest level they had ever reached. The US remained the most heavily protected nation on earth until 1913. Throughout this period, it was also the fastest-growing.3
The three nations which have developed most spectacularly over the past 60 years – Japan, Taiwan and South Korea – all did so not through free trade but through land reform, the protection and funding of key industries and the active promotion of exports by the state. All these nations imposed strict controls on foreign companies seeking to establish factories.4 Their governments invested massively in infrastructure, research and education. In South Korea and Taiwan, the state owned all the major commercial banks, which permitted it to make the major decisions about investment.5 In Japan, the Ministry of International Trade and Industry exercised the same control by legal means.6 They used tariffs and a number of clever legal ruses to shut out foreign products which threatened the development of their new industries.7 They granted major subsidies for exports. They did, in other words, everything that the World Trade Organisation, the World Bank and the IMF forbid or discourage today.
There are two striking exceptions to this route to development. Neither Switzerland nor the Netherlands used infant industry protection. Instead, as the economic historian Eric Schiff showed in Industrialisation without National Patents, published in 1971, they simply stole the technologies of other nations.8 During their key development phases (1850-1907 in Switzerland; 1869-1912 in the Netherlands), neither country recognised patents in most economic sectors.
Switzerland’s industrialisation took off in 1859, when a small company based in Basel pilfered the aniline dying process which had been developed and patented in Britain two years before. The company was later named Ciba; more recently, after a series of mergers, it became Novartis and then Syngenta. In the Netherlands, in the early 1870s, two enterprising firms called Jurgens and Van Den Bergh nicked a patented French recipe and started producing something called margarine. They later merged to form a company named Unilever. In the 1890s, one Gerard Philips stole Thomas Edison’s design for incandesent lamps, and founded Europe’s most successful electronics company.9
The nations which are poor today are forbidden by the trade rules from following either route to development. New industries are immediately exposed to full competition with established companies overseas, which have capital, experience, intellectual property rights, established marketing networks and economies of scale on their side. “Technology transfer” is encouraged in theory, but forbidden in practice by an ever fiercer patents regime. Unable to develop competitive enterprises of their own, the poor nations are locked into their position as the suppliers of cheap labour and raw materials to the rich world’s companies. They are, as a result, forbidden from advancing beyond a certain level of development. While there is no sound argument for permitting rich nations to protect their economies, there is a powerful case for permitting the poor ones to follow the only routes to development which appear to work.
George Monbiot’s book The Age of Consent: a manifesto for a new world order is published on June 16th by Flamingo.
References:
1. Ha-Joon Chang, 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.
2. ibid
3. ibid
4. Mark Curtis, 2001. Trade for Life: Making Trade Work for Poor People. Christian Aid, London.
5. John Brohman, April 1996. Postwar Development in the Asian NICs: Does the Neoliberal Model Fit Reality? Economic Geography, Volume 72, Issue 2.
6. Takatoshi Ito, 1996. Japan and the Asian Economies: a “Miracle” in Transition. Brookings Papers on Economic Activity, Issue 2 (1996). The Brookings Institution, Washington DC.
7. Graham Dunkley, 2000. The Free Trade Adventure: The WTO, the Uruguay Round and Globalism. Zed Books, London. First published in 1997 by Melbourne University Press.
8. Eric Schiff, 1971. Industrialisation Without National Patents: The Netherlands, 1869-1912; Switzerland, 1850-1907. Princeton University Press.
9. ibid
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