The Ashgate Research Companion to International Trade Policy

Kenneth Heydon, Stephen Woolcock

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317043089
• Edition: 1
• Topic: Economia
• Subtopic: Economia internazionale

This volume provides a state of the art review of current thinking on the full range of trade policy issues, addressing the economic and political dimensions of international trade policy. The volume contains a systematic examination of: - specific trade policy instruments (such as tariffs, non-tariff barriers and trade rules) - sectoral concerns (in agriculture, manufacturing and services) - trade linkages (to issues such as the environment and labour standards) - systemic considerations (what role for the WTO?) The organising theme of the volume is that open markets for trade and investment yield large potential gains in human welfare as long as trade policy is conducted as an integral part of broader domestic economic management and regulatory reform, and as long as the particular challenges facing developing countries are effectively addressed. This 'case' is presented on the basis of rigorous analysis of first principles and of empirical experience among key trading nations. An integrated set of original and comprehensive perspectives from a diverse group of experts, linked by a common organisational thread. The contributing authors create an ideal mix of internationally recognised experts together with younger specialists making their mark in trade policy analysis; academics as well as trade policy practitioners; and representatives of both developed and developing countries.

PART I
The Political and Economic Context of Trade Policy

1
Free Trade versus Protection: An Intellectual History

Razeen Sally

The doctrine of free trade, however widely rejected in the world of policy, holds its own in the sphere of the intellect.

Frank Taussig

All theory is grey, my friend, but green is life’s glad golden tree.

Goethe, Faust, Part Two

Introduction

The two quotes above signal the polar extremes in the debates for and against free trade. Since Adam Smith, classical and neoclassical economists have proclaimed the superiority of free trade in theory. The American economist Frank Graham called it ‘a ubiquitous and timeless principle’. To Stanley Jevons it was ‘a fundamental axiom of political economy’. At the other end of the spectrum, implacable opponents of free trade, from counter-Enlightenment Romantics such as Carlyle and Ruskin to today’s anti-globalization postmodernists, reject it on anti-economic grounds. It is a product of the ‘dismal science’ and the ‘quackery’ of economists, as Carlyle put it. It is a bloodless laboratory experiment, they say; a utopia grafted onto the human skin, with damaging social consequences.

The free trade-versus-protection debate is not as Manichean as the views above suggest. The reality, of course, has shades of grey in between. This chapter tries to get a sense of where thinking on the issue stands today. It does so via a potted history of ideas. The controversies swirling around free trade and protection are first traced back to their roots in Classical Antiquity and brought forward to the Middle Ages. Then follows a section on mercantilism pre-Adam Smith. After that comes the emergence and establishment of free trade doctrine in classical political economy, especially in the writings of Adam Smith and David Hume. Then follow nineteenth- and twentieth-century developments.

The purpose of this roundabout method is to avoid a shallow repetition of current – and mostly ahistorical – arguments pro and contra free trade. Intellectual history, hopefully, will give us a wider, but also less superficial, panorama of this central debate in early twenty-first century globalization.

From Classical Antiquity to the Middle Ages¹

Political, philosophical, ethical and legal arguments for and against free trade have existed since ancient Greek and Roman times. But these are all non- or meta-economic arguments. Economic analysis – the systematic observation and interpretation of how economic phenomena interact – came much, much later in the mercantilist tradition.

The leading and oldest non-economic argument in favour of free trade – namely that it leads to international peace – probably originated in an early Christian ‘universal economy’ tradition. It had a cosmopolitan outlook and welcomed unfettered trade across the seas as a means of bringing about better contact, understanding and friendship among peoples, eventually leading to the universal brotherhood of man. This was seen as a sign of beneficent divine intervention. In the Middle Ages, natural-law theorists, from Vittoria and Suarez to Grotius and Pufendorf, regarded free trade as part of the jus gentium, the law of nations. The eighteenth- and nineteenth-century classical liberals, along with Immanuel Kant, made an explicit connection between free trade and international peace. Richard Cobden was perhaps the most powerful advocate of free trade as the central means of ensuring peaceful international relations. That idea was carried forward in the thinking of Woodrow Wilson and Cordell Hull. The latter, arguably, was the spiritual father of the post-1945 multilateral trading system. As he declared, ‘unhampered trade dovetails with peace; high tariffs, trade barriers and unfair economic competition with war … I will never falter in my belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade’ (Hull 1948: 81).

Protectionist arguments – again overwhelmingly non-economic – were probably more influential down the ages. Plato and Aristotle embodied a Greek political-philosophical tradition that denigrated economic activity as something for social inferiors, especially women and slaves. Politics was the superior, virtuous activity, the preserve of male citizens in the polis. The latter was supposed to be politically self-contained, for which it had to be economically self-sufficient, save for trading in necessities. That meant minimal contact with foreigners.

Finally, much Christian thought over the centuries had an anti-economic streak, with a bias against foreign trade. The latter supposedly inflames the vices of worldliness and avarice. It pulls people away from the religious life, which is intimately bound up with ascetic virtues.

Mercantilism²

Mercantilist thinking dominated in the two centuries before Adam Smith’s publication, in 1776, of The Wealth of Nations, in Britain, France and elsewhere in Europe. Economic analysis emerged slowly and imperceptibly during this period, though Schumpeter says that mercantilism was essentially ‘pre-analytic’: its proponents were mostly pamphleteers full of assertions, opinions and axes to grind, not dispassionate analysts.

Mercantilism’s political context was the ascendancy of the Westphalian system of nation-states. Kings and princes were in the business of nation-building. They projected their power within by centralizing control over domestic societies and economies; and projected their power externally in warlike international relations, not least to grab or defend overseas territory. In the economic sphere, the self-interested, profit-seeking merchant, and wealth creation more generally, were increasingly welcomed – a radical departure from antecedent attitudes. But it was considered folly to leave merchants to their own devices. Rather the state had to ensure that self-interested behaviour was guided, deliberately and forcefully, so that it served national interests. It was incumbent on the state to make trade flow in the ‘right’ channels while avoiding the ‘wrong’ channels. Hence, notwithstanding a ragbag of diverse and often conflicting views within the mercantilist canon, its organizing principle was raison d’état.

Mercantilism had at least five main planks: the accumulation of specie; a favourable balance of trade; promotion of infant industries; the belief in an international zero-sum game; and the preservation of domestic stability.

Firstly, some mercantilist writers sought to accumulate specie (gold in particular) in the national exchequer through maximizing exports and minimizing imports. They considered a hoard of specie to be a leading indicator of national wealth. It was also ‘the sinews of war’, a repository of funds to pay mercenaries and fight wars. The accumulation-of-specie argument is now considered outdated, even by modern-day mercantilists.

Secondly, many (perhaps most) mercantilists advocated a healthy trade surplus by means of export promotion and import protection – mercantilism’s ‘two great engines’, according to Adam Smith. Many considered this to be the leading indicator of national wealth. As Thomas Mun, a leading English mercantilist, put it:

The ordinary means therefore to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value.³

Thus intervention in foreign trade, through customs duties, bounties, quotas, foreign exchange controls and outright bans, was to complement a panoply of internal controls on production and consumption.

Thirdly, from Elizabethan times onwards, mercantilists favoured the promotion and protection of infant industries to kickstart industrialization. Manufacturing was considered a superior wealth generator to agriculture and other forms of economic activity.

Fourthly, mercantilists generally believed in Hobbesian international politics and economics. One nation could only gain at the expense of other nations, since international wealth was finite.

Fifthly, domestic social stability was a mercantilist imperative. Foreign trade had to be controlled precisely because, if left uncontrolled, it would disrupt the domestic social balance.

‘Mainstream’ economists, from David Hume and Adam Smith to Eli Heckscher (1935) and Jacob Viner, have gone out of their way to dismiss mercantilism’s central planks as economic nonsense. A trade surplus (or deficit), in isolation, does not tell us anything; and it is certainly not a good indicator of national wealth. Manufacturing is not intrinsically superior to other forms of economic activity. And international trade, if governed by market forces, is a positive-sum game that delivers all-round gains. Hence Paul Krugman’s dismissal of mercantilist shibboleths as ‘pop internationalism’. To David Henderson (1986), this is ‘do-it-yourself economics’. Nevertheless, the main tenets of pre-Adam Smith mercantilism endured into the nineteenth and twentieth centuries, and are alive and well today. They retain powerful ideological appeal.

The Emergence of Free Trade Doctrine⁴

The economic defence of free trade, as opposed to its defence from non-economic standpoints, only got going in the eighteenth century. In the interstices of mercantilism, several writers had insightful flashes of the benefits of an unrestricted international division of labour, with, at its core, the interdependence of self-adjusting imports and exports, and of trade and payments. Some came close to saying that free trade, not protection, delivers a superior gain in terms of national wealth creation. Charles Davenant expressed this position pithily:

Trade is in its nature free, finds its own channel, and best directs its own course: and all laws to give it rules and direction, and to limit and circumscribe it, may serve the particular ends of private men, but are seldom advantageous to the public.⁵

This turned the mercantilist presumption – that the state should direct trade into ‘good’ and not ‘bad’ channels – on its head. It set up the principle of non-intervention in trade, akin to the French Physiocrats’ governing principle of laissez-faire.

Now it is time for Adam Smith to enter the scene. His genius was not originality; rather it was to draw on a range of thought before him, seasoned with acute observation of history and the world around him, to come up with a sweeping synthesis of the economic system and its interrelated parts. The result was his Inquiry into the Nature and Causes of the Wealth of Nations. He drew particularly on preceding economic analysis (from the Physiocrats, for example) and his own Scottish–English tradition of moral philosophy.

The governing principle of the Smithian economic system is ‘natural liberty’ (or non-intervention), which allows ‘every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice’. And as Smith went on to say, ‘All systems of preference or restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord’ (Smith 1976 (1776), Book 4, chapter 9: 208). Thus self-interest (broadly conceived), if left to its own devices, conduces to the public good, particularly by maximizing the wealth of the nation. The crucial qualification is that this is not a vision of anarcho-capitalism or unadulterated laissez-faire. Rather, it depends fundamentally on an appropriate framework of rules (‘justice’ in Smith’s terminology), which the state is charged with instituting, updating and enforcing.

Smith extended this economic system animated by natural liberty from the domestic to the international sphere, from intranational to international trade. Book 4 of The Wealth of Nations laid out a comprehensive system of international trade, with a many-sided defence of free trade that remains unsurpassed. Smith’s contemporary and close friend David Hume wrote some brilliant sketches on international trade,⁶ but it was Smith who furnished the overarching system.

Free Trade in Smith and Hume: An Elaboration⁷

By the end of the eighteenth century, free trade had become the established presumption in Scottish–English political economy. British policy at the time, however, was still largely protectionist; and the political economy consensus outside Britain still favoured protection over free trade. Let us now probe deeper into the classical-liberal system of free trade in Hume and Smith.

Both Hume and Smith made a full-frontal attack on mercantilism as their point of departure. Hume’s attack was directed at the accumulation-of-specie argument, which he considered self-defeating given automatically adjusting movements of trade and payments. Smith attacked ‘real-economy’ distortions caused by import protection and export promotion in the pursuit of a trade surplus. Both Scotsmen reserved some of their most vivid language to excoriate mercantilism’s dog-eat-dog, zero-sum view of international trade. Here is a sampling from Hume:

Nothing is more unusual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expense. In opposition to this narrow and malignant opinion, I will venture to assert, that the increase of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours.⁸

And here is Smith in a similar vein:

By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the other nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.⁹

Hume and Smith: Economic Analysis

Smith grasped the insight that moving from protection to free (or freer) trade generates a one-shot efficiency gain: imports replace costlier domestic production, thereby releasing domestic resources for more productive uses, including exports. He then dismissed various protectionist arguments as a wasteful diversion of resources. His analysis was based on absolute cost advantages. What he failed to grasp was the essential insight of comparative advantage, later established by Torrens and Ricardo.

That said, Hume and Smith were much more concerned with a dynamic, rather than a static, view of international trade. To them, the dynamic gains from trade are critical to the long-run progress of commercial society, far more important than short-term resource-allocation effects.

Hume’s main observation on the dynamic gains from trade relates to what we now call ‘technology transfer’. He viewed unfettered international trade as a conveyor belt for the transmission of ideas and technology across borders. This allows individuals and enterprises within nations to spot and then imitate better practice abroad, leading to improvements in their own performance, and, in the aggregate, to overall economi...