The Myth of Free Trade

...When the dollar declined by 50 percent against the Deutschmark and the Japanese yen, as it did through most of 1987, the cost of any import from these countries was automatically doubled: what cost one dollar now cost two dollars...

...The War of 1812 spurred American manufacture...

...Although such a move was clearly massive "protectionism," Joseph Chamberlain found suitable language to present the proposition as an improved form of free trade...

...All these events contributed to the explosion, but the detonator was the tariff...

...John Stuart Mill understood the political dynamic behind Corn Law repeal...

...Nevertheless, free trade mythology charges that Smoot-Hawley caused the Great Depression of the 1930s...

...As Henry Brougham put it to Parliament in 1816: "It was well worth while to incur a loss upon the first exportation, in order, by glut, to stifle in the cradle, those rising manufacturers in the United States, which the war had forced into existence, contrary to the natural course of things...

...The natural propensity of such corporations, as Adam Smith noted, is to maximize gain, which—in a modern world where virtually all the factors of production are portable—means to locate where wages and taxes are low and protective walls are high...

...It would be the greatest advance that free trade has ever made, to extend its doctrines permanently to more than 30 million of the human race...

...But the United States that enjoyed 17.5 percent of the world market in 1966 had only 13.9 percent in 1983...

...Not the bank failures and not the collapse of the money stock...

...was now the "Workshop of the World," the source of manufactured commodities, machinery, and of capital...

...There is a global imbalance between the planetary power to produce and the people's power to consume—that is, to buy...

...While the world economy has been (or is being) transformed into a global "factory" in a global "village," no corresponding political institutions have, as yet, emerged...

...In the years following World War II, however, governments have found it increasingly difficult, almost impossible, to continue such policies— even when they want to—because they are increasingly losing control of their national economies...

...to contain the suicidal instincts of a capitalism left to the capitalists...

...Once more the power of the free trade myth displayed itself, because the deliberate devaluation of the American dollar was pure-andsimple protectionism...

...In the following century, however, free trade did indeed become a "principle" of prevailing economic dogma...

...it speeds the collapse of the American economy...

...Then they indulged in the ultimate and most deceptive form of protectionism, devaluation of currency, under the universal explanation that it was a way to ensure a "level playing field...

...The stimulants that the government seeks to pour into the economy by deficit spending are wasted, as the "stimulant" goes to purchase wares made in other countries...

...Trade wars are being waged without halt...

...At present there is no supranational political institution to play a balancing role vis-a-vis global corporations in the way that past national sovereignties did vis-à-vis their national corporations...

...The reason for this odd development...

...The United States struck back...

...The capacity to consume could not keep up with the capacity to produce—the ancient inevitable of a gross maldistribution of income...

...It would have been long before the Corn Laws would have been abolished in Great Britain [if] those laws had not been contrary to the private interests of 212 • DISSENT FREE TRADE nearly the whole of the manufacturing and mercantile classes...

...To the United States, the world's greatest creditor nation now turning into the world's greatest debtor nation thanks to annual trade deficits of more than $100 billion a year, devaluation of the dollar appeared to be a natural solution...

...They "negotiated" VERs (voluntary export restraints), which were quotas...

...Free trade" for the U.S...

...but when the war ended, Britain set out to destroy this competition...

...But, in terms of dollars and cents, the trade deficit was rising instead of falling, because whatever was imported required many more dollars...

...Free trade enjoyed a brief revival in the SPRING • 1988 • 215 FREE TRADE immediate post–World War II period, almost exactly a century after the repeal of the Corn Laws...

...Not the sharp increase in the Federal Reserve's discount rate during October 1931...

...the Wilson-Gorman Tariff, which, despite Democratic President Cleveland's efforts, did virtually nothing to lower the existing high tariffs...

...Sooner or later, these continual wars, directed against weaker peoples, had to become wars between the great powers...

...Once more history repeated itself...

...In 1930, American imports came to about $3 billion, which was 3.3 percent of the Gross National Product...

...It started as an effort on the part of American agriculture to get the same kind of protection afforded American manufacture...

...The slump in the economy started in June 1929 (a few months before the stock market crash) and continued on to June 1930 (when Smoot-Hawley was enacted) and beyond...

...true wisdom is to keep down the petty contentions of ordinary times, and to stand together in support of the established principles of social order...

...The consequence was that trade deficits—measured moneywise —rose to unprecedented heights...

...Not the collapse of the Austrian Kreditanstalt bank during May 1931...

...For American importers and retailers, ditto...

...It is also a mischievous myth because it attributes the Depression to Smoot-Hawley instead of to the gross maldistribution of income in the years leading up to 1929...

...After southern influence was weakened by the Civil War, protectionism ran rampant, like 214 • DISSENT FREE TRADE a wild pig...

...To prove that the Great Designer of the universe could work his benevolent will despite man's selfishness, Smith wrote The Wealth of Nations to reveal a grand design wherein even man's greed served the common good...

...But so powerful was the hold of the free trade myth on the thinking of the world, especially the Western world, that protectionist practices had to be garbed in free trade dress...

...Hence, it was touted as "nonprotectionist," even as "antiprotectionist," because it was a way to relieve pressure for quotas, tariffs and subsidies in the United States...

...The decoupling of corporation from country is nowhere better exemplified than in the American experience over the last two decades...

...and the Payne-Aldrich Tariff of 1909, which continued the tradition...

...As for the European powers, they were involved in amassing their empires with their systems of preferences and exclusions...

...Despite these many pressures of special interests and of the State and Defense Departments in favor of "free trade," the United States was compelled—as was Britain toward the end of the last century—to turn toward "protectionism...

...As Queen Victoria—the epitome of the Imperialist Age—put it: "If we are to maintain our position as a first-rate power, we must, with our Indian Empire and large Colonies, be prepared for attacks and wars, somewhere or other, CONTINUALLY...

...The world is glutted with commodities, capital, and people without work...

...These global corporations— globally owned and operated, gathering capital from many lands, and locating their operations in many lands—are able to thumb their noses at governmental regulations...

...meant a world market for its goods made with inexpensive raw materials, as it did for the British a century before...

...The decline in the eleven months before Smoot-Hawley was far more precipitate than in the eleven months after...

...The Great War (World War I) was the inevitable consequence of the Age of Imperialism, the bloodiest conflict in human history up to that time...

...Thus was the myth of free trade perpetuated as Britain set forth to organize the biggest protected market in the world—a model repeated in the next century by the European Common Market, a device to minimize trade barriers within a circumscribed zone while raising barriers against all those outside the zone...

...Dollar devaluation was also witlessly discriminatory, giving "protection" to some industries that did not need it and got it anyhow because they were competing against German and Japanese producers, but denying protection to other industries, primarily labor intensive, that were competing against Hong Kong, Singapore, Taiwan, and South Korea (whose currencies were pegged to the American dollar) or against Latin American countries whose currencies were falling even more rapidly than the dollar...

...the Dingley Act, passed in McKinley's administration, which restored the 1890 schedule...

...Trade barriers would be removed within the "commonwealth" while duties were imposed on those outside the commonwealth...

...The resultant rise in exports and decline in imports would reduce America's trade deficit...

...A cause seldom triumphs unless somebody's personal interest is bound up with it...

...Such relocation means a redistribution of world income, a polarization with more income to a tiny top and less for everyone else...

...Not the stock market crash of October 1929...

...In effect, this was exactly the same as imposing an additional tariff of 100 percent on imports from these countries...

...An empire provided a place to invest surplus capital, a place to ship surplus wares in exchange for cheap raw material, and a place to export surplus population—the jobless, the poor, the criminal riffraff...

...All its major features were clearly in place before the depression and it did not become effective until after the depression...

...Although this is at the root of America's present troubles, the United States is not alone...

...If they are less visible than in the past, it is due to the near abandonment of crass old weapons like tariffs and prohibitions in favor of sly supersophisticated stratagems such as government financing of production at home or consumption overseas with interestfree (low-interest) loans, suppression of worker rights to reduce production costs, and the government's purchasing obsolete machinery, designating inaccessible ports of entry for imports, revaluating currencies, specifying purchasing restrictions, etcetera, ad infinitum, ad nauseam...

...The tariff had insignificant influence, because the tariff itself was statistically insignificant...

...What made this "solution" appealing is that it did not involve tariffs, quotas, nontariff barriers, or subsidies...

...In Parliament the action was defended as a necessary step to preserve "free trade...

...In his Report on Manufactures (1791) Secretary of the Treasury Alexander Hamilton outlined a comprehensive plan for the development of manufacture that called for outright bans on certain competing imports and subsidies for exports...

...In line with that policy, the great powers combined their forces to put down revolutions both in Europe and the Americas...

...If the "business climate," as interpreted by a corporation, is not attractive in one part of the globe, the company moves its activities to another part...

...Increases in tariff levels did not end with World War I. The Emergency Act of 1921 and the Fordney-McCumber Act of 1922 lifted the tariff to the highest level ever—with no apparent negative effects on the American economy as a whole...

...The result was a century of unending war...

...Yet—alas the myth—dollar devaluation is presented as "free trade's" answer to "protectionism...

...To these economic reasons for favoring "free trade" in the United States must be added a major political reason: the purchase of allies in exchange for pieces of the American market—so many bases in exchange for allowing so many cars, panties, or television sets to be sold in the United States...

...American manufacture was reared behind a protectionist fence almost from the day of the nation's birth...

...The "expedient" became a principle in the hands of Adam Smith, who saw economics as a subhead of theology—as a modern way to prove the existence of God "by design...

...In the long run, this means relocation of the centers of production from high-wage to low-wage countries, from lands with progressive social policies to those with oppressive social policies...

...Although there was only one nickel mine in the United States, owned by Joseph Wharton, an act of 1870 protected the company against all foreign competition...

...The U.S...

...England was the workshop of the world, far ahead of any possible competitors in its manufacturing potential...

...Of the duties collected, moreover, Smoot-Hawley was only responsible for about 32 percent of the sum...

...This British "solution" became the European SPRING • 1988 • 213 FREE TRADE solution, turning the century after the Treaty of Vienna into the Age of Imperialism, with its bloody and brutal conquest of tens of millions of "lesser" peoples in Africa, Australia, Asia, and Latin America...

...I was brought up, like most Englishmen," wrote John Maynard Keynes, "to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as part of the moral law...

...In this mysterious way, egoism became altruism...

...Providence had seen to it that each country should be more adept at producing a given product than some other country...

...It was not a response to the depression...

...Richardo later called these superior talents "natural attributes" that gave each country a "comparative advantage...

...It is a myth that has bred a progeny of myths: the Peace Myth, that the "century of peace" between the Treaty of Vienna (1815) and the outbreak of World War I (1914) was due to free trade...

...The true believer would not get in God's way but would let things be (laissez-faire) in both domestic and international trade...

...This time the prime mover was not Britain but a United States that in the post-Hitler era found itself in almost exactly the same position as Britain in the post-Napoleonic period...

...An equally devastating effect has been the increasing inability of the government to stimulate the economy by borrowing and spending...

...they agreed to hold down wars among themselves for fear of revolution...

...it never did exist, with the possible and limited exception of a brief period when Britain practiced it as well as preached it to expand its near-monopoly over world manufacture...

...God did not do this by personal appearances but by applying "the invisible hand...

...The myth nourishes the highflown rhetoric of statesmen who prate of free trade while practicing all sorts of protectionism...

...The myth is embraced by conservative businessmen who use it to promote their special economic interests, and it is dear to liberals, who see it as a way to curb monopolies, to help Third World countries, and to promote internationalism...

...To allege that such a trivial sum could have triggered or prolonged the Depression is a myth...

...The ancient plague is back...

...Even under Democratic President Woodrow Wilson, the Underwood-Simmons Act lowered tariffs by a mere 10 percent...

...Glut had returned...

...But this is a mischievous myth: It conceals the real problem of the world economy, maldistribution of income...

...The world war in trade is heating up because in the present world market no nation can make it without waging war against others, for the very simple reason that the world market cannot consume what the world can produce...

...In 1966, American multinational corporations had 17.7 percent of the world market...

...The global corporation is a threat to every advanced economy...

...The century of "peace" was a century of war—CONTINUALLY...

...Indeed, American multinationals in Japan do such a thriving business there that, if their sales in Japan were to be reckoned as American "exports" to Japan (which, of course, they are not), the balance of trade between Japan and the United States would be in America's favor...

...Indeed, in 1929 America's output in goods and services hit the highest point in the nation's history...

...I regarded ordinary departures from it as being at the same time an imbecility and an outrage...

...In 1839, China confiscated shipments of opium that the British, contrary to agreement, were smuggling into China...

...Both Germany and the United States—soon to challenge British dominance in manufacture— rejected "free trade" because they saw in it "perfidious Albion's" trick to enslave other nations eager to develop their own industries...

...In 1789, on July Fourth— Independence Day—the infant United States decided to protect its "infant industries" by passing a tariff bill, among whose stated purposes was "the encouragement and protection of manufacturers...

...In the lexicon of the free trade mythologists, however, this wardrenched era was defined as the "century of peace...

...and the Current Myth, that the great nations of the world in the post—World War II era have been working toward free trade...

...Whatever the merits of demerits of these acts—protectionism plus piggishness—they make a mockery of the myth that the century prior to World War I was an era of "free trade" so far as the U.S...

...Then in the fall of 1929 came the Great Depression...

...Yardeni's is a 1985 version of a myth that is so widespread that it is accepted as a "given...

...q 218 • DISSENT...

...When other countries began to develop manufacturing capacity, English free traders demanded that an embargo be placed on British-made machinery and on British coal so that other nations might not catch up with Britain...

...The great corporations that governments tried to control are now getting out of control as the multinational replaces the SPRING • 1988 • 217 FREE TRADE national company...

...In addition, repeal of the Corn Laws meant that British bread would be cheaper and employers, heeding the "iron law of wages," could pay less to their employees...

...In 1828, Congress enacted a law that free-traders, mainly southern agricultural interests, called the Tariff of Abominations...

...In effect, America's "free trade" commitment has meant that government expenditures have stimulated economies in other countries...

...Smith, a professor of moral philosophy, envisioned a world governed by a "divine being whose benevolence and wisdom have, from all eternity, contrived and conducted the immense machinery of the Universe so as at all times to produce the greatest possible quantity of happiness...

...To open all markets everywhere meant to allow British manufactured goods to be sold everywhere and to deny other countries the opportunity to develop their own "infant industry...

...In this case, the myth rests on another myth, since there was virtually no free trade as well as no peace...

...They began to collide in China, Africa, India, Persia, Latin America, the Middle East, and the crumbling remnants of the Ottoman Empire...

...To do otherwise was to imply that man was wiser than God—a blasphemous thought...

...Yet the myth had (has) its appeal to conservatives who prefer to point to Smoot-Hawley rather than income imbalance as the cause of the depression and to progressives waging their traditional war against monopolies...

...I say that such a proposal might commend itself even to an orthodox free trader," said Chamberlain in 1896...

...it turns to globalized laissez-faire at a moment when the countries of the world need massive and collective intervention by governments in their highly interdependent economies...

...This inherent and natural ailment of a capitalist society was somewhat countered in the near half century from 1930 to 1980 by policies of growth and redistribution (Keynesianism...

...No wonder that Keynes was taught to think of free trade as "part of the moral law...

...The earth did not expand with the expanding needs and appetites of the imperialist nations...

...The sad story is that the world today is probably more heavily "protectionist" than at any time in world history...

...Disraeli saw free trade for what it was when, in the 1843 debate over repeal of the British Corn Laws, he said: "Free trade is not a principle, it is an expedient...

...Americanheadquartered multinationals do much of their production in other lands...

...Although the United States also began to devise its own protective measures, by relative standards, America—mired in a muddy myth— became an island of free trade in a protectionist ocean whose waves were washing away American manufacture...

...Just as Britain was soon challenged by the United States and the European continent by producers who had risen from infancy behind protected walls, so too did the United States find itself challenged by the European Common Market and by Japan and, later, other countries— including recently "backward" nations...

...In 1816, Congress passed a tariff act whose stated intent was purely protectionist, lifting rates by 42 percent over the prewar level...

...To pay for imports, the United States had to borrow money from abroad, requiring it to allocate an ever larger percent of its product to pay interest on overseas loans...

...Britain had given up the practice, although mumbling away at the preachments, well before the turn of the century...

...Because world oil is priced in dollars, some of America's competitors were able to buy petroleum at bargain rates, while America could not...

...One of the immediate effects has been the polarization of income in the United States as many of the blue-collar jobs—the upward escalator in America—have been wiped out...

...To interfere with the working of the "immense machinery," the "invisible hand," was an immoral act, a sin against the "divine being...

...Each land would do what it could do best and exchange its wares with those of another country, thereby blessing the earth with "the greatest possible quantity of happiness...

...The capitals are Victoria's —G.T...

...Smoot-Hawley had virtually no impact on the downward trend at all: the decline just continued downward on an almost straight line graph...

...Nor can they, so long as our thinking is bemused by an eighteenth-century myth, yclept "free trade...

...Not the tax increase of 1932...

...There were other negative features of dollar devaluation...

...The consequence has been a steady deindustrialization of the United States, a deindustrialization inflicted on America by many of its most prominent multinational corporations...

...For American producers who did their work in such favored lands, the idea of free trade in the United States was a delight, allowing them to produce and sell in "protected" markets overseas while exporting to the United States with its "unprotected" market...

...Thus, Edward E. Yardeni, economist for Prudential-Bache, writes: The single most catastrophic cause of the Great Depression was the Smoot-Hawley Tariff of June 1930...

...The Great Depression began before, not after, Smoot-Hawley...

...The strong American dollar could buy raw materials, such as petroleum, cheaply...

...To encourage exports, they all— including the United States—concocted super-sophisticated forms of subsidies, a no-no of classic free trade policy...

...History is full of myths that have served mankind well...

...in 1983, American multinationals had exactly the same share of the world market...

...For American bankers who had made bad loans to Third World countries, their chief "protection" was a "free trade" policy in the United States that would allow debtor countries to export to the United States far more than they would import from the United States...

...The myth is so powerful that it dominates virtually all thinking of America's academics, who continue to reiterate classic clichés that never did and certainly do not today square with reality...

...The working of the "invisible hand" was, of course, visible for those who would see through the eyes of Adam Smith...

...By cheapening the dollar vis-à-vis other currencies, American-made products could be bought inexpensively by people with yen, francs, lire, or marks, and foreignmade products would be more expensive for Americans making purchases with weak dol216 • DISSENT FREE TRADE lars...

...By 1987, the volume of imports to the United States fell and the volume of exports rose—as expected...

...the Depression Myth, that the SmootHawley Tariff Act of 1930 caused or prolonged the Great Depression...

...Britain, on behalf of the smugglers, declared war on China...

...Yet all the facts run to the contrary...

...The peace myth is based on the fact that among the "western nations" there was no major conflict for a whole century—a fact that has little to do with free trade but much to do with the great powers' fear of another French Revolution and its bastard child Napoleon...

...Although the myth of free trade was to provide the rhetorical rationale for imperialism, the real reason for Britain's expansionism was its need to deal with the perennial problem of "glut," the simultaneous "glut" of commodities, capital, and people—the Achilles' heel of any capitalist society cursed by a lopsided maldistribution of income...

...The actual duties calculated for 1930 came to $482 million —a sum equal to one-half of 1 percent of the Gross National Product...

...The interplay between "free trade" and empire is brilliantly documented by Bernard Semmell in a book with the oxymoronic title of The Rise of Free Trade Imperialism...

...The challenge came quickly this time because American producers, unable to export their products to closed markets, simply exported their production, locating their facilities in lands where wages and taxes were low and where "protective" walls were high...

...So the final impact of Smoot-Hawley was about one sixth of 1 percent of the GNP...

...This "protectionist" measure worked—at least in part...

...The myth, however, was not the only reason that America began to suffer the deindustrialization that Britain had experienced at the end of the last century...

...Thus, the great nations met in "round" after "round" to announce reductions of tariff barriers and then rushed home to erect nontariff barriers, thousands of little pieces of red tape to break the legs of anyone trying to penetrate their boundaries with foreign goods that they did not want...

...went...

...Of the $3 billion in imports, two-thirds came in free...

...As Viscount Castlereagh put it: "The existing Concert [of Powers] is their only perfect security against the revolutionary embers more or less existing in every state of Europe...

...The following year, the Smoot-Hawley Tariff was enacted...

...The old "natural attributes" that once provided "comparative advantages" to a company in a given land are now replaced by unnatural attributes— such as tariffs, quotas, subsidies, nontariff barriers, and currency devaluation—that bestow the "comparative advantage" on given geographic sites for corporate location...

...Its relatively high wages and social programs make it a place to be avoided by the corporations...

...Then there were the McKinley Tariff of 1890, setting duties on manufactured goods higher than ever before...

...In sum, dollar devaluation is PROTECTIONISM in a form that is clumsy, irrationally discriminatory, a longtime drain on the nation's funds, and a fatal threat to the future of America once overseas investors conclude that to invest in dollars is to invest in a vanishing value...

...When, despite British efforts to keep other nations dependent on its manufactures, competitors did appear on the scene, Britain turned to the idea of empire as the answer...

...Among the nations first to be adversely affected by the flight of the multinational operations to low-wage, low-tax, protectionist lands is the United States...

...For American manufacturers who could produce and sell in protected markets overseas or who could produce cheaply in Third World countries and sell expensively in America, "free trade" in the United States was their updated version of "protectionism...

...As an "expedient," free trade served the interests of the rising British textile manufacturers in the years following the Napoleonic Wars...

...That free trade is a myth does not necessarily mean that it is bad...

...Thus, Milton and Rose Friedman: The century from Waterloo to the First World War offers a striking example of the beneficial effects of free trade among nations . . . one of the most peaceful [periods] in human history among western nations, marred only by some minor wars—the Crimean War and the Franco-Prussian War are the most memorable—and, of course, a major Civil War within the United States...

...instead they turned their militaries loose upon the defenseless peoples of continents still unblessed by Christianity...

...Yet, the myth hath it, this was a century of peace—cradled by "free trade...

...So profoundly and devoutly did Britain believe in the credo of free trade that it was ready to use armed force to impose this divinely ordained freedom on others—as in the Opium Wars...

...The end result is to weaken the American economy and, simultaneously, to make it more difficult for the government to come to the rescue by traditional Keynesian strategies...