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They understood but largely ignored the fact that a significant minority of innocent people were usually harmed.
In a world where it cost too much to import grain from the neighboring valley, let alone from across the ocean, a short crop was partially compensated for by a rise in price. In a global agricultural market with cheap shipping, even that comfort disappeared.5 The loss of this familiar cushion provides as poignant an example as any of the risks of a globalizing economy.
Heckscher and Ohlin’s essential insight was that decreased shipping costs created not only the global convergence of commodity prices, but also convergence of the prices of the three basic input factors: wages, rents, and interest rates.
Their model predicted that protection benefited those who predominantly owned a relatively scarce factor and harmed those who owned a relatively abundant one.12 With free trade, the opposite occurred.
The Stolper-Samuelson theorem predicts that the main beneficiaries of increased trade would be the owners of abundant factors in each nation: capitalists and laborers in England, and landowners (that is, farmers) in the United States. This is precisely what happened, and thus it was no coincidence that all these groups favored free trade. Likewise it is no surprise that the owners of scarce factors in each nation—English landowners and American laborers and capitalists—sought protection.
The Danish experience remains to this day a powerful, though nearly forgotten, lesson on the appropriate government reaction to the challenge of global competition: support and fund, but do not protect.
In the twentieth century, the world would find out that the German coalition of xenophobic, protectionist landowners and capitalists arrayed against socialist, free-trading workers was a prescription for fascism. In nineteenth-century England, on the other hand, capitalists and workers united in favor of free trade against the old landowning oligarchy, a profoundly democratic development.
The rapid erection of tariff barriers between 1880 and 1914 should have choked off global commerce. In fact, no such thing occurred; between those two dates, the volume of world trade approximately tripled, driven by two forces. First, the steam engine continued to prove mightier than the customhouse, as savings on shipping costs more than made up for increased import duties. Second, the planet had grown much richer, with total world real GDP nearly quadrupling during that thirty-four-year period. All other things being equal, wealthier societies trade more, since they have more excess goods
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During the first half of the twentieth century, patriots around the world less and less felt the world their country, and this would cause no little grief. America learned the hard way that protection invites retaliation; a nation cannot trade out without trading in.
[Trade wars] undoubtedly sharpen national antagonisms. They also provide excellent opportunities for nationalist leaders to arouse popular resentment … international economic relations provide them with an excellent instrument to achieve their ends, just as a promise of a quick and crushing victory by means of aerial superiority undoubtedly contributed in a most important way to the present
war.
[After the First World War] we made new loans to the rest of the world; now, again, we are making such loans. But then, we sought to recover, with interest, sums that we had advanced to our allies to finance the prosecution of the war. And, at the same time, we raised our tariff so fast and so far as to make it difficult, if not impossible, for any of these debts to be paid. Now, however, we have written off the wartime balance of the lend-lease account and we have taken the lead in reducing barriers to trade. We have come, at last, to recognize the requirements of our position as the world’s
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Free trade provides modest benefits for most of the population while greatly harming small groups in specific industries and occupations.
rice. The GATT, in essence, created a global “consumers’ union” representing the world’s billions of disenfranchised buyers, each nicked a few pennies, francs, or yen every time the cash register rang.
As a rough approximation, then, we can divide the history of modern globalization into four periods. The first period spans the years between 1830 and 1885, when rapidly falling transport and communication costs combined with relatively low tariffs (except in the United States) to dramatically increase the volume
of trade and to produce global convergence of wages, land prices and rents, and interest rates. During the second period, roughly between 1885 and 1930, intense agricultural competition from the Americas, Australia, New Zealand, and the Ukraine caused a European protectionist backlash; this was easily overwhelmed by the continuing fall in transport prices.47 The third period, which began with the passage of Smoot-Hawley in 1930, saw slowing improvements in transport technology swamped by large tariff hikes. These events resulted in a devastating fall in world trade.48 During the fourth period,
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of 6.4 percent per year over the next half century. Between 1945 and 1998, the volume of world trade increased from 5.5 pe...
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The postwar increase in trade volume and the nearly simultaneous rise of longshoremen’s unions combined to make the journey from cargo hold to freight car (or, increasingly, diesel truck) nearly as expensive as the journey across the ocean. An exhaustive government study of the freight carried on one transatlantic voyage by one vessel, the SS Warrior found that more than one-third of the cost of getting its cargo to its final destination was incurred on the pier. For cargoes to and from Hawaii, the cost was closer to 50 percent.
The power to regulate commerce among the states eventually gave rise in 1887 to the Interstate Commerce Commission (ICC), which regulated nearly every aspect of long-range transport in the United States, corroded nearly every industry it touched, and stifled American transport innovation until it was finally abolished in 1995. For more than a century, merchants had sought an “intermodal” shipping device that could be seamlessly loaded and unloaded among train, truck, and ship. In 1837 a shipper in Pittsburgh, James O’Connor, devised a boxcar that could be either fitted with train wheels or
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1926 the Chicago North Shore and Milwaukee Railway began to “piggyback” trailers onto flatcars. The ICC decided that such intermodal devices fell under its authority and promptly brought their development to a halt.
The rise of protectionism in the 1930s empowered the owners of scarce factors both in the United States (labor, represented by the Democratic Party) and in Germany (land and capital, represented most ferociously by the Nazis). So too does the rise of free trade today
empower those who favor it, most spectacularly the owners of America’s abundant factors—land and capital—represented by the Republican Party.
Behind a tariff wall built by Washington, Hamilton, Clay, Lincoln, and the Republican presidents who followed, the United States had gone from an agricultural coastal republic to become the greatest industrial power the world had ever seen—in a single century. Such was the success of the policy called protectionism that is so disparaged today.
Modern quantitative techniques confirm that the evidence for free trade as an engine of growth in the nineteenth century is weak at best. In fact, a number of rigorous quantitative studies have suggested that during the 1800s, protectionism actually may have fostered economic development.
distinguished economic historian, Kevin O’Rourke, studied eight wealthy European nations, the United States, and Canada during the late nineteenth century and was startled to find a positive correlation between tariff levels and economic growth—the higher the tariff, the better a nation did.
Not all trade historians agree that America’s high nineteenth-century tariffs were beneficial. Bradford DeLong of Berkeley notes that protectionism delayed the acquisition by New England entrepreneurs of leadingedge English steam and industrial technologies, stunting industries that might have benefited from them. Although Bils may be correct in saying that a lower tariff would have devastated existing New England factories, DeLong argues that the nation would have wound up with a different, and much more prosperous, capital-intensive “high-tech” industrial sector in its place.
The two lists speak for themselves; in 2006 the average GDP for the “always open” group was $17,521, as opposed to $2,362 for the “always closed” group. Sachs and his colleagues next looked at the effect of trade policy on the ability of a nation to join the “convergence club” of the world’s prosperous economies.16 This time, they examined the relationship in both developed and developing nations between per capita GDP in 1970 and growth rates over the next twenty years. They found that free-trading nations had very high growth rates.
year. In other words, poor nations that adopt free trade tend to catch up with rich nations.
Sachs and Warner next performed the same exercise for nations with generally protectionist policies over the same period. Their real per capita GDPs barely grew, clocking an average rate of just 0.5 percent per year.
When the poor protect, they stagnate and fall ever further behind the developed nations.
And therein lies the solution to the riddle: during the nineteenth century, trade within a nation was much more important than trade with other countries. As long as a country’s internal markets were open, a tariff wall against foreign goods did relatively little damage. Before the twentieth century, external trade constituted only a tiny part of the economy of most nations. For example, in 1870 exports constituted just 2.5 percent of GDP in
the United States; in France, 4.9 percent; and even in free-trading England, only 12.2 percent. As trade has grown, the world economy has become more dependent on it, with exports rising from 4.6 percent of world GDP in 1870 to 17.2 percent in 1998.
Geography contributes as well: the larger and more economically diverse a nation, the more self-sufficient it is, and the less important trade becomes. Since its independence, the United States has been the most self-sufficient of all major nations; today imports constitute only about 14 percent of its GDP. Holland lies at the other extreme, with imports making up 61 percent of its economy.17 This is consistent with Edward Denison’s data for the ...
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Norway; less benefit for the larger and more diverse economies of Germany and France; and none a...
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In the nineteenth century, nations, particularly large, self-reliant nations such as the United States, could get away with protectionist trade policies. In the globally integrated economy of the twenty-first century, autarky becomes a much dicier proposition. Further, most of the damage done to the economies of the developing world has been self-inflicted; to paraph...
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Whom does free trade hurt in the developed world? The relatively scarce factor: low-skilled labor. Who benefits? Highly skilled workers. Further, globalization increases income inequalities in the rich nations, as the inflation-adjusted incomes of the highly skilled rise rapidly and those of the low-skilled rise more slowly or even fall.
This graph clearly shows that in America, the top quintile,
or 20 percent, of the population has become relatively richer, increasing its share of the income pie by one-sixth (from 41 percent to 48 percent) between 1970 and 2005, while everyone else has gotten relatively poorer.
Worse, even though the unemployment rate has fallen during the past two decades, job insecurity has grown dramatically during the same period. Average workers are about one-third more likely to lose their job than they were two decades ago, and to be paid almost 14 percent less when they eventually do find work again, if they are lucky enough to do so. (One-third of workers are not so lucky.) A 1998 Wall Street Journal survey asked Americans
if they agreed with the statement, “Foreign trade has been bad for the U.S. economy because cheap imports have cost wages and jobs here.” As predicted by Stolper-Samuelson, this issue cleaves the nation along the abundant-scarce factor fault line: among those earning more than $100,000 per year, only one-third agreed, whereas among blue-collar workers and union members, two-thirds agreed.22
The developing world exports to the United States not only shirts, sneakers, and electronics but also its abundant human capital: low-skilled workers who compete with Americans depress domestic wages, increase the income gap, and fan anti-immigration sentiment. It is no accident that union members are among the most vocal proponents of stricter immigration policy.
This number varies between zero and one; a
population in which everyone has exactly the same income has a coefficient of 0.0, and a population in which only one individual earns all the income has a coefficient of 1.0. The Ginis of the world’s twenty wealthiest nations range from 0.25 (Sweden) to 0.41 (United States). The list of the highest-Gini nations fails to impress: Namibia, 0.74; Botswana, 0.63; Bolivia, 0.60; and Paraguay, 0.58.26 More systematic research strongly suggests that increasing inequality produces social and political instability, which in turn leads to decreased investment and decreased economic development.
Modern developed nations have gotten into the habit of intentionally lowering their Ginis with redistributive tax policies and social welfare pr...
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economic development, but by reducing inequality, they can also buy social peace, which can offset the ine...
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The landlords should make an estimate of their probable losses from the repeal of the Corn Laws, and found upon it a claim to compensation. Some, indeed, may question how far they who, for their own emolument, imposed one of the worst of taxes upon their countrymen [i.e., the Corn Laws], are entitled to compensation for renouncing advantages which they never ought to have enjoyed. It would be better, however, to have a repeal of the Corn Laws, even clogged by a compensation, than to not have it at all; and if this were our only alternative, no one could complain of a change, but which, though
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Such sentiments not only unnecessarily antagonize workers but also are unfair; American industry has in fact been much more adept than labor at getting protection, particularly in the form of non-tariff barriers: quotas, subsidies, antidumping legislation, and the like.35 Trade economists are slowly beginning to realize that they must stop being their own worst enemies. Dani Rodrik of the Kennedy School of Government at Harvard has, with great sensitivity, extensively surveyed the social havoc caused by the increased mobility of goods and services, explored the necessity of compensation, and
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global economy.
When governments erect tariff barriers, Samuelson asserts, the result is industrial stagnation; it is far better to protect workers than to protect industries. Even so, Samuelson is not overly optimistic about the ability to “bribe the suffering factor” in a nation where a majority of people are worse off. (Neither is Rodrik, who notes the difficulties of paying for such social welfare schemes with taxes in a world in which corporations can easily move their capital and factories across national borders.)
