during this period
It was only after the Second World War that the US – with its industrial supremacy now unchallenged – liberalized its trade and started championing the cause of free trade. But the US has never practised free trade to the same degree as Britain did during its free trade period (1860 to 1932). It has never had a zero-tariff regime like Britain. It has also been much more aggressive in using non-tariff protectionist measures when necessary.[41] Moreover, even when it shifted to freer (if not absolutely free) trade, the US government promoted key industries by another means, namely, public funding of R&D. Between the 1950s and the mid-1990s, US federal government funding accounted for 50–70% of the country’s total R&D funding, which is far above the figure of around 20%, found in such ‘government-led’ countries as Japan and Korea. Without federal government funding for R&D, the US would not have been able to maintain its technological lead over the rest of the world in key industries like computers, semiconductors, life sciences, the internet and aerospace.
Given that protectionism is bad for economic growth, how can the two most successful economies in history have been so protectionist? One possible answer is that, while Britain and the US were protectionist, they were economically more successful than other countries because they were less protectionist than others. Indeed, it seems likely that other rich countries known for their protectionist tendencies – such as France, Germany and Japan – had even higher tariff walls than those of Britain and the US.
This is not true. None of the other countries among today’s wealthy nations were ever as protectionist as Britain or the US, with the brief exception of Spain in the 1930s.[42] France, Germany and Japan – the three countries that are usually considered to be the homes of protectionism – always had lower tariffs than Britain or the US (until the latter two countries converted to free trade following their economic ascendancy).
France is often presented as the protectionist counterpoint to free-trade Britain. But, between 1821 and 1875, especially up until the early 1860s, France had lower tariffs than Britain. [43] Even when it became protectionist – between the 1920s and the 1950s – its average industrial tariff rate was never over 30%. The average industrial tariff rates in Britain and the US were 50–55% at their heights.
Tariffs were always relatively low in Germany. Throughout the 19th and in the early 20th century (until the First World War), the average manufacturing tariff rate in Germany was 5–15%, way below the American and the British (before the 1860s) rates of 35–50%. Even in the 1920s, when it became more protective of its industries, Germany’s average industrial tariff rate stayed around 20%. The frequent equation of fascism with protectionism in free trade mythology is highly misleading in this sense.
As for Japan, in the very early days of its industrial development, it actually practised free trade. But this was not out of choice but due to a series of unequal treaties that it was forced by Western countries to sign upon its opening in 1853. These treaties bound Japan’s tariff rate below 5% until 1911. But, even after it regained tariff autonomy and raised manufacturing tariffs, the average industrial tariff rate was only about 30%.
It was only after the Second World War, when the US became top dog and liberalized its trade, that countries like France came to look protectionist. But, even then, the difference was not that great. In 1962, the average industrial tariff in the US was still 13%. With only 7% average industrial tariff rates, the Netherlands and West Germany were considerably less protectionist than the US. Tariff rates in Belgium, Japan, Italy, Austria and Finland were only slightly higher, ranging from 14% to 20%. France, with a tariff rate of 30% in 1959, was the one exception.[44] By the early 1970s, the US could not claim to be the leading practitioner of free trade any more. By then, other rich countries had caught up with it economically and found themselves able to lower their industrial tariffs. In 1973, the US average industrial tariff rate was 12%, compared to Finland’s 13%, Austria’s 11% and Japan’s 10%. The average tariff rate of the EEC (European Economic Community) countries was considerably lower than the US rate, at only 8%. [45]
So the two champions of free trade, Britain and the US, were not only not free trade economies, but had been the two most protectionist economies among rich countries – that is, until they each in succession became the world’s dominant industrial power.*
Of course, tariffs are only one of the many tools that a country can use to promote its infant industries. After all, Hamilton’s original recommendation listed eleven types of measures to promote infant industry, including patents, product quality standards and public investment in infrastructure. Britain and the US may have used tariffs most aggressively, but other countries often used other means of policy intervention – for example, state-owned enterprises, subsidies or export marketing support – more intensively.
In the early days of their industrialization, when there were not enough private sector entrepreneurs who could take on risky, large-scale ventures, most of today’s rich country governments (except the US and the British) set up state-owned enterprises. In some case, they provided so many subsidies and other help (e.g., poaching skilled workers from abroad) to some private-sector enterprises that they were effectively public-private joint ventures. In the 18th century, Prussia, the leader of German industrialization, promoted industries like linen, iron and steel by means of these methods. Japan started steel, shipbuilding and railway industries through state ownership and targeted subsidies (more on this in chapter 5). In the late 19th century, the Swedish government took the lead in developing the railways. As of 1913, it owned one-third of the railways in terms of mileage and 60% in terms of goods transported – this at a time when the leaders in railway development, namely Britain and the US, relied almost entirely on the private sector. Public-private co-operation in Sweden continued in the development of the telegraph, telephone and hydro-electric sectors. The Swedish government also subsidised R&D from early on.
After the Second World War, state efforts to promote industry were intensified in most rich countries. The biggest shift was in France. Contrary to the popular image, the French state has not always been interventionist. There certainly had been a tradition of state activism, represented by Jean-Baptiste Colbert, Louis XIV’s long-time finance minister (1865–83), but it was rejected after the French Revolution. So, between the end of Napoleon’s rule and the Second World War, except during the rule of Napoleon III, the French state took an extreme
In Japan, the famous MITI (Ministry of International Trade and Industry) orchestrated an industrial development programme that has now become a legend. Japan’s industrial tariffs were not particularly high after the Second World War, but imports were tightly controlled through government control over foreign exchange. Exports were promoted in order to maximize the supply of foreign currency needed to buy up better technology (either by buying machinery or by paying for technology licences). This involved direct and indirect export subsidies as well as information and marketing help from JETRO (Japan External Trade Organisation), the state trading agency. Japan took other measures to create the space needed for the accumulation of new productive capabilities by infant industries. The Japanese government channelled subsidized credits into key sectors through ‘directed credit progammes’. It also heavily regulated foreign investment by transnational corporations (TNCs). Foreign investment was simply banned in most key industries. Even when it was allowed, there were strict ceilings on foreign ownership, usually a maximum of 49%. Foreign companies were required to transfer technology and buy at least specified proportions of their inputs locally (the so-called local contents requirement). The Japanese government also regulated the inflow of technologies, to make sure that obsolete or over-priced technologies were
