This time it's (really not) different, Part II

Defence is more important than opulence.

The US is not in danger of a hostile foreign power cutting off its import supply.
It will adapt to the loss of traditional industries.
There are better ways to support those left behind than tariffs.

NATIONAL SECURITY CONCERNS ABOUT FREE TRADE.

In my previous blog, I talked about how economic theory arguably culminated in support of free trade over protectionism all the way back in 1776 with Adam Smith’s Wealth of Nations. But, as discussed in my dissertation, the first subsequent major movement away from free trade came after the Napoleonic Wars in the early 19^th Century – not long after Wealth of Nations. Arguably the most prominent academic pushing for such protectionism was Thomas Robert Malthus. And Malthus invoked a very specific reason for this departure from the new economic orthodoxy – national security.

During the Napoleonic Wars, Napoleon created a ‘Continental System’ which ended the export of all corn to Britain. But Britain had a significant agricultural industry that it was able to further develop so it was able to manage without European corn. And the monopoly that this trade ban gave to British farmers raised prices and encouraged them to produce even more.

But when the Napoleonic Wars unexpectedly ended and trade suddenly and impressively recommenced, corn prices halved, and British farmers were placed under significant pressure.

Britain was a corn exporter during Smith’s time, until 1793 (after Wealth of Nations, and 3 years after Smith died), so Smith was “in happy unconsciousness of the change that time was speedily to bring”, thinking that “the free importation of foreign corn could very little affect the interest of the farmers of Great Britain”, as they were heavily protected by high transport costs.

But if Smith had foreseen such a development, surely he would have acknowledged the national security risk. If Britain, heavily dependent now on French corn which had driven British farmers to disappear, were to recommence hostilities with France (or if France simply had a poor harvest), France could cut off Britain’s supply and the richest country in the world would starve – surely a national security issue. After all, there is virtually no country in Europe that hasn’t exercised the power to completely stop or heavily tax exports, if outright prohibition wasn’t already part of their general laws. And the political mistrust of the Napoleonic Wars continued long after the wars ended. Surely this justified protecting British agriculture with tariffs (to be called the Corn Laws in 1815) to stem agriculture’s already enormous losses and Britain’s potential complete ruin.

Malthus stood on the protectionist side of this debate, across from David Ricardo on the free trade side - the two most prominent academic voices of this debate. Though interestingly the two were still close friends (take note, modern society).

Support for such a protectionist exception could even be found in Adam Smith’s own work. Smith referred to Britain’s Navigation Act that protected the armed forces as “perhaps the wisest of all commercial regulations of England”, the one case where regulation was “positively expedient” despite the fact that it was “not favourable to foreign commerce” because in this case, “defence is of much more importance than opulence”. He believed the Act would assist an industry vital to the defence and health of the country (English mercantile shipping) at the expense of laying some burden upon a foreign country (at the time, Holland’s naval power).

Trump claimed national security reasons for his initial steel and aluminium tariffs. But with respect to steel, the US imports most of its supply from allies. China doesn’t even crack the top 10. So what’s the national security concern?

If the US imported a lot from non-allies, there may be a concern that the enemy (if war were to break out) could cut of the US’s supply, like Britain feared after the Napoleonic Wars. But even back then, this was arguably a non-issue. France cutting off Britain would cause massive financial losses to France, making it impossible for them to finance a war effort. And Britain, given its size and market power, could arguably obtain supply from elsewhere at short notice. Why not the US too in terms of steel?

But again, this is still a non-issue because these steel tariffs are aimed at US allies more than China.

MAYBE TRUMP'S ARGUMENT WAS MORE ABOUT NATIONAL ECONOMIC SECURITY.

Adam Smith once said:

"No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction in which it might not otherwise have gone.”

But contrary to Smith’s (and Ricardo’s) desire for specialisation, a diversified country/town is less dependent on one industry and thus, less subject "to the unmitigated force of the fluctuations of a single trade". Thus, it is less subject to widespread depression.

In this way, pure specialisation isn’t desirable. Even though a purely manufacturing society is undoubtedly better than a purely agricultural one, certain evils of specialisation mean going to the extreme is unadvisable.

Labour mobility was also greater during Adam Smith’s time, when workers retained closer links to previous employments, such as agriculture. But during WJ Ashley’s time in the late 19^th/early 20^th century (and arguably even more so today), workers were more skilled/specialised, causing them to be more immobile and cling more to very specific occupations, even in declining industries.

Keynes supported protection of agriculture for this reason too:

“The case for protection of agriculture was less narrowly economic: a well-rounded society needed contact with the changing seasons and the experience of cultivating the soil. Agriculture, like art, was a public good that the nation could afford to maintain.”

In his Self-Sufficiency paper, he wrote:

“We have until recently conceived it a moral duty to ruin the tillers of the soil and destroy the age-long human traditions attendant on husbandry if we could get a loaf of bread thereby a tenth of a penny cheaper”.

Surely it is worth preserving agriculture at the expense of such a marginal immediate gain.

But he does caution against taking self-sufficiency too far, referring to Russia as such a poor example – “Let Stalin be a terrifying example to all who seek to make experiments”. Not only is this likely an inefficient use of resources, but it hinders the ability of developing countries to pull themselves out of poverty through one of the most important activities in which they have greater advantage – agriculture. Keynes simply didn’t want the world to be stuck in the pure cruel internationalist capitalism of their forefathers. But problems with retreating from free trade still needed to be avoided.

But rather than focusing on agriculture, Ashley wanted to re-establish Britain’s superior world position in light of:

“the increasing industrial strength of Imperial Germany and the United States; … Britain’s declining share of world trade in its chief manufacturing staples of cotton, textiles and machine tools; the entrenched poverty and persistent industrial unrest in the face of economic growth; and an expanding chorus of eugenicists asserting than an unworthy underclass would soon drag down the English middle classes.”

There were declines in Britain’s most significant export industries: cotton manufactures, cotton yarn, iron and steel, woollen and worsted, and linen, as well as shipping.

“… all the older staple industries of Great Britain [were] either visibly declining in their exports or maintaining themselves with increasing difficulty”.

Countries that traditionally exported raw materials to Britain for Britain to turn into manufactures, were also increasingly beginning to manufacture for themselves, and capture other markets too, e.g. Indian cotton manufacturing. This was a development unpredicted by Smith, who thought England would maintain great natural manufacturing advantages.

But even if these industries couldn’t be brought back, Ashley argued that tariffs can still ease transitions, rather than allowing industries to lurch ceaselessly from depression to prosperity. Higher profits won't mean higher wages necessarily, but lower profits will almost definitely cause unemployment. The pain of unemployment and low wages far outweighs the joy of high wages and overtime. Even Adam Smith conceded the potential need to “ease the transition by temporary means of defence”.

Ashley also pointed to US and German protectionism, highlighting the fact that their wages (net of the cost of living) had gone up considerably during the period of protectionism, and unemployment and poverty were at far lower levels than had been allowed to occur in Britain.

Now, Trump supposedly has same concerns about the US’s decline, and loss of traditional industries to countries like China, and the potential for tariffs to fix it.

TARIFFS ARE STILL NOT THE BEST WAY THOUGH.

Ashley’s arguments were criticised for failing to appreciate that Britain (like the US today) would adapt. It may lose industries at which the US and Germany (China) were better/more powerful, but Britain (the US) would upskill and become proficient in new industries, not become a social and economic backwater of low skill poor slaves as Ashley feared. Arguably there was justification for temporary support during the transition – but preferably education, retraining, infrastructure, health care and income support, not something that upsets the trading partners.

Furthermore, the Corn Laws were repealed in 1846 specifically because of the damage they inflicted, and their inability to achieve price stability and domestic supply. The Lancaster cotton industry for example, suffered from its inability to cheaply import cotton from the US during the Corn Laws (like US car industry would from a lack of cheap imported steel). Why would Trump’s tariffs be any different?

Furthermore, as Bertrand Russell notes, the loss of an industry to international competitors is almost always a gradual one anyway (US manufacturing has been declining for decades), absorbed through reductions in investments rather than significant immediate hardship. "Heroic measures" are only necessary in the unlikely event of an "organised sudden attack" on an industry, which is not the case in the US.

So the US does not have to worry about a hostile foreign power cutting off its supply. And it will continue to adapt to new industries as old ones shift to other countries. Those individuals left behind should be supported productively, not with destructive protectionism. And history’s ongoing tendency to return to free trade supports this notion.