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As all that is solid melts to air and everything holy is profaned...

Wednesday, February 01, 2017

Brexit and Free Trade- Lesson from History

Free Trade Hall, Manchester built 1853-6

Once upon a time the United Kingdom was the richest and most powerful country in the world. It was rich and powerful because it was the first country to have an industrial revolution. The UK could manufacture cotton, iron and other goods more cheaply and in greater quantities than any other country. 

So long as the UK was the only industrial country a policy of free trade worked to its advantage. Since other countries were not able to produce manufactured goods as cheaply as the UK, there was no need to worry about imports of manufactured goods. What the UK needed was imports of cheap raw materials and food in exchange for exports of manufactured goods.

Before Germany was unified in 1870, the UK imported wheat from Prussia in exchange for manufactured commodities. For most of the nineteenth century, cotton was imported from the USA in exchange for British iron. Then, around 1880, the situation began to change. United Germany and the United States had pushed forward with the development of their steel industries. The UK had its own steel industry, but as German and USA production increased, they no longer needed to import from the UK. In 1880, the USA had a 100% tariff on imported steel. Under Bismark, from  1870 Germany had a similar high tariff policy, designed to protect newly developing industries from cheap foreign -UK- competition.

Most of the post-1880 steel production in the USA was absorbed by its internal economic development but this was not the case in Germany. In Germany, to keep up production, surplus steel was exported very cheaply. The ‘dumping’ of German steel along with the realisation that the UK was no longer the only industrial superpower led to a questioning of free trade.  The Conservative party started to argue for ’fair trade’. This involved restricting free trade to the British Empire and imposing tariffs on imports from the rest of the world.

However the Liberal party remained convinced that global free trade was the best way to avoid economic warfare which in turn would ensure peace. Then came World War One…

The war disrupted the global economy. Countries which had imported, for example British cotton, had their supplies cut off. This forced them to either developed their own cotton industries or find alternative suppliers. Japan was a country which  benefited from this, building up its cotton industry as an alternative to the UK. Coal was another victim of the war. The UK had built up a coal export industry, but then needed all its coal to keep up its war effort. Countries which could no longer import British coal had to develop their own coal industries, if they had them, or find other sources.

Despite competition from newly industrialised countries, across a whole range of statistics, UK industrial production peaked in 1913. After the war, it never recovered. Cotton, coal, shipbuilding, iron  and steel- all went into a decline.  Traditional support for free trade survived through the 1920s, but the Great Depression which began with the Wall Street Crash of 1929 provide the final blow. In a desperate bid to stave of total collapse of the UK economy, from 1931 onwards the UK gave up free trade and imposed import tariffs to protect ‘key industries’ like cotton, steel and shipbuilding.

The deal at the time was that in exchange for protection from foreign competition and against calls for nationalisation, the UK’s traditional industries would rationalise themselves. This would be done by shutting down older, smaller and less efficient factories, mines, shipyards and steel works and concentrating production in newer, larger and more efficient work places.

Some progress towards rationalisation was made, but the economic, political and social costs of the ‘creative destruction’ of the UK’s Victorian industrial legacy were too great and so most of the UK’s 100+ year old industrial infrastructure was left in place.

After the Second World War there was no return to free trade. British industry was protected by import restrictions. Through the 1950s the economy seemed to be prospering, but by the 1960s it was becoming harder to sustain this prosperity. Membership of the European ’Common Market’ began to seem an attractive proposition. The UK tried but failed to join in 1961 and 1967. In 1973 it was successful. 

Now the UK is set to leave and ‘prosperity through free trade with the rest of the world’ is one of the Brexiteers‘ slogans. But if free trade is the route to prosperity, why was it not readopted after World War Two? 

Perhaps because after WW2 it was realised that the UK was no longer the world’s only industrial nation. The UK had been able to prosper under free trade in the nineteenth century when other countries, including the colonies of the British Empire, had no choice but to buy manufactured goods from the UK. 

Today the UK does not have a monopoly in manufacturing. A policy of free trade, with no restrictions on imports and no tariff barriers would be more likely to undermine than encourage a revival of UK manufacturing. It should also be noted that modern manufacturing industries employ only a fraction of the number of workers  Victorian manufacturing industries needed. 

Where processes cannot be automated, the processes involved are located in areas with the cheapest possible labour costs. UK standards of living would have to fall dramatically to compete at global sweatshop levels.

To conclude, the belief that a post-Brexit UK can thrive and prosper by embracing ‘free trade’ with the non-EU world is a dangerous fantasy. In 1851, the UK could indulge in free trade because, as the only industrialised nation in the world, it had no competitors. 

Through the rest of the nineteenth century, even as protectionist nations like Germany and the USA overtook the UK, the belief in the benefits of free trade persisted. It took the harsh reality of the 1930s to force the UK into giving up free trade and imposing import restrictions and tariff barriers. The UK  has not been a free trade nation since 1931.

Today’s Brexit free traders fondly imagine a return to the ‘Greater’ Britain of the 1850s not the ‘Lesser’ Britain of the 1930s.

Great Exhibition, Hyde Park, 1851 

Jarrow March 1936