[Futurework] Enslaved by Free Trade?

[Keith Hudson]

In the following article in this week's New Scientist, George Monbiot makes a case for governments to defend new industries from foreign competition. It's a plausible case but a fallacious one.

If a government decides to protect a particular new industry by giving subsidies to it or by erecting tariff barriers against homologous imports then a price has to be paid. Either taxes have to be raised or customers of the imported products have to pay a higher price than otherwise. In both cases one favoured industry is being subsidised by penalising the others. A government had therefore be totally confident that the industry it is protecting will have a more profitable future than the others. But that is something that governments are incapable of doing. Indeed, as we have seen in the last decade or so, even shrewd venture capitalists are not capable either.

The fact is that in both a free market or a controlled market (over the longer term), customers decide on the fate of its economy, not governments, nor even entrepreneurs as a generality. The reason for the economic success of any highly prosperous country is always due to a microscopically small number of individual entrepreneurs at any one time. But no-one can choose in advance who are likely to be the seminal entrepreneurs, and the best thing a government can do is to encourage all of them and wait for the seminal industries to emerge.

If Monbiot wants to prove that state support for new industries by countries such as Japan, Taiwan and South Korea was the reason why they were successful, then how does he differentiate this effect from the adoption ("stealing") of technologies from existing practitioners?

As to giving examples of countries which have succeeded by stealing the technologies of others, Monbiot only mentions Switzerland and Holland. But this has, in fact, been widespread. Ever since the Renaissance when people risked their lives in stealing the secrets of the latest silk spinning machines from the Italian city states and taking them to the rest of Europe, the whole of the subsequent industrial revolution could only have taken place by means of new techniques being stolen and transmitted like wildfire from one country to another (America being an important recipient) no matter how much the manufacturers tried to confine them in their own premises or cities.

If present-day patents and intellectual copyright had been as strongly in force two hundred years ago as today --  or as the developed countries and large coportations would them to be -- then the industrial revolution would simply have not happened.

Keith Hudson   

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ENSLAVED BY FREE TRADE

George Monbiot

The founding myth of the dominant nations is that they achieved their industrial and technological superiority through free trade. Nations that are poor today are told that if they want to follow our path to riches they must open their economies to foreign competition. They are being conned.

Almost every rich nation has industrialised with the help of one of two mechanisms now prohibited by the rules of global trade. The first is "infant industry protection": defending new industries from foreign competition until they are big enough to compete on equal terms. The second is the theft of intellectual property. History suggests that technological development may be impossible without one or both.

Britain's industrial revolution was founded on the textile industry. This was nurtured and promoted by means of ruthless government intervention. As the development economist Ha-Joon Chang at the University of Cambridge has documented, from the 14th century onwards, the state systematically cut out competitors by taxing or banning the import of foreign manufactured products and banning the export of the raw materials to countries with competing industries.

Only when Britain had established technological superiority in almost every aspect of manufacturing did it suddenly discover the virtues of free trade. It was not until the 1850s and l860s that it opened up most markets.

The US, which now insists that no nation can develop without free trade, defended its markets just as aggressively during its key development phase. In 1816 the tax on almost all imported manufactured products was 35 per cent, rising to 40 per cent in 1820 and, for some goods, 50 per cent in 1832. This gave domestic manufacturers a formidable advantage in their home market. The US remained the most heavily protected nation on earth until 1913. Throughout this period, it was also the fastest-growing.

The three nations that have developed most spectacularly over the past 60 years -- Japan, Taiwan and South Korea -- all did so not through free trade but through land reform, the protection and funding of key industries, and the active promotion of exports by the state.

In South Korea and Taiwan, the state owned all the major commercial banks, and this allowed it to make major decisions about investment. In Japan, the Ministry of International Trade and Industry exercised the same control using legislation. All three used tariffs and a number of clever legal ruses to shut out foreign products that threatened the development of their new industries. They granted major subsidies for exports. They did, in other words, everything that the World Trade Organization, the World Bank and the International Monetary Fund forbid or discourage today.

There are two striking exceptions to this route to development. Neither Switzerland nor the Netherlands used infant industry protection. Instead, as the economic historian Eric Schiff showed in Industrialisation Without National Patents, published in 1971, they simply stole the technologies of other nations. During their key development phases (1850 to 1907 in Switzerland, 1869 to 1912 in the Netherlands), neither country recognised the validity of patents in most economic sectors.

Switzerland's industrialisation took off in 1859, when a small company based in Basle pilfered the aniline dying process that had been developed and patented in Britain two years before. The company was later named Ciba; more recently, after a series of mergers and splits, it became Novartis and Syngenta. In the Netherlands, in the early i870s, two enterprising firms called Jurgens and Van den Bergh "borrowed" a patented French recipe and started producing something called margarine. They later merged, and went on to form part of the company named Unilever.

Those nations that are poor today are forbidden by trade rules from following either of these routes to development. Their new industries are immediately exposed to full competition with established companies overseas that have capital, experience, intellectual property rights, established marketing networks and economies of scale on their side.

"Technology transfer" is encouraged in theory, but forbidden in practice by an ever fiercer patents regime. Unable to develop competitive enterprises of their own, the poor nations are locked into their position as the suppliers of cheap labour and raw materials to the rich world's companies. They are, as a result, barred from advancing beyond a certain level of development.

There is no sound argument for permitting rich nations to protect their economies. But there is a powerful case for permitting the poor ones to follow the only routes to development that appear to work.
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George Monbiot's book The Age of Consent: A manifesto for a new world order, is published on 16 June by Flamingo


Keith Hudson, 6 Upper Camden Place, Bath, England