The Secret History of Protectionism
Between the 60s-70s, rich countries grew by 3.2% per year. During this period, they comfortably used protectionist policies like high tariffs, subsidies, and so on. When they implemented neoliberal policies (free trade), they grew by 2.1% per year. “Growth failure has been particularly noticeable in Latin American and Africa, where neo-liberal programs were implemented more thoroughly than in Asia.” In the 1960s and 1970s, Latin America’s per capita income grew at 3.1% per year. In the 1990s, it grew at only 1.7% per year; between 2000 and 2005, it grew only 0.6%.
In the 18th century, Robert Walpole, the first British prime minister enacted a group of protectionist policies that provided the foundation of economic growth:
“Britain’s average tariff on manufacturing imports was 45-55%, compared to 6-8% in the Low Countries, 8-12% in Germany and Switzerland, and around 20% in France.
Britain also banned exports from its colonies that competed with its own products, home and abroad. It banned cotton textile imports from India, which were then superior to the British ones. In 1699 it banned the export of woolen cloth from its colonies to other countries (the Wool Act), destroying the Irish woolen industry and stifling the emergence of woolen manufacture in America.
Finally, policies were deployed to encourage primary commodity production in the colonies. Walpole provided export subsidies to (on the American side) and abolished import taxes on (on the British side) raw materials produced in the American colonies such as hemp, wood, and timber. He wanted to make absolutely sure that the colonists stuck to producing primary commodities and never emerged as competitors to British manufacturers. Thus they were compelled to leave the most profitable ‘high-tech’ industries in the hands of Britain — which ensured that Britain would enjoy the benefits of being on the cutting edge of world development.” (Chang, 45)
Adam Smith criticized Walpole’s protectionism, because he believed that British industries had become internationally competitive. Indeed, by the end of the Napoleonic Wars in 1815, British manufacturers were the most efficient in the world. Britain now believed that free trade was in their interest. Hence, they abolished the Corn Laws that limited the ability to import cheap grains. (Chang, 46) It was seen as an act of trade imperialism, since Britain’s open market now encouraged agriculture rather than industrialization. Richard Cobden, the English manufacturer and statesman, argued that without the Corn Laws “the factory system would, in all probability, not have taken place in American and Germany.” (Chang, 48) Unsurprisingly, John Bowring of the Board of Trade encouraged “the member states of German Custom Union to specialize in growing wheat and sell the wheat to buy British manufactures… Britain adopted free trade only when it had a technological lead over others.” (Chang, 48) This is why 19th century German economist Friedrich List criticized Britain for “kicking away the ladder.”
Alexander Hamilton in 1791 submitted his Report on the Subject of Manufactures to the US Congress, which argued the need for protectionism and subsidies to build up infant industries. “The core of his idea was that a backward country like the US should protect its ‘industries in their infancy’ from foreign competition and nurture them to the point where they could stand on their own feet.” During the War of 1812, the US Congress raised tariffs from 12.5% to 25%. In 1816, they were raised to an average of 35%; by 1820, it amounted to 40%. The US’s protectionism did not cease. Abraham Lincoln raised industrial tariffs to their highest level in US history. Such high tariffs never truly declined: the Underwood Tariff bill in 1913 reduced it from 44% to 25%, but they were raised again due to the First World War, the Republican return to power in 1921 raised it again, by 1925 the average manufacturing tariff had climbed back up to 37%, and the Smooth-Hawley tariff as a response to the Great Depression raised them even more. (Chang, 54)
The dogma of anti-protectionism is baseless:
“Despite being the most protectionist country in the world throughout the 19th century and right up to the 1920s, the US was the fastest growing economy. The eminent Swiss economic historian, Paul Bairoch, points out that there is no evidence that the only significant reduction of protectionism in the US economy (between 1846 and 1861) had any noticeable positive impact on the country’s rate of economic growth.” (Chang, 55)
Even during its free-trade period, the US “promoted key industries through 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.” (Chang, 55-6) Despite its penchant for preaching the religious virtues of free trade, the US practiced virtually every protectionist policy in the book to grow its economy.
The same is true for other countries. In the 18th century, Prussia highly subsidized linen, iron, and steel. Japan kick started steel, shipbuilding, and railway industries through state ownership and targeted subsidies. In the late 19th century, the Swiss government led the charge in developing railways — by 1913 it owned one-third of the railways in terms of mileage and 60% in terms of goods transported. “In Finland, Norway, and Austria, the government [directed] the flow of bank credit to strategic industries. Finland heavily controlled foreign investment. In many parts of Italy, local government provided support for marketing and R%D to small and medium-sized firms in the locality.” (Chang, 58-60)
In 1961, South Korea’s yearly income amounted to $82 per person. The average Korean earned less than half the average Ghanaian citizen ($179). A 1950s internal report from USAID — US government agency primarily responsible for foreign aid— called Korea a ‘bottomless pit.’ In 1973, South Korea launched the Heavy and Chemical Industrialization program (HCI). The first steel mill, modern shipyard, and locally designed cars went into production. South Korea’s per capita income grew by more than five times between 1972 and 1979. Exports grew nine times during this period. They prohibited spending foreign exchange on anything not crucial to industrial development through import bans, high tariffs, and excise taxes. (Chang, 9) As a result of such protectionist policies, Korea is “one of the most ‘inventive’ nations in the world — it ranks among the top five nations in terms of the number of patents granted annually by the US patent Office.”(Chang, 11) Loose patent laws were crucial for this economic miracle, since it allowed ‘reverse engineering.’ Koreans would “take apart IBM machines, copy the parts, and put them together.” They “churned out fake Nike shoes and Louis Vuitton bags in huge quantities.” (Chang, 11) “Foreign books… were still beyond the means for most students… I could have never entered and survived Cambridge without those illegal books.” (Chang, 11)
Chile’s early neo-liberal financial crash in 1982 led to the nationalization of the Banking Sector. Chile’s income per capita grew by the late 80s, rivaling pre-Pinochet level. The government provided exporters with much help in overseas marketing and R&D. They also used capital controls in the 90s to successfully reduce the influx of short-term speculative funds, although recent free trade agreements with the US forced Chile to never use them again. 
India’s recent economic success is often attributed to free trade in the early 1990s. However, recent research demonstrates that India’s growth acceleration really began in the 1980s. Furthermore, even after the early 1990s free trade period, India’s average manufacturing tariffs remained above 30%.
Another good case study of successful protectionist policies is China:
“Like the US in the mid-19th century, or Japan and Korea in the mid-20th century, China used high tariffs to build up its industrial base. Right up to the 1990s, China’s average tariff was over 30%… It imposed foreign ownership ceilings and local contents requirements (the requirements that the foreign firms buy at least a certain proportion of their inputs from local suppliers.) (Chang, 29-30)
Contrary to neo-liberal dogma, this did not prevent foreign countries from investing in a highly lucrative market called China.
The Failures of Free Trade
Free Trade disproportionately harms developing countries despite the orthodoxy’s moralizing tales about the miracles of free trade. For example, Mexico’s per capita income growth stood at an average of 3.1% per year during its protectionist period from 1955-82. Compared to its free trade period, during which the US’s subsidized corn destroyed Mexico’s agriculture sector, NAFTA did positively impact the economy. However, the growth of per capita income of 1.8% still pales in comparison to its protectionist period. Moreover, recently NAFTA’s positive impacts seem to have declined as growth of per capita income stands at 0.3%. (Chang, 68) The benefits of free trade are short-lived, and these countries need a long-term goal that allows them to build their infant industries. The Ivory Coast cut tariff by 40% in 1986 due to pressure from free-trade zealots. Its chemical, textile, shoe, and automobile industries virtually collapsed. Unemployment soared. Zimbabwe’s trade liberalization in 1990 increased unemployment to 20%.
Free Trade Agreements also make poor nations poorer:
“Trade liberalization has created other problems, too. It has increased the pressures on government budgets, as it reduced tariff revenues. This has been a particularly serious problem for the poorer countries. Because they lack tax collection capabilities and because tariffs are the easiest tax to collect, they rely heavily on tariffs (which sometimes account for over 50% of total government revenue).” (Chang, 69)
Pressures from the IMF for rapid trade liberalization reduces the budget of poor nations, and less revenue means cutting education, health, and infrastructure — damaging long-term growth.
State Owned Enterprise (SOE)
There is a myth that plagues many people across the world. It is the myth that private enterprises are necessarily more efficient than state owned enterprises. They treat this as a logical tautology. The truth, like always, is much more nuanced and complicated.
Singapore Airlines is famous for its excellence. It has never made a financial loss in its 35-year history. Did you know that it was an SOE? Temasek controls 57% of Singapore airlines; Temasek’s single shareholder is Singapore’s Ministry of Finance (Chang, 108). South Korea’s POSCO became one of the world’s most efficient steel producers on the planet (and now the world’s 3rd largest) within ten years of its production in 1973. This was also an SOE. (109-110) Taiwan has had a very large SOE sector. Throughout the 1960s and 1870s, it accounted for over 16% of national output. (Chang, 109-110)
Austria, Finland, France, Norway, and Italy benefited greatly from SOE’s after the Second World War as well. “In Finland, public enterprises led technological modernization in forestry, mining, steel, transport equipment, paper machinery and chemical industries.” (Chang, 111) France’s famous enterprises like Renault (automobiles), Alcatel (telecommunications equipment), St Gobain (glass and other building materials), Usinor (steel; merged into Arcelor, which is now part of Arcelor-Mittal, the biggest steel-maker in the world), Thomson (electronics), Thales (defence electronics), Elf Aquitane (oil and gas), Rhone-Poulenc (pharmaceuticals; merged with the German company Hoechst to form Aventis, which is no part of Sanofi-Aventis), all used to be SOEs.
Successful SOE’s can be seen in Latin America as well. Brazil’s oil company Petrobras is a world-class firm with leading technologies. EMBRAER, the Brazilian manufacturer of ‘regional jets’, is another. EMBRAER is now the world’s biggest producer of regional jets and the world’s third largest aircraft manufacturer of any kind, after Airbus and Boeing. (Chang, 111)
The common criticism of SOE’s is that there exists no incentive for citizens to monitor them — because they all share the profit. They are secure, with no threat of bankruptcy. This allows them to act as if their budgets are soft. (Chang, 105-6) However, many of the same problems apply to large private firms. Shareholders only own a small amount, so there is also no big incentive to monitor. Their budget is just as soft: the 2008 financial crisis. (107) Considering the success of SOE’s, the dogmatic privileging of private enterprises over SOE’s appears to be totally unwarranted.
Intellectual Property Rights (IPR)
Loose patent and copyright laws have been essential for virtually every rich nation. Like Japan, Korea, Taiwan, and China that made counterfeits to grow their economies, European nations in the 19th century encouraged counterfeits too. For example, Germany fought against the British trademark law of 1862 by placing the stamp indicating the country of origin on the packaging instead of the individual articles. This meant that once the packaging was removed, one could not tell the product’s country of origin. Or, they would send pieces of products, like pianos and bicycles, and assemble them in Britain. (Chang, 133)
The US “refused to protect foreigners’ copyrights in its 1790 copyright law. The US was a net importer of copyright materials and saw the advantages of protecting only American authors.” (134, Chang) Switzerland refused to patent protect chemical substances, because “the ‘inventor’ had merely found a way to isolate [the substance].” (Chang, 132) The Netherlands abolished its 1817 patent law in 1869. Even the British free-market magazine, The Economist, opposed patents in the 19th century. Furthermore, Britain banned the migration of skilled workers in 1719, banned the export of ‘tools and utensils’ in the wood and silk industries in 1750, and they banned the export of many other types of machinery in 1785. (Chang, 129-130)
So why did all of these nations object to IPR’s? The British free-market magazine, The Economist, believed that the cost of the patent system would be higher than its benefits. Naturally, this leads us to the question: what are the costs? The cost is that it can harm developing countries. This is why Germany, Britain, US, Netherlands, and Switzerland disregarded patent and copyright laws when they would hinder their growth — such pragmatism, however, is not allowed if you’re not a Western country. For example, 41 pharmaceutical companies took the South African government to court for copying life-saving drugs for HIV/AIDS. They argued that the government’s practices were contrary to the TRIPS agreement. Moreover, they argued that there would be no more new drugs without patents. Is it then true that without patents there would be no more new drugs? 13 fellows of the Royal Society, the highest scientific society of the UK, argued in an open letter to the Financial Times: ‘Patents are only one means for promoting discovery and invention. Scientific curiosity, coupled with the desire to benefit humanity, has been of far greater importance throughout history.’ The facts support this claim: “in the year 2000, only 43% of US drugs research funding came from the pharmaceutical industry itself. 29% came from the US government and the remaining 28% from private charities and universities.” (Chang, 125)
Another downside of IPR’s is that they cost a lot:
“To comply with the TRIPS agreement, each developing country needs to spend a lot of money building up and implementing a new IPR system. The system does not run itself. Enforcement of copyright and trademarks requires an army of inspectors. The patent office needs scientists and engineers to process the patent applications and the courts needs patent lawyers to help sort out disputes. Training and hiring all these people costs money.” (Chang, 141)
Most developing countries cannot reap the benefits of patent laws, because they do not have the resources or the infrastructure to conduct researches. Considering the fact that “The World Bank estimates that, following the TRIPS agreement, the increase in technology license payments alone will cost developing countries an extra $45 billion a year, which is nearly half of foreign aid given by rich countries ($93 billion a year in 2004-5), this does not sound like a great deal for developing nations.
Who Benefits from Free Trade?
In 2002, India paid more tariffs to the US than Britain, despite the fact that the size of its economy is only one third of UK. Bangladesh paid as much to the US as France, despite it being 3% the size of France. (Chang, 75) Rich countries account for 80% of the world’s output, conduct 70% of international trade, and make 70-90% of all foreign direct investments. Plus, rich countries own 97% of patents and the vast majority of copyrights and trademarks. Rich countries collectively control 60% of the IMF and World Bank’s voting shares, bestowing them absolute control— for example, the US has a de facto veto regarding decisions in the 18 most important areas.
The World Bank, the IMF, and the World Trade Organization (WTO) form what the Cambridge Economist Ha-Joon Chang calls “the Unholy Trinity” of Free Trade. After the Third World debt crisis of 1982, the IMF and the World Bank began to exert more influence on developing nations through structural adjustment programs (SAPs). They now impose conditions on lending money, which range from “fertility decisions, ethnic integration, and gender equality, to cultural values.” (Chang, 33) For example, during the IMF crisis in 1997, the IMF demanded a limit to the amount of debt that private sector companies could have. They demanded humiliating conditions like “reductions of trade barriers to specific Japanese products and opening capital markets so that foreign investors can have majority ownership of Korean firms, engage in hostile takeovers… and expand direct participation in banking and other financial services.”
The WTO was created from an attempt to apply the same trade rules for every nation participating in the trade agreement. This sounds good on the surface, but it is quite pernicious: rich countries disproportionately protect products that poor countries export. This means that poor countries face higher tariffs than rich countries. An Oxfam report demonstrates this:
“The overall import tax rate for the USA is 1.6 per cent. That rate rises steeply for a large number of developing countries: average import taxes range from around four per cent for India and Peru, to seven per cent for Nicaragua, and as much as 14-15 per cent for Bangladesh, Cambodia and Nepal.”
Applying the same rules to reducing tariffs by the same proportions is unfair, because developing countries have higher tariffs in absolute terms. For example, “before the WTO agreement, India had an average tariff rate of 71%. It was cut to 32%. The US average tariff rate fell from 7% to 3%. Both are similar in proportional terms, but the absolute impact is very different.” (Chang, 76)
Another favorite of the Unholy Trinity is to impose low inflation as conditions for trade agreements or lending money. Stanley Fischer, chief economist of the IMF between 1994 and 2001, once explicitly recommended 1-3% as the ideal inflation rate. This is regarded as a truism in the neo-liberal orthodoxy, as one regularly encounters such arguments from Republicans like Paul Ryan. But is it really a truism? The evidence says otherwise:
“During the 1960s and 1970s, Brazil’s average inflation rate was 42% a year. Despite this, Brazil was one of the fastest growing economies in the world for those two decades — its per capita income grew at 4.5% a year during this period. In contrast, between 1996 and 2005, during which time Brazil embraced the neo-liberal orthodoxy, especially in relation to macroeconomic policy, its inflation rate averaged a much lower 7.1% a year. But during this period, per capita income in Brazil grew at only 1.3% a year.” (Chang, 149)
Furthermore, South Korea’s tariff rate was up to 20% -17.4% during its economic miracle period in the 1960s and 19.8% in the 1970s. This doesn’t mean that hyperinflation that we see in Argentina in the 1980s and 1990s, in which actual inflation was 20,266%, is good. It is rather that one does not need to have 1-3% to grow the economy. In fact, two World Bank economists, Michael Bruno, once the chief economist, and William Easterly, show that, below 40%, there is no systematic correlation between a country’s inflation rate and its growth rate.
Why does inflation not hinder growth? Chang explains that:
“the tight monetary and fiscal policies that are needed to lower inflation, especially to a very low level, are likely also to reduce the level of economic activity, which, in turn, will lower the demand for labor and thus increase unemployment and reduce wages… It protects their existing incomes better, but it reduces their future incomes. It is only the pensioners and others (including, significantly, the financial industry) whose incomes derive from financial assets with fixed returns for whom lower inflation is a pure blessing.” (Chang, 151)
The damage from these policies, therefore, cannot be unique to Brazil. For example, South Africa’s economic growth slowed down thanks to pressure from the IMF — which made it lower inflation rate to 6.3% a year, as investment rates fell from the historic 20-25% down to about 15%.
Perhaps, this is why during the latter half of the ‘Golden Age of Capitalism’ (1950-73), the average real interest rates were 2.6% in Germany, 1.8% in France, 1.5% in the USA, 1.4% in Sweden and -1.0% in Switzerland. They knew that they needed lax monetary policies to generate income and jobs. On the contrary, South Africa struggled to keep its interest rates high to maintain low interest rates recommended by the IMF.
Despite the sanctimonious rhetoric surrounding free trade, the reality is that free trade disproportionately benefits rich countries. They like to hide behind liberal economists’ and their aura of expertise, deriding the Left as fear mongering and irrational. Yet, they seem to be the ones that are woefully ignorant of history. Economists like Ha-Joon Chang do not argue that free trade is never efficient: “Free trade may often — although not always – be the best policy in the short run, as it is likely to maximize a country’s current consumption.” (Chang, 74) He has also argued many times that when a country’s industry is ready to compete in the global market it shouldn’t be tied down by over-regulation. Instead, he is attacking the religious orthodoxy that the free market is always good, because “in the long run, free trade is a policy that is likely to condemn developing countries to specialize in sectors that offer low productivity growth and thus low growth in living standards. This is why so few countries have succeeded with free trade while most successful countries have used infant industry protection to one degree or another.” (Chang, 74)
 Chang (2008), p. 27-8
 M. Weisbrot, D. Baker, and D. Rosnick (2005), ‘The Scorecard on Development: 25 Years of Diminished Progress,’ September 2005, Center for Economic and Policy Research (CEPR), Washington, DC, downloadable from http://cepr.net/documents/publications/development_2005_09.pdf
 The figures for Germany, Switzerland, and the Low Countries P. Bairoch (1993), Economics and World History — Myths and Paradoxes (Wheatheaf, Brighton), p. 40. Table 3.3. French Figures. See J. Nye (1991), ‘The Myth of Free-Trade Britain and Fortress France: Traiffs and Trade in the Nineteenth Century,’ Journal of Economic History, vol. 51. no. 1.
 Brisco (1907), p. 165
 See D. Landes (1998), The Wealth and Poverty of Nations (W.W. Norton & Company, New York), p. 521.
 O. Frayssé (1994), Lincoln, Land, and Labour, translated by S. Neely from the original French edition published in 1988 by Paris, Publications de la Sorbonne (University of Illinois Press, Urbana and Chicago), p.226, note 46.
 Bairoch (1993), pp. 37-8
 The Korean income figure is from H. –C. Lee. (1999), Hankook Gyongje Tongsa [Economic History of Korea] (Bup-Moon Sa, Seoul) [in Korean], Appendix Table 1. The Ghanaian figure is from C. Kindleberger (1965), Economic Development (McGraw-Hill, New York), Table 1-1.
 Lee (1999), Appendix Table 1 (income) and Appendix Table 7 (exports).
 Maddison (2003), Table 4c
 D. Rodrik and A. Subramanian (2004), ‘From “Hindu Growth” To Productivity Surge: The Mystery Of The Indian Growth Transition,’ Kennedy School of Government, Harvard University, March 2004. Downloadable from https://www.imf.org/External/Pubs/FT/staffp/2004/00-00/rodrik.pdf
 Mexican per capital income experienced a fall in 2001 (-1.8%), 2002 (-.08%), and 2003 (-0.1%) and grew only by 2.9% in 2994, which was barely enough to bring the income back to the 2001 level. In 2005, it grew at an estimated rate of 1.6%. This means that Mexico’s per capita income at the end of 2005 was 1.7% higher than it was in 2001, which translates into an annual growth rate of around 0.3% over the 2001-5 period. The 2001-2004 figures are from the relevant issues of the World Bank annual report, World Development Report (World Bank, Washington, DC). The 2005 income growth figure (3%) is from J.C. Moreno-Brid & I. Paunovic (2006), ‘Old Wine in New Bottles? – Economic Policymaking in Left-of-center Governments in Latin America,’ Revista – Harvard Review of Latin America, Spring/Summer, 2006, p.47, Table.
 Tariffs account for 54.7% of government revenue for Swaziland, 53.5% for Madagascar, 50.3% for Uganda and 49.8% for Sierra Leone. See Chang (2005), pp, 16-7
 J. Willner (2003), ‘Privatisation and State Ownership in Finland,’ CESifo Working Paper, no. 1012, August 2003, Ifo Institute for Economic Research, Munich.
 M. Berne & G Pogorel (2003), ‘Privatisation Experiences in France,’ paper presented at the CESifo Conference on Privatisation Experiences in the EU, Cadenabbia, Italy, November 2003.
 Machlup & Penrose (1950)
 ‘Strong global patent rules increase the cost of medicines,’ The Financial Times, February 14, 2001.
 The IPR expenditure is cited in M. Wolf (2004), Why Globalisation Works (Yale University Press, New Haven), p. 217. The foreign aid figure is from the OECD.
 The output figure is from World Bank (2006). The trade figure is from the WTO (2005), World Trade 2004, ‘Prospects for 2005: Developing countries’ goods trade share surges to 50-year peak’ (Press Release), released on 14 April 2005. The Foreign Direct Investment (FDI) figures are from various issues of UNCTAD World Investment Report.
 See. A. Buira (2004), ‘The Governance of the IMF in a Global Economy,’ G24 Research Paper, downloadable at https://www.g24.org/wp-content/uploads/2016/01/Session-1_3-2.pdf
 M. Feldstein (1998), ‘Refocusing the IMF,’ Foreign Affairs, March/April 1998, vo. 77, no. 2
 Oxfam (2003), ‘Running into the Sand — Why Failure at Cancun Trade Talks Threatens the World’s Poorest People,’ Oxfam Briefing Paper, August 2003, p. 24
 S. Fischer (1996), ‘Maintaining Price Stability,’ Finance and Development, December 1996.
 A. Singh (1995), ‘How did East Asia grow so fast? — Slow Progress Towards an Analytical Consensus,’ UNCTAD Discussion Paper, no. 97, Table 8, The other statistics in the paragraph are from the IMF database.
 F. Alvarez & S. Zeldes (2001), ‘Reducing Inflation in Argentina: Mission Impossible?’ http://www8.gsb.columbia.edu/faculty/szeldes/Cases/Argentina/
 M. Bruno (1995) ‘Does Inflation Really Lower Growth?’, Finance and Development pp. 35-38; M. Bruno & W. Easterly (1995), ‘Inflation Crises and Long-run Economic Growth,’ National Bureau of Economic Research (NBER) Working Paper, no. 5209, NBER, Cambridge, Massachusetts; M. Bruno and W. Easterly (1996), ‘Inflation and Growth: In Search of a Stable Relationship’ Review of Federal Reserve Bank of St. Louis, vol. 78, no. 3
 Calculated from the IMF dataset.
T. Harjes & L. Ricci (2005), ‘What Drives Saving in South Africa?’ In M. Nowak & L. Ricci, Post-Apartheid South Africa: The First Ten Years (IMF, Washington, DC), p. 49, figure 4.1.
 OECD Historical Statistics (OECD, Paris), Table 10.10. 348s