by Mesay Berhanu Gemechu
Trump has just introduced a wave of tariff hikes on import duties against 60 countries including China, Japan, India, Cambodia, and Vietnam. The measures described by the President himself as ‘explosives’ reflect his administration’s aggressive stance that has brought the U.S. on a brink of tariff wars with its longtime trading partners including the EU. China in particular faces the toughest measure of the Trump administration with a 145% total import tariff on its exports to the U.S. market. Countries such as Japan and India are also subject to 24% and 27% tariff rates while Cambodia and Vietnam are also hit with 49% and 46% tariff rates respectively.
Trump may have launched his offensive based on what is described as “legitimate concerns” involving such thorny issues as overcapacity, trade imbalances, IP theft, unfair subsidies, and denial of market access in the existing international trade practices, which the President insists have put the U.S. at a gross disadvantage for quite a long time. However, the latest tariff barriers raised so high to protect America’s interest may also lead to inflation that would apparently hurt domestic consumers in the U.S. It will also undoubtedly impact the global economy, particularly of those countries having a significant portion of their economies heavily relying on the volume of export trades they are sending to the U.S. market.
For Trump, the measures now put the U.S. in a stronger position to effectively protect its interest against those countries which don’t have much in their bargaining powers to the world superpower. The impacts of these measures and the reactions of those countries at the receiving end are expected to unfold soon, following the conclusion of the 90-day pause the Trump administration has granted for possible negotiations with all parties ready to concede to his moves. However, the ongoing rhetoric and war of words between the opposing camps appear to have failed to reckon on the historical significance of tariffs and the roles they have played as economic and political weapons in the economic transformations that have taken place, particularly in the Western hemisphere over the past several centuries.
The Myth of ‘Free Trade’
The British author, Daniel Defoe, who is widely known particularly for his novel, Robinson Crusoe, also wrote another non-fictional work that is barely known. This book was published in 1728 with the title, A Plan of the English Commerce. In the book, Defoe expounds on the Tudor monarchs’ industrial policy implemented in Britain during the 100 year period between Henry VII and Elizabeth I. The policy utilized protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage, and other means of government interventions to counter Britain’s reliance on exports of raw wool to the Low Countries, referring to parts of Europe occupied by present-day Belgium and the Netherlands, which were technologically more advanced at the time.
To change the status quo of the time, Henry VII employed government interventions including poaching skilled workers from the Low Countries, in addition to increasing tax on the export of raw wool. He even imposed an outright ban on the exports of unfinished cloth in 1489 which his successor also continued to enforce in 1512, 1513, and 1536. The temporary ban imposed on the export of raw wool was later withdrawn when there was excessive production of raw wool that could not be fully processed locally by the infant industries in England.
The South Korean economist and professor at the University of Cambridge, Ha-Joon Chang, indicated in his book, Bad Samaritans, that the ‘import substitution industrialization policy’ introduced by Henry VII was instrumental to the economic transformation of Britain which subsequently became the most advanced economy in the world. Accordingly, Chang underscores that Defoe’s book, A Plan, shatters the foundation myth of capitalism, free market, and free trade, which was not the driving engine of Britain’s successful economic transformation from raw material exporter to a leading nation of advanced manufacturing industries.
Chang argues that the historical evidence actually shows the opposite of what the free-market economic rationale posits to be the case: “We know exactly what we want and how best to achieve it. Consequently, leaving people to do what they desire and know to be good for themselves is the best way to run the economy. Government just gets in the way.” (Bad Samaritans, pp. 25) The historical narratives in Defoe’s book clearly show that it was not free market but government protection and subsidies which actually realized the transformation of the British woolen manufacturing industries. Chang, therefore, noted that economic development is driven by government interventions which require people like Henry VII, who can envision a different future than those trying to maintain the status quo.
Later, Robert Walpole who was the prime minister of Britain from 1721 to 1742 also further introduced a new law intended to protect British manufacturing industries from foreign competition by providing subsidies to promote ‘the exportation of manufactured goods and importation of raw materials’ (Bad Samaritans, pp. 44). Accordingly, tariffs on imported foreign manufactured goods were raised, whereas, tariffs on raw materials used for manufacturing were lowered or even dropped altogether.
Regulation was also introduced to control the quality of manufactured products to ensure Britain’s competitiveness in the global market. Chang also noted that it was similar strategies that were also successfully implemented later to realize the ‘miraculous’ economic transformation in the East Asian economies including Japan, Korea, and Taiwan. The author also demonstrated that Britain had remained a highly protectionist economy until the mid-19th century, with average tariffs of 45 – 55% imposed on manufacturing imports which were much higher than the 6-8% in the Low Countries, 8-12% in Germany, and around 20% in France.
Walpole’s measures also included an outright ban on the development of new rolling and slitting steel mills in America forcing it to concentrate on low, value-added pig and bar iron products. The cotton textile imports from India known as ‘calicoes’ which had superior quality to the British products at the time were banned. The Wool Act introduced in 1699 also banned the export of woolen cloth from British colonies to other countries. Britain also imposed the Navigation Act which demanded that all trade with Britain should be conducted in its own ships. Compare this with the role of the U.S. dollar which currently serves as the main currency acceptable to conduct international trade not only with just the US but among other economies across the world. Walpole’s economic interventions also included the export subsidies provided on the American side to encourage exports of raw materials, which Britain also supplemented by abolishing import taxes on raw materials to boost import trades from its American colonies.
The U.S. Taking over the World
When it was still under British colonial rule, America was at the receiving end of all the impacts of the protectionist policy tools deployed by the British. As a result, it was denied the use of tariffs to protect its new industries, while exporting products which could be competitive with British products was also banned. Instead, it was provided subsidies to produce raw materials. Outright restrictions were also imposed on America’s potential manufacturing products, impeding the development of the manufacturing industries of high technology.
Adam Smith, author of Wealth of Nations, who is also considered the Scottish father of free market economics, advised the Americans not to develop manufacturing, arguing that any attempt to ‘stop importation of European manufactures’ would ‘obstruct instead of promoting the progress of their country towards real wealth and greatness.’ (Bad Samaritans, pp. 49).
Intellectuals the likes of Alexander Hamilton fiercely disagreed with Smith’s proposition, advocating for the development of manufacturing industries using government protection and subsidies following the footsteps of Britain. In his 1791 report submitted to the US Congress, Hamilton underscored that a ‘backward country’ like the US should protect its ‘industries in their infancy’ from foreign competition. A series of measures proposed by Hamilton in his report included “protective tariffs and import bans; subsidies; export ban on key raw materials; import liberalization of and tariff rebates on industrial inputs; prize and patent for inventions; regulation of product standards,” (Bad Samaritans, pp. 49) among others. Chang ironically remarks in his book that if Hamilton were the finance minister of a developing country today, he would be denounced by the IMF and the World Bank, which would then refuse to lend money to his country, even putting pressure for his removal from office.
Following Hamilton’s recommendations, it was noted that the average tariff on foreign manufactured goods in the US was raised more than two-fold, from 5% to around 12.5%, though this increment was not found big enough to boost the manufacturing productions of the nascent American industries at the time. But the US Congress doubled the tariff again to 25% immediately in 1812 when the Civil War broke out, which also interrupted the imports of manufactured goods from Britain and Europe, creating the space for the emergence of new industries in the US. Subsequently, the tariff was raised again in 1816 to an average of 35%, further increased to an average of 40% by 1820. Chang noted that Hamilton’s infant industry program led to rapid industrial development in the US, without which it would not have become the world’s greatest superpower, as it would probably have still remained a minor agrarian nation under the weight of its powerful colonial master.
Abraham Lincon, known widely as the Great Emancipator, was a strong advocate of infant industry protection. As the leader of the newly formed Republican Party, commonly known as GOP, he raised industrial tariffs to their highest level in US history as manufactured imports remained at 40-50% until the First World War, which was by far the highest compared to any other country at the time.
‘Golden Age of Capitalism’, and ‘Historical Amnesia’
The US proved to be the fastest-growing economy in the world, in spite of being the most protectionist economy in the world throughout the 19th century and before World War I. The availability of natural resources, large domestic market, and high literacy rate have indeed contributed to its rapid economic growth. However, Chang argued that other countries not endowed with these favorable markets had also grown rapidly behind protective barriers. Even though the US has never practiced protectionism at the same level as Britain did, the US government also employed other non-tariff interventions such as public funding of R&D, which accounted for 50-70% of the country’s total R&D funding from the 1950s to the mid-1990s. Historical facts attest to the trends that it was during the ‘Golden Age of Capitalism’, during the period between 1953-73, the US and other rich countries in Europe grew by 2.5% per capita and 4.1% respectively compared to 1.8% and 1.3% growth rates in the liberal golden age (1870-1913). Japan also demonstrated a marked growth rate of 8.1% from just 1.5% between the two periods.
Now the potential fallouts of the introduction of Trump’s tariff hikes and their long-term impacts not just on the U.S. economy alone but on the overall global economic architecture may well be understood in light of this historical backdrop. This may reflect on the ongoing rhetorics over the impeding tariff wars as an extension of the general tendency to re-writing history in line with what Chang refers to in his book as ‘historical amnesia’. Or, it may attest to the grain of truth expressed in the age-old adage that history repeats itself. And that will remain to be seen over the coming years.
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Mesay Berhanu Gemechu is a graduate of Hankuk University of Foreign Studies (HUFS), Seoul, South Korea in the area of international development studies focusing on Africa. He served as deputy editor-in-chief of Addis Fortune, the largest English weekly in Ethiopia, and he was also the 2023 African Correspondent for the Korea-Africa Foundation representing his home country. Mesay currently lives in Seoul, South Korea. The writer can be reached at: gmesayb24@gmail.com
