History Repeats Itself
I recently read this book: The Weary Titan, Britain and the Experience of Relative Decline, 1895-1905 http://press.princeton.edu/titles/9312.html.
It is amazing how the debates about the industrial decline of the country, especially relative economic decline (relative to Germany and the USA, both of which erected protective tariffs against British exports, while Britain adhered dogmatically to free trade), is hauntingly familiar to the USA today, faced with unfair competition from Japan, South Korea and China primarily. Joseph Chamberlain was the tariff reform champion. Even brilliant and mainstay figures as Lord Salisbury and Arthur Balfour questioned free trade: “In spite of any formula, in spite of any cry of Free Trade, if I saw by raising the duties on luxuries, or threatening to raise it, I could exercise pressure on a foreign power, inducing it to lower rates and give relief, I should pitch orthodoxy and formulae to the winds and exercise pressure.” –Salisbury. The book sets forth the positions of Chamberlain, the free traders who wanted orthodoxy - status-quo, and Arthur Balfour, the Prime Minister in 1903, who wrote a masterful analysis of the situation in a memorandum entitled “Economic Notes on Insular Free Trade.” Keynes wrote of the memo: “The Economic Notes on Insular Free Trade is one of the most remarkable scientific deliverances ever made by a Prime Minister in office. It wears well and bears re-reading. I think that economists today would treat Balfour’s doubts, hesitations, vague sensing of trouble to come, polite wonder whether unqualified laissez-faire is quite certainly always for the best, with more respect, even if not with more sympathy, than they did then.”
Chamberlain himself argued things that are so eerily similar to the situation we face today in the USA that it gave me goose bumps reading it, e.g., “whereas at one time England was the greatest manufacturing country, now its people are more and more employed in finance, in distribution, in domestic service… I think it is worthwhile to consider – whatever its immediate effects may be - whether that state of things will not be the destruction ultimately of all that is best in England, all that has made us what we are, all that has given us prestige and power in the world.” He went on to tell London’s bankers that in the short run, the net effect of the changes would be to leave Britain more divided between rich and poor and less self-sufficient, “richer and weaker.” Over the long run the country could not survive as merely a “hoarder of invested securities” if it was not also the “creator of new wealth.” He went on: “…are you entirely beyond anxiety as to the permanence of your great position?... Banking is not the creator of our prosperity, but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth; and if the industrial energy and development which has been going on for so many years in this country were to be hindered or relaxed, then finance, and all that finance means, will follow trade to the countries which are more successful than ourselves.”
Ultimately, I think Balfour’s position of raising retaliatory tariffs on protectionist countries in order to negotiate a reduction of theirs for ours to create a fairer playing field was more workable than Chamberlain’s cry for Imperial Preference, since walling off Britain and her colonies from competition, even legitimate competition, could exacerbate a lack of innovation and upgrading of plant and equipment, technology, etc. and lead to possibly even more decay, not to mention the problematic politics involved. Essentially, Chamberlain’s position, while I agree with all of his arguments on the problems with free-trade while others practice mercantilism, would amount today to what might seem a general, across the board raising of tariffs in the USA against all other countries, while Balfour’s position would amount to strategic raising of tariffs or retaliation in some measure against currency manipulation by China and others and other stealth protectionist practices which give them an unfair advantage at the expense of our manufacturing base, perhaps by taxing their purchase of our treasuries in proportion to the degree of currency manipulation or something like that, i.e., counter-intervention in the currency markets or raising tariffs and/or restricting Chinese investment into the U.S. With the U.S. Section 301 investigation into Chinese trade practices, i.e., forced transfers of IP and know-how, refusal to allow U.S. companies to invest in and own Chinese assets, barriers to U.S. imports, etc., it seems the U.S. is now headed in the very direction that Balfour recommended back in the early 1900s.
That Balfour identified the problems, saw the future and prescribed what would seem to the best solution over 100 years ago without any historical precedent (as Britain was THE first industrial power and the first to face these issues), which nowadays we have plenty of, is astounding to me and merely highlights his brilliance as a thinker with a sharp analytical mind.
Nothing happened back in the 1900s though because of the lack of political will to do anything, the opposition of vested multinational business and financial interests and fear of political fallout splitting parliamentarian parties. Indeed, the whole tariff debate split the conservatives and brought in the staunchly free-trade liberals, collapsing Balfour’s government. Again, this is incredibly, eerily familiar today, down to the Democratic Party recently splitting into pro-TPP and anti-TPP camps or the agonies of the Republican Party over the fate of NAFTA. History really repeats itself.