Professional Documents
Culture Documents
then
proceed to look at some of the specific arguments which classical economists put forward in its cause.
It will then continue to review such arguments in the context of the modern age to evaluate how valid or
otherwise they may still be. Protectionist viewpoints will also be summarised and some common ground
between both schools of thought highlighted. Data will be provided to support the case that free trade
has historically improved economic growth and prosperity in the world, but also question how this has
been distributed within and between nations. The issue of rising protectionism will be raised and, finally,
the essay will conclude by contending that, although some free trade principles are still relevant in the
modern age, the greater complexity and interdependence of world economy render others redundant. It
is also proposed that, had Adam Smith, David Ricardo and others foreseen how capitalist economies
would have developed, they may have had a different view of state intervention.
Demands for free trade arose in an age when the world economy was radically different from that of the
modern age. When Adam Smith wrote The Wealth of Nations, Britain was dominated by landed
interests and a gentlemanly order, known as ‘Old Corruption’ (Cain and Hopkins, 1993: p.301). The
then mercantilist system was one of economic nationalism, government intervention and a pursuit of
wealth as a means of ensuring state security. Its emphasis was on ‘a favourable balance of trade to
generate an inflow of funds, and a favourable commodity composition of trade to promote economic
development and employment in manufacturing’ (Irwin, 1996: p. 34). As such, the home market was
protected by tariffs and duties, and characterized by domestic monopolies with the resultant effects on
productive inefficiency and higher prices. Also, as Heilbroner highlights, there had not yet been a
recognition of what we now know as business cycles (Heilbroner, 1967: p.65). Contrast with today’s
The roots of free trade were as much philosophical as economic in that they placed the liberty of the
individual before that of the state: ‘every man, as long as he does not violate the laws of justice, is
perfectly free to pursue his own interest in his own way’ (Irwin,1996: p.84 quoting Adam Smith). In
1
economic terms, free trade was rooted in Ricardian comparative cost theory (Deane,1989: p.157) and
was seen as the best method for the efficient allocation of resources and maximization of national
income and the wealth of society (Irwin, 1996: pp. 79-80). The rise of free trade may also be seen as
the result of the emergence of the industrial classes to a position of superiority over the landed classes
(Helibroner, 1991: p.45) as the control of technological change shifted in their favour (Cole, Cameron
and Edwards, 1991: p.27). In political terms, this was reflected in the 1832 Reform Act. In the European
context, free trade developed with the support of French industrial and German agricultural interests
and, in Kindleberger’s second wave after 1850, elsewhere for ideological reasons (Kindleberger, 2000:
p.88). This then, was the backdrop to the rise of free trade.
Classical free trade principles were numerous but essential to them were a minimalist role by
governments with intervention only in specific areas and circumstances; individual liberty under the law;
the free flow of goods and capital; a freely competitive market; and the absence of monopolies. Their
aims were very much the maximisation of consumer interests as opposed to those of producers and
special interests. Legitimate government intervention would include the provision of public goods such
as ‘law, order, transport projects and the provision of elementary education’ (Cole, Cameron and
Edwards, p.31); reciprocity with regard to retaliation for foreign imposed tariffs; and the protection of
infant industries. In this respect, free traders shared common ground with later protectionists such as
Alexander Hamilton and Friedrich List, albeit they advocated such a policy only as a temporary
measure (Kenwood and Lougheed, 1999, p. 69). In opposing protectionism, free traders highlighted the
adverse effects of specific measures which distorted the natural flow of trade such as tariffs, subsidies
and import bans, and later associated policies including regulatory barriers, bureaucratic impediments
(red tape), and exchange controls. Effects of such policies, in addition to those mentioned earlier,
included the sub optimal allocation of capital to protected industries, and therefore a distortion of
opportunity costs, and the protection of special interests at the expense of society as a whole (Irwin,
Fundamental to much of the arguments between free trade and protectionist positions are the roles of
the individual and the state. Frieden and Lake confirm that ‘liberals view economics and politics as
2
autonomous spheres, whereas realists assert that politics determines economics’ (Frieden and Lake,
2000:p.13). Protectionist policies were viewed as beneficial to domestic industry and employment and
also as a source of government revenue from tariffs. Their arguments included the protection and
support of national defence, strategic and infant industries and, as realists, they saw trade surpluses
conducive to national security and therefore the economy as something to be utilised in the interests of
state power.
An underlying assumption of the free trade case is that markets are perfect and therefore consumers
have full information, freedom of entry, and that competition is perfect. In promoting strategic trade
policy, protectionists argued that markets did not conform to these principles and may be characterised
by monopolistic or oligopolistic structures, imperfect information, and that governments and other actors
may distort markets to their own advantage. In effect, they viewed the market as an anarchic
environment and this underpinned their case for state intervention. Such arguments were, and still are,
often couched in terms of fair trade or of a ‘level playing field’ (Coughlin, Chrystal and Wood, 2000:
p.316) in that tariffs and other import barriers should be used in a reciprocal manner to coerce others to
compete fairly. Some free traders may not have disagreed with this on occasion, but with protectionists
such policies tended to be the rule rather than the exception. Protectionist arguments failed to take
account of the long-term effects and costs of their policies but, despite this, protectionism still persists
and, in recent times, has shown some signs of increasing (FT.com, 2009). Domestically, protectionist
policy choices are not always made for economic, but for political, reasons - what Coughlin, Chrystal
and Wood have highlighted as the ‘public choice’ argument (Coughlin, Chrystal and Wood, 2000:
How applicable then, are such arguments and policies to the modern world trade system? Classical
liberal free traders would be alarmed at the extent and role of government involvement in today’s
modern economies. In Britain, for example, government spending has grown rapidly in recent decades
(Diagram One) and it has also risen as a percentage of GDP, from just under 16% in 1900 to almost
44% in 2009 (Diagram Two). This is projected to rise to over 47% by 2011, although this is distorted by
3
Diagram One: UK Government Spending and GDP 1900 - 2010
1600
1400
1200
1000
£ billion
800
600
400
200
0
1900
1920
1930
1950
1960
1980
2000
2010
1910
1940
1970
1990
Year
Source: Diagram constructed from figures obtained from www.ukpublicspending.co.uk, (November 2009)
Actual figures included in Appendix One
60%
50%
40%
Percentage
30%
20%
10%
0%
1910
1930
1940
1960
1970
1980
1990
2010
1900
1920
1950
2000
Fiscal Year
% of GDP
Source: Diagram constructed from figures obtained from www.ukpublicspending.co.uk, (November 2009)
Note exception of high expenditure during WW2 years.
Actual figures included in Appendix One
However, as stated earlier, the modern economy differs radically from that of classical times and there
is a greater need for government intervention to facilitate the flow of products, capital and people and
for states to provide an increasing array of both national and international public goods. Classical
liberals would not argue with expenditure on law, education and transport, which account for over 22%
of current UK government expenditure (calculated from ONS Yearbook figures, 2005: p.367), and
perhaps not with expenditure on health and social protection in support of Adam Smith’s view that ‘No
4
society can surely be flourishing and happy, of which by far the greater part of the numbers are poor
and miserable’ (Heilbroner, 1967: p. 55, quoting Adam Smith in Wealth of Nations). These inclusions
would raise this figure 67% of total current expenditure (calculated from ONS Yearbook figures, 2005:
p.367). Classical economists could not have fully foreseen the necessity for such intensive government
involvement in the economic and social life of the nation, nor perhaps the need to balance the
requirements of the modern domestic and international economies. Neither may they have fully
imagined the multilateral character of post 1945 ‘embedded liberalism’ based as it was on domestic
Classical liberals would baulk at the idea of state protection of an industry per se, but were it in support
of an infant industry, or one in transformation, then this would rank as one of the exceptions to their free
trade principles. Modern governments have often applied this measure as part of their industrial policy,
for example Japan and other south east Asian economies in recent decades, as does China currently in
support of its industrialisation policy. Defence of infant industries is also permitted by the WTO (World
Trade Organisation) with regard to the least developed countries, LDCs, through its system of GATT
preferences, therefore providing them time to adapt to world markets ( WTO Link 1). The lack of such
policies may make it more difficult for countries to compete on an equal footing against more advanced
economies, therefore classical liberal arguments could be seen to be relevant in the modern age with
The debate over free trade is perhaps most visible and commonly understood in relation to import
tariffs, product bans, quotas and other versions of such policies such as voluntary agreements and
negotiated export restraints. Examples include the current spat between China and the USA over tyres
( WTO Link 2) and disagreements between developed and less developed nations over textiles and
clothing ( WTO Link 3). Tariffs in the industrialised world have reduced by more than 80% since GATT’s
creation in 1948 ( WTO Link 4), and by the 1990s had fallen to less than 4% of industrial goods in
developed countries ( WTO Link 5). Additionally, since January 2000, WTO negotiations have expanded
to cover non-tariff barriers, services and intellectual property ( WTO Link 6). However, many
imbalances in tariff structures still exist and, on balance, they disfavour developing nations. Although
5
exports of LDCs have been rising faster than developed economies in recent years (Diagram Three),
and now account for 33% of their GDP (Appendix Two), much still needs to be done to improve their
capabilities of competing fairly in the world economy. This aspect will be returned to later in the essay.
30.0
25.0
Percentage Growth
20.0
15.0
10.0
5.0
0.0
80
90
95
00
05
06
07
0-
0-
1-
0-
5-
20
20
7
0
19
19
19
19
20
Period/ Year
Source: Figures extracted from UNCTAD website, www.unctad.org, utilising the site’s statistical package. Figures then
summarised and chart constructed in MS Excel. See Appendix Three for actual figures.
Historically, free trade has proved to be a facilitator of world growth, greater productivity, and gains from
Ricardian comparative advantage. Kindleberger highlights that the period from 1820 to 1875 was one of
generally decreasing tariffs in Europe (Kindleberger, 2000: p.87). Between 1800 and 1830 international
trade grew from £300 million to £400 million, an increase of 30% (Hobsbawm, 1969: p.139); between
1830 and 1850 it doubled; and between 1850 and 1880 it trebled or quadrupled (Kenwood and
Lougheed, 1999: p.67). Hobsbawm also states that the growth by 1870 was five times what it was in
1840 (Hobsbawm, 1969: p.139). However, from the period 1880 to 1913 ‘only Britain, Holland and
Denmark steadfastly adhered to free trade’ but the tariffs that existed did not seriously hinder growth
and world trade grew steadily in this period (Kenwood and Lougheed, 1999: p.72). The inter-war years
saw British industry decline as it had become obsolete and inefficient (Hobsbawm,1969: p. 150)
culminating in the Great Depression of 1929-32. However, a period of economic nationalism followed
when protectionist measures were, in the short term, successful (Mazower, 1998: p.129) and
economies recovered aided by higher tariffs, state monopolies, the subsidisation of agriculture and
6
increased military expenditure. Classical liberalism appeared to have failed during this period
Between 1945 and 1970 world economic growth averaged approximately 5% per year, partly as a result
of lower trade barriers, with world trade growing even faster, averaging about 8% during this period
(WTO Link 7). Therefore, in general, the data of the last two centuries support the view that free trade is
conducive to growth in world trade. Diagram Four illustrates the growth since the origin of GATT:
However, there exists an issue as to how this growth is distributed both between and within nations.
Although the WTO offers help to LDCs in the form of extra time to meet their WTO commitments, non-
reciprocity tariff agreements, safeguards when adopting international measures and technical help in
institution building, much still needs to be done to improve the structural weaknesses in their
economies. As Ruggie highlights: ‘the liberalisation produced by the GATT has benefited few
[developing countries]’ (Ruggie, 1982: p.414). Many LDCs especially need help with stabilizing food
production, building infrastructures, developing training, and improving policy making and economic
management and, as the WTO states, much of this depends on political stability in these countries
(WTO Link 9). Classical liberal arguments are relevant to this ‘progressive liberalisation’ and the role
7
states and international institutions might play in helping developing economies adapt their industries to
transition, are growing and are rising as a percentage of their GDP, they accounted for
only 0.6 per cent of world exports and 0.8 per cent of world imports in 2004. (WTO World
70%
60%
50%
Percentage
40%
30%
20%
10%
0%
48
58
68
78
88
98
07
19
19
19
19
20
19
19
Source: Figures extracted from UNCTAD website, www.unctad.org, utilising site’s statistical package. Figures then summarised
and chart constructed in MS Excel. See Appendix Three for actual figures.
Developed nations, particularly the USA and the EU as the largest export markets for LDCs (WTO
World Report, 2006: p.26 WTO Link 11), have a role to play in allowing them greater market
access by extending preferential non-reciprocal agreements and increasing duty-free and quota-free
agreements. Tariffs and subsidies in developed nations are, on average, higher then those in
developing countries and a sample of 31 developing countries showed the average ratio of subsidies
to GDP at 0.6%, whilst that for a sample of 22 developed countries was 1.4% (WTO Link 12). Also,
since the advent of the financial crisis in 2008, protectionist measures have been on the increase. As
stated on the Financial Times website in April 2009: ‘As economies have dived, ….The World Bank
has found 17 of the G20 have implemented 47 measures since the last G20 summit with the aim of
restrict[ing] trade at the expense of other countries’ (FT.com, 2009). This was supported six months
8
later by the Centre for Economic Policy Research which identified 280 state protectionist initiatives
implemented since November 2008, of which 192 tilted the balance in favour of domestic commercial
Classical liberal arguments in favour of free trade principles have perhaps come under more scrutiny
and criticism recently with regard to the free flow of capital. Events in most developed economies
commencing in 2008 have illustrated the absence of Smith’s ‘invisible hand’ and the need for regulation
to protect individual investors and consumers. Adam Smith would certainly recognise the self interest
and ‘mean rapacity’ (Heilbroner, 1967: p.62, quoting Adam Smith in Wealth of Nations) of the financial
community and their eagerness ‘to take advantage of their neighbour’s greed’ (Heilbroner,1967: p.50,
quoting Adam Smith in Wealth of Nations). Keynes also recognised this in the 1930s when he
commented: ‘nothing less than the democratic experiment in self-government was endangered by the
threat of global financial market forces’ (Chomsky, 2003: p.138). But would Smith agree with
government intervention in such a case? Again, classical liberal points of view must be put in context of
their time which was a world of ‘atomistic competition’ (Heilbroner, 1967: p.53) where self regulation
was perhaps more possible. Classical liberals favour liberty under the law but, in view of how modern
financial markets operate, they might support amendments to the law in the form of regulation as the
provision of a public good and necessary for the protection of individuals. Debate over financial
regulation continues and differences remain between major nations, particularly the USA and UK over
such issues as a ‘Tobin Tax’ on financial flows. Classical liberals may perceive such a measure as a
tariff on the free flow of funds but may balance this against the requirement for consumer protection
Keynesian demand management, via deficit financing, fiscal measures and industry support, may be
seen as interference and a distortion of the free market by classical liberals, as it would be by
neoclassical economists. Their, perhaps naïve, belief that the market would self adjust according to
Adam Smith’s ‘natural order’ has been disproved by recent, and previous, events. However, as stated
earlier, knowledge of business cycles and recurring financial crises were not as advanced in the age of
Adam Smith as they are now and therefore classical arguments should, again, be viewed in context of
9
their time. In this respect, the classical liberal case for non-intervention, unless it affected free
competition, is not fully relevant in the present age. Government failures to intervene contributed to the
depth of Great Depression of 1929 onwards whereas recent involvement, in order that similar mistakes
were not repeated, has mitigated the effects of the global financial crisis of 2008-09.
Exchange rates between nations have a direct affect on trade and can be manipulated, via money
market operations, to distort normal trading patterns. The most obvious current example of exchange
rate management is that of the Chinese Yuan which is presently estimated to be 15% - 25%
undervalued against the US dollar (The Economist, 2009). This works both as a subsidy for exports and
a barrier to imports by making the former cheaper and the latter more expensive. As such, it would be
seen as interference in the free market and would be opposed by classical liberals. It may also be
viewed as a protectionist policy, in the Chinese case one of protecting its agricultural and infant
industries from the world market. However, with almost half of the Chinese population still employed in
this sector (Peoples Daily, 2000), such actions may be viewed as a necessary transitional policy until
the economy is more diversified in order to avoid severe problems in the short term. In view of this,
classical liberal arguments with regard to support of structural transition may be seen as relevant one,
but not in the longer term as it would be viewed as an aggressive and unfair means of driving exports.
As highlighted earlier, classical liberals would oppose monopolies that work against the interests of
consumers. In this respect government intervention, in the form of the Monopolies and Mergers
Commission in the UK, to prevent a merger which is considered detrimental to the public might be
viewed favourably. As Roll highlights: ’Preservation of free competition, if necessary by state action,
was the principal duty of economic policy’ (Roll, 1973: p.149, quoting views of Adam Smith and free
trade thinkers). Additionally, classical liberals may agree with recent proposals to demerge some of the
larger banks. Where they would stand on state monopolies is debatable, for example the Post Office
and national utility and transport companies. Perhaps they may view them as necessary providers of
national public goods, benefiting from Schumpeterian dynamic efficiencies (Samuelson,1976: p. 532),
and necessary for the efficient operation of the market. Alternatively, they may see them as a market
10
distortion, as detrimental, and therefore consider that consumers would be better served by
In conclusion, this essay has illustrated the historical background and context in which free trade
philosophy originated and highlighted the key principles and arguments it espoused. It then reviewed
these in turn and considered their relevance in the modern era with some examples. Data were
provided to show that, in general terms, free trade principles are still valid in that, historically, they have
generally provided the increase in wealth predicted. The uneven distribution of that wealth was
discussed with particular reference to the LDCs and the developing world, an issue not fully considered
by classical free traders. In this respect, the protection of infant industries as proposed by Smith, and
later endorsed by J.S. Mill and Alfred Marshall (Deane, 1989:p.140) is highly relevant in helping such
countries develop the capacities to compete in modern markets. Elements of the mercantilist and
protectionist cause were also highlighted and, as some periods of history have shown, protectionist
measures have produced benefits in the short term for some economies and specific sectors within
them.
It was also contended that, at the time of writing, many classical liberal economists could not have
foreseen many of the developments and effects of modern capitalism with regard to its technological
sophistication, greater international interdependence, the complexity of modern society, and the greater
need for state intervention in the economy. Completely free markets do not have the natural regulating
mechanisms perceived by classical liberal economists and therefore require some element of
intervention to protect societies. Also, in current age of globalisation, it is difficult to perceive the
international system functioning without state intervention. In view of this, it has not always been clear
where they would have stood on some elements of contemporary government economic policy.
Finally, classical free trade proponents differed from protectionists, not in that the state should not
intervene in economic affairs, but to the extent that it should. Adam Smith was a realist in this respect
and recognised ‘that the freedom of trade should ever be entirely restored in Great Britain is as absurd
as to expect that…Utopia should ever be established’ (Deane,1989: p.70, quoting Adam Smith in
11
Wealth of Nations). Free trade is therefore a normative theory and its ideals are unlikely to be fully
achieved. Protectionist arguments persist and are likely to do so in future, particularly in times of
economic difficulty when their simplistic sounding solutions may appeal. The future of modern
economies, in view of the rise of protectionism in recent times, is perhaps best recognised by Underhill
when he states that the trade system will continue ‘to be a mixture of liberal principles with protectionist
12
Appendix One
Total
Fiscal GDP % of
Spending
Year (£ bn) GDP
Total
1900 1.885 0.3 15.92%
1910 2.14 0.3 14.02%
1920 5.975 1.6 26.78%
1930 4.615 1.1 23.84%
1940 7.183 4 55.69%
1950 13.285 4.5 33.87%
1960 25.974 9.1 35.04%
1970 51.523 21.6 41.92%
1980 230.8 103.9 45.02%
1990 560.887 200.9 35.82%
2000 958.931 339.3 35.38%
2010 1411 654.7 46.40%
13
Appendix Two: Ratio of exports of goods and commercial services to GDP of the least-
developed countries, 2007
LDCs 422700 24 33 21 30 4 3
Afghanistan 9658 ... ... ... ... ... ...
Angola 61403 90 73 87 72 3 1
Bangladesh 68415 14 19 14 18 1 1
Benin 5428 23 24 17 19 6 5
Bhutan 1096 30 52 26 47 4 5
Burkina Faso 6767 9 10 8 9 1 1
Burundi 974 7 6 7 5 0 1
Cambodia 8350 49 67 37 49 11 18
Central African Republic 1712 18 13 17 11 1 2
Chad 7085 15 53 13 52 2 1
Comoros 449 24 14 6 3 19 10
Congo, Dem. Rep. of 8953 22 ... 21 ... 2 ...
Djibouti 830 18 18 6 7 13 11
Equatorial Guinea 9923 100 50 100 49 1 0
Eritrea 1375 14 ... 6 ... 9 ...
Ethiopia 19395 11 13 6 7 5 6
Gambia 644 45 36 30 18 15 18
Guinea 4564 22 27 21 26 1 1
Guinea-Bissau 357 31 27 29 24 2 3
Haiti 6715 13 10 9 8 4 2
Kiribati 78 27 ... 13 ... 14 ...
Lao People's Dem. Rep. 4108 28 37 20 29 9 7
Lesotho 1600 29 55 25 50 4 4
Liberia 735 ... 48 ... 27 ... 22
Madagascar 7382 29 26 21 15 8 11
Malawi 3563 25 ... 23 ... 2 ...
Maldives 1055 72 81 17 22 55 59
Mali 6863 26 28 23 23 4 5
Mauritania 2644 36 ... 33 ... 3 ...
Mozambique 7790 16 36 9 31 8 5
Myanmar 19618 24 ... 19 ... 5 ...
Nepal 10315 22 12 14 9 7 3
Niger 4170 18 18 16 16 2 2
Rwanda 3339 6 9 4 6 2 4
Samoa 525 ... 29 ... 3 ... 26
Sao Tome and Principe 145 ... 8 ... 5 ... 3
Senegal 11165 27 25 20 15 7 10
Sierra Leone 1664 8 20 2 18 6 3
Solomon Islands 388 38 58 23 41 15 17
Somalia ... ... ... ... ... ... ...
Sudan 46228 15 20 15 19 0 1
Tanzania 16181 14 24 7 14 6 10
Timor Leste 395 ... ... ... ... ... ...
Togo 2499 31 35 27 27 3 8
Tuvalu ... ... ... ... ... ... ...
Uganda 11771 11 21 7 17 3 4
Vanuatu 452 59 47 11 7 48 39
Yemen 22523 42 34 40 31 2 3
Zambia 11363 27 43 23 40 4 2
5458380
World 0 25 32 20 25 5 6
Note: Trade in goods is derived from balance of payments statistics. Data are
estimated for most countries.
source:
14
http://www.wto.org/english/res_e/statis_e/its2009_e/section1_e
/i21.xls
Appendix Three
Source figures for Diagram Three
15
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16