Free trade

Dr Eamonn Butler takes a closer look at how free trade came about. He also explains how various forms of protectionism have undermined the success of free trade over the years and that if free trade is going to be at the forefront of economic policy leaders are going to have to be tough.

Throughout the history of economic life, “free trade” has been the exception, not the rule.

Nearly a thousand years ago, the rise of Europe’s merchant class posed a challenge to the feudal system of the time. The merchants’ business was buying and selling, not working the land – so they owed no obligation to a landlord, and paid no taxes to the church.

But these feudal grandees found new ways to get their cut. They charged the merchants for transporting goods across their land. Or water: Cambridge’s riverside colleges became rich by charging tolls on every barge full of grain punted up from the fens to the town’s mills.

Monarchs had even greater powers to help them gain from the restriction of trade. Elizabeth I, keen not to be wholly dependent on Parliament for funds, sold monopolies in the manufacture and sale of a vast array of essential goods – salt, leather, glass, knives, sailcloth, starch, iron, paper, and more.

Then the tradesmen themselves started to use the system to rig markets in their favour. Under pressure from workers who knitted socks by hand, England’s government in 1623 outlawed a revolutionary machine that could do the job with much less labour. To defend other jobs, the importing of printed calico was made illegal. And cities prevented workers from coming in from other towns and competing with their own tradesmen.

The prevailing view was mercantilism – that a town or nation got rich by exporting as much as it could and importing as little as it could. To discourage imports, huge excise duties were raised on foreign goods like tobacco and brandy. And not surprisingly, a lively smuggling trade arose.

By 1776, the mercantilist doctrine had brought America into conflict with Britain, which wanted to use its colonies as cheap suppliers of raw materials and sell them back expensive finished goods.

But in the same year, the economist Adam Smith exploded the mercantilist idea in his influential book, The Wealth of Nations. A country’s wealth, he argued, lies not in the amount of silver in its vaults, but in the labour and enterprise of its people. Free trade benefits both sides: why build costly hothouses to grow grapes in Scotland, when you can buy wine cheaply from France? And his ideas led to the great Nineteenth-Century free trade era and the wide prosperity that came with it.

Yet protectionism has never been far below the surface. In 1930, the United States saw its domestic production threatened by ever-cheaper foreign imports, and raised tariffs on 20,000 different products. The measure led to wide retaliation that destroyed world trade and produced the chaos that led to World War II.

An enormous post-war desire to prevent a recurrence led to the establishment of GATT, the General Agreement on Tariffs and Trade.

Getting agreement, though, is always a hard slog. Some countries, particularly poorer ones, still cling to the mercantilist illusion. Others acknowledge the wider benefits of free trade, but still can’t resist favouring their politically powerful groups – Europe its farmers, America its steelmakers.

Understanding the merits of free trade, it seems, is not enough: if you want to have it and keep it, you also have to be tough.

Dr Eamonn Butler is Director of the Adam Smith Institute.