Free trade

Contents

DIFFICULTY OF THE PROBLEM .

THE BEGINNINGS OF FREE TRADE GROUNDS oF RESISTANCE

THe Historic TEst— § 1. British Misery under Protection § 2. The Change under Free Trade § 3. The Statistics of Expansion § 4. Expansion in Protectionist Countries § 5. British and American Shipping § 6. German Trade Expansion : § 7. Wealth-Earning Power of Free Trade § 8. The Financing of the War 5 § 9. Troubles of Recent Tariffism .

Chapter I Difficulty Of The Problem

REE TRADE is the name _ given, by common consent, to the policy of admitting foreign goods in general into a country without taxing them at the place of landing. No country, as a matter of fact, has complete free trade. Britain, before the war, put import duties on alcoholic drinks, tea, coffee, sugar, cocoa and tobacco. But none of these duties was imposed in order to give an advantage to home traders. Excise duties were imposed on our own alcoholic drinks, to balance the import duties ; and the duties on tea and coffee and sugar, articles which we do not produce in this country, were levied for the sake of the revenue they bring. In Holland, also, a number of small customs duties were laid for revenue purposes only ; there, as here, there was no attempt to ‘protect’ home industries by making particular foreign goods dearer than home made. ‘Protection’ is the historic name for the policy of

B keeping up by import duties the price of articles that are produced at home. The general policy, on the contrary, of letting foreign goods compete on an equality in the markets of a country with its own produce, whether raw or manufactured, is what is meant by free trade; and the rival policy, properly known as ‘ protection,’ is what has been advocated in this country since 1903 under the name of ‘ tariff reform.’ This last name was oddly borrowed from the free trade movement in the United States, which calls for ‘ tariff reform ’ in the sense of cutting down the high existing tariff, or schedule of protective duties on imports. In Britain the label has been made to mean the setting up of a new protective tariff. At present (summer, 1919) there is no clear official or organised policy of protection before the country; but there has been embodied in the Budget a plan called ‘imperial preference,’ under which things already taxed (whether under the special war duties which were set up to check imports or under the standing duties on liquor, tea, tobacco, etc.) are allowed to enter at lower rates when they come from British possessions beyond seas.

It is commonly understood that this plan is chosen as a first step towards setting up new import duties on foreign manufactured and semimanufactured’ goods ; and the purpose of this book is to inquire, as carefully as may be, whether that

‘ Such as leather, pig iron, tin and other metals, which are really the raw material of great industries.

policy, followed in most countries and latterly much advocated here, is really in the general interest of industrial countries in general and of our Own in particular. The question is of immense importance, and cannot be too seriously discussed. It is too often pronounced upon without any proper study of its many difficulties; and the reader is invited to treat it as one upon which no decision should be come to without an attentive study of the lessons of the past.

It is told of an eminent man of science that from his youth up, upon whatever problem he might be engaged, his great concern was, in his own words, ‘to know the go of the thing.’ No scientific terms could better express the aim, and the difficulty, of every inquiry into what we call the ‘law’ of a natural process. It generally turns out that ‘the go of the thing’ is the hardest problem of all. Botanists and gardeners, between them, know a great deal about the life of plants. The scientific man has minutely studied the structure of parts, and the differences between the orders ; the gardener knows what conditions and what tendance are needed to make each kind grow best. But to this day neither gardeners nor botanists are agreed as to what really causes the upward motion of the sap. So, in the study of weather, the men of science take immense pains, and employ a multitude of delicate instruments, to measure wind pressures and rainfall all over the earth, and to think out the causes of storms ; and the practical man, the sailor for instance, is weather-wise to the extent of being often able to some extent to foresee the way of the wind. But neither he nor the meteorologist can yet tell us with any certainty what brings about rain; why for weeks together the clouds never break; or why at other times ‘it rains’ every day. There are at least six theories of how rain is ‘ made.’ Five of them are reasoned scientific guesses, never proved by experiment ; and the sixth makes out that rain is caused in several different ways. The outcome is, so far, that weather cannot be confidently predicted more than a httle way ahead.

Yet again, as to medicine, one of the most distinguished of English physicians has lately been telling us that the mass of new experience gained in the war has made the doctors feel that they have to learn their business anew, finding if they can ‘ the go of the thing’ in regard to many even of the diseases they are able to treat with fair success, and still more in regard to those which baffle them. Yet the doctors in general have had to spend a number of years in systematic study before they are held qualified to prescribe for our ailments.

If, then, it is so hard to get a true knowledge of ‘the go of the thing’ in matters of natural science, where nobody denies that things happen by regular ‘ law,’ we can well understand that in such a matter as the immense process, of commerce all over the world, where changeable human wills are always at work, it must be a difficult business to know what makes trade go well or ill, why some countries grow rich and others stagnate, what causes ‘depressions,’ why some trades flourish and others languish in the same or in different countries. Yet average men of business in all ages have wanted to prescribe for trade by laws and taxes.

This means a multitude of new risks. Everybody in business knows more or less about his own; though some men plainly have special gifts of ‘making things pay.’ But all commercial history goes to show that the power to run one’s own. business well does not mean the power to plan good laws for the whole of trade. To understand a trade is not to understand trade, which is, as it were, the blood circulation of the whole commonwealth. Men naturally see things in the light of their own interests: it does not at all follow that the laws they would like to make for trade are in the interests of the nation as a whole. If the seller is to legislate for the buyer, whose advantage will be considered ?

Men, too, tend to be shortsighted even about their own interests. When the seller legislates for the buyer, he is very apt to forget that to put the buyer at a perpetual disadvantage may spoil his own market. In the course of history we find him even forgetting for the moment that he too must bea buyer. So long, then, as trade laws were made at the wish of sellers who organised themselves to

‘pull wires,’ trade everywhere progressed very slowly. It remains true, however, that even in the modern world, in which trade has grown so enormously, it chronically suffers from ups and downs, and its promoters are constantly asking to have its pulse felt, so to speak. In most countries, consequently, it is always being prescribed for ; and in our own there was a strenuous conflict going on about ‘fiscal policy’ for ten years before the war.

That problem again presses upon us, and cannot be put aside. Plain men may excusably plead that they cannot come to an opinion for themselves when men of business, and even the political economists, are divided as to the proper treatment. But where men cherish their political rights they must take some pains to learn how to use them if the rights are to remain worth having.

One of the great causes of confusion in the discussion on tariffs is that those who want them will hardly ever be at the trouble to check their own arguments against each other, and to face the meaning even of the statistics they themselves produce or ask for. In 1905, the ‘ Tariff Reform Commission,’ while actually asking for a tariff in order to keep up wages, declared that the low price of foreign goods coming into our markets was due to the low wages paid in the countries that sent them. But those were the very countries that already had tariffs, which were declared to be the only means of keeping wages up. Tariffists in general could not see that the two statements were in flat contradiction. The Commission further reported (proceeding on the figures before 1904) that our great cotton industry was in a ‘ station ary’ position. The historic facts are that the cotton exports of 1903 were valued at £73,000,000; those of 1904 at £83,000,000 ; those of 1905 at £92,000,000 ; those of 1896 at £99,009,000 ; those of 1907 at £110,000,000 ; and those of 1913 (after a fall from 1908 to 1910) at £127,000,000.

It is obvious that such an immense expansion as this disposes once for all of the assumption made in 1904 that the cotton trade was in a stationary position. Had such an expansion taken place under tariffs it would have been triumphantly claimed as proving beyond all possibility of dispute that the tariff system was incomparably the best for our trade. But the tariffist agitation has gone on all the same, because its promoters attach no weight to any evidence or argument that may be adduced against them. From the first, they grounded their case largely on the unemployment alleged to occur under free trade. It was shown many times over that our unemployment under free trade had been immensely less than under protection ; and that the protected United States had far more of itthan we. But all that evidence too was disregarded; and the agitation went on as before.

In this state of things, it is the urgent duty of every honest citizen to go into the question for himself. If he shirks that duty he is putting his own and his country’s destinies in the hands of any self-seekers who may organise a policy. The voter who puts his political conscience in other men’s keeping counts for very little in his country’s destiny. If he is not to be a mere pawn in other men’s game, he must try for himself to understand ‘the go of the thing.’

Everything in the history of science goes to show that if any great general truth is to be discovered it is as a result of much attention to the facts and long thinking about the processes. It was Newton, not the gardener, who (as the story goes) got the idea of the law of gravitation from seeing an apple fall. It will be trained men, not untrained sufferers, who will discover new general truths about medicine. But ‘a trained man,’ for this purpose, is not necessarily a professional man of any kind: he is simply a man whose mind has been long and specially concentrated on a particular field of study, and has thought connectedly about it while others have attended only to details. The gardener is in his own way a trained man, as is the manufacturer, the retailer, the exporter, the shipowner. The way to find out the best regimen for trade is to study the general ‘ go of the thing’ ; and this is to be done not by merely attending to one’s own trade and jumping thence to a conclusion about the whole vast process of international exchanges, but by studying the history of trade and trades, in general and in particular, noting how they have been affected by different laws in the past and in our own day; and checking by statistical facts all the thousand-and-one general assertions that are made every day by people who want a particular law made.

All this can hardly be done by many men of business. Great men of business, men of large intelligence who can think widely on the complexities of trade, have frequently pointed to important truths about it ; and in the past we see politicians like Burke and professors like Adam Smith taking much pains to learn what intelligent traders can teach them. And a number of good men of business have taken pains to understand political economy. But even those economists who reject a number of Smith’s doctrines admit that he, the retiring man of the study, did immensely more to clear up the subject of ‘ the wealth of nations ’ than did any of the traders who helped to make that wealth. Too often, as he showed, they had helped to hinder it by pressing wrong prescriptions upon incompetent politicians who took it for granted that traders must know the best policy for trade in general. The difference between Smith and the men whose prescriptions he fought against was that he strove to get a view of all or many of the facts while they took account of only a few. And he sought for the facts on all sides, among the traders, in books, in histories, and in statistics.

When all is said, however, we shall do well to be modest about the exactitude of our theoretical knowledge. Remembering the confession that has been made for the doctors, let us recognise that to know all about ‘the go of the thing’ is not easy. It is not all a matter of prejudice on one side, though there has been a tremendous play of prejudice on the subject at all times. Seventy years elapsed between the publication of Smith’s Wealth of Nations (1776) and the abolition of the Corn Laws (1846) ; and this was not wholly due to wrong thinking on one side. Smith’s own reasoning is not seldom astray ; and the economists who backed him made their mistakes as well as those who opposed him.

The lesson is that we should all feel we have much to learn, keep our tempers, and be ready to think out afresh, patiently, every new consideration put to us. That is, in short, the only way by which any kind of knowledge is steadily advanced. Even before the war, medical diagnosis had become a very much more complex matter than it was fifty years ago, and amateur opinion on complicated cases had thus become more than ever unauthoritative. But it is probably the case that two doctors out of three pronounce and vote upon questions of fiseal policy with perfect confidence on the strength of a wholly superficial and empirical view of the case. Their prescription is as that of the unqualified amateur in a case of obscure disease. Well aware of the need for a close study of causes in their own business, they see no need for it in the immensely?complex problem of international trade and fiscal policy.

When men scientifically trained thus disregard the need for scientific study in a problem outside of their own field, we can hardly expect the required attention from those who have not undergone any special scientific preparation. But there is only the more need to appeal to all and sundry to take a little pains over a question which may involve the well-being of their children and the destiny of their country.

Chapter II The Beginnings Of Free Trade

(Ge of the common errors in the popular advocacy of what is called ‘tariff reform’ is to assume that that is a new or modern policy and that what is called free trade is an old one. There could not be a more complete misconception. The policy of keeping out foreign goods by import duties or prohibitions, or ‘ making the foreigner pay ’ in the way of a tax, is simply the very oldest of all. It is the primeval rule-of-thumb of the savage chief, retained by kings and councils, and turned to their own purposes by trade-bodies influential enough to control parliaments. Those then who call free trade a worn-out shibboleth should look to their history. Telling us to reconsider the doctrines of our grandfathers, they are inviting us to go back to those of our greatgrandfathers, and of our remote ancestors.

In the history of trade, freedom is the modern policy as against the ancient, Not that it was adopted anywhere for freedom’s sake, on a mere theory that freedom must always be a good thing. The first experiments were made by rulers or States in which the effects of heavy customs duties had been reflected upon and seen to be often bad; and in which a policy of light duties was thought to be likely to promote trade. Such a process of reflection had occurred in the Netherlands even before the war which ended in the United Provinces (as the Dutch Netherlands were then called) becoming independent of Spain. But it was not any profound insight that showed the people of Holland the wisdom of low port dues and customs duties. They could not greatly extend their trade on any other plan.

The Netherlands, as apart from Flanders, had but small natural resources for production. They began to acquire wealth by the two related methods of fishing and sea carriage ; and for the purposes of both kinds of trade it was at that stage plainly necessary to make the charges on foreign ships and goods light. If the Dutch barred foreign ships by heavy port dues, their own ships carrying fish and other cargoes would be equally barred elsewhere. If they put heavy import duties on foreign produce, their own produce would be equally checked. Being by geographical position a * middle-man’ country, Holland became, long before England, a ‘nation of shopkeepers.’ Her traders secured supremacy in the carrying business by planning different kinds of ships for different trades, looking alike to speed and to economy. Thus she built up the greatest transit trade the world had yet seen. Without timberto build her own ships, without cornland enough to feed her own dense population, she became the chief corn-market and timber-market in Europe. And whereas the traders of other countries often spoiled their markets by selling short measure or poor quality abroad, the Dutch authorities established State checks which guaranteed both quantities and qualities. Such methods made trade grow as it had never grown before.

It was only by the wealth and the credit thus acquired mainly by fishing and by transit trade that the United Provinces were able to bear the immense costs of their long struggle with Spain. They had to incur an enormous debt, and to levy terribly heavy taxation, both on incomes and on food. On their own fish, it was said, they paid to the State five times the original cost. But they knew better than to try to ‘ make the foreigner pay ’ by taxes which would strangle the shipping trade by which they mainly lived. Always they maintained low customs duties.

It is still common to read that the commercial supremacy of Holland was broken down by the English Navigation Laws, set up by Cromwell and extended after the Restoration. This is a historical delusion, many times exposed. To begin with, the Navigation Laws were imposed with the idea of transferring some of the carrying trade from Dutch to English ships, but not with any hope of ruining Holland; and so far from having any such effect, they for a long time curtailed English trade, while the Dutch greatly expanded. Fifty years after their enactment, these were admitted by English experts to have been the direct results.! The relative decline of Dutch trade, later, came about from two causes. One was that while the Dutch Government maintained the policy of low customs duties for the great European transit trade, their capitalists were allowed to make monopolies of their trade with the Indies and the New World. The other was that when the chief rival countries, France and Britain, began to develop alike their manufactures and their export trade in the eighteenth century, their much greater natural resources inevitably increased their wealth at a greater rate, while Holland, small in area and therefore small (though dense) in population, had always to bear the heavy burden of her old war debt.

Yet Holland never lost her European carrying trade ; and had her rulers been enlightened enough to allow free competition where they maintained monopolies in their trade beyond seas, they might have expanded on that side as they had previously done in the European trade. In a word, they were successful where the circumstances practically compelled them to be free traders; unsuccessful where they were at liberty to follow the ordinary mercantile instinct of ‘beggar my neighbour.’ In modern times, under a free trade policy all round, Holland has been once more remarkably l Details and references are given in the author’s pamphlet, Shipping After the War, 1917. (Cobden Club.)

successful. After 1870, her carrying and transit trade increased more than that of any of the neighbouring countries under tariff systems. The figures cannot be argued away.

It was in the eighteenth century, on the other hand, that British trade began noticeably to forge ahead ; and this progress was brought about, not by the Navigation Laws, which hindered it, but by steps in the direction of free trade. In the early years of the reign of George I his statesmen began taking steps to lighten the burdens on trade ; and in 1721 Sir Robert Walpole made a great reform. During the long wars with France under William and Anne, the sorely needed extra revenue had been largely raised by taxes on exported goods and on imports of raw materials as well as of finished goods. At one stroke Walpole removed the duties from 106 articles of export and 388 articles of imported raw material. As was said of him long afterwards, he found the English rate-book the heaviest in Europe, and left it the lightest.

Unable to go further and take duties off imports of manufactures (a policy in which he would have been fiercely resisted by the manufacturers and others) he did what he could to help the trade of the American colonies by removing some of the vetoes which had been put upon their exports of produce to foreign countries. Already in his day men urged that the mother country should get revenue by taxing the colonies. This Walpole always refused to do, pointing out that the mother

_country’s best advantage from her colonies lay in the expansion of her trade with them. It was the reversal of Walpole’s policy, in the generation after his death, that lost the American colonies to the British crown.

Just about the close of Walpole’s period, a free trade reform of another kind was begun in Italy. In the last days of the Italian republics, at the close of the fifteenth and the beginning of the sixteenth century, Florence, the capital of Tuscany, had come under the rule of the family of the Medici, who, beginning in trade, became merchant princes and bankers. The trade policy of Florence, even in its free days, had always tended, like that of most other European States, to keep up monopolies and check foreign competition, and the Medicean rule set up a costly and vexatious system of customs, tolls, regulations and checks of every kind on trade, under which both the trade of Florence and the agriculture of the country districts went from bad to worse. In particular, the agricultural region of Siena, called the Maremma, which had come under the rule of the Medici by the overthrow of the old Sienese republic, was reduced to poverty and misery. Such remained the state of those once flourishing parts of Italy under the sway of the Medicean Grand Dukes who ruled it after the Italian republics had all been overthrown by the Spanish and French conquests.

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When the last of the native Grand Dukes succeeded in 1723, there was in his dominions a very liberal-minded ecclesiastic, named Bandini, who belonged to one of the old land-owning families of the Sienese Maremma, and in his youth had had experience in managing the estate. He saw that the misery of Sienese agriculture was due to the absolute bar on free trade in corn. All export of grain was forbidden. The agriculturists therefore kept down their production to the limit of what was likely to be consumed; since to grow more was simply to lose it. In a good year they suffered from low prices; in a bad year the people were starved, because no corn was allowed to be imported.

Bandini urged on the Grand Duke and _ his ministers that the proper policy was to let the producers sell their surplus outside Tuscany. On that footing they would grow all they could. Then even in a bad year there would be far more corn for the home market than would have been produced under the old system; so that the people would have more and cheaper food, and the export of surplus corn would bring in other goods from the neighbouring countries which bought it. Bandini had probably heard of the system of subsidies on exports of corn that was set up in England under William and Mary. Even before their time, the government of Charles II had allowed the export of English surplus corn when the price had fallen to a certain figure. This was a relaxation of the old laws forbidding export which had existed in England as elsewhere. Under William there was added to the freedom of export an actual subsidy or bounty upon the eorn that was exported. The arrangement was by way of a compensation to the English landowners for the land tax to which they had to submit after 1688.

The subsidy, we can see, was bad and unnecessary. It would have been quite enough for the prosperity of agriculture to allow export of surplus corn; the subsidy caused producers to sell abroad rather than at home if they could, thus making English corn cheaper to foreigners than to English people. Bandini asked for no subsidy, but merely for freedom. The native Grand Duke and the ministers treated him as a madman; some even suggested that he should be locked up. It was not till a new dynasty came in that he was listened to.1 In.1734, largely through the clever diplomacy of Walpole, the risk of a European war over the succession to the crown of Poland was avoided by a series of compensations to the parties interested ; and one of these was the granting to Francis of Lorraine (husband of Maria Theresa, afterwards Empress of Austria) the succession to the duchy of Tuscany. In 1787 Francis entered on the succession ; and it was under him and his suc-

1 He wrote an Economical Discourse in or before 1737. This was read and acted on by the new ruler, but was not printed till 1775.

cessor Leopold that the principles of Bandini were carried into practice.

The result was that Tuscany, including the Sienese Maremma, became the most prosperous part of Western Europe. Food, industry, wealth, and population all increased as they had never done before; and the example began to impress the thinking men in France, where the agriculture of every province was fettered as that of Tuscany had been. It seems incredible that within a kingdom such restrictions should have been set up ; but so it was in both Spain and France. In Spain they were abolished by the Italian minister Alberoni during his short period of power from 1714 to 1718; but they appear to have been put on again. In France they lasted down to the reign of Louis XVI. As in old Tuscany, the production of food was thus kept down everywhere to the lowest level at which agriculture could keep going, and the poverty of the people and the tyrannies of landlords (who also were kept poorer than they need have been) prepared the way for the French Revolution.

In all the more enlightened countries, as in Italy, there had been some men who, like Bandini, saw more or less clearly ‘the go of the thing,’ and suggested reforms which would make agriculture and commerce and industry more free. The great difficulty was always to persuade, not merely rulers, but the majority of the people concerned, to give up an old system and try a new one.

Both before and after Walpole, men wrote in England pointing out how all the barriers to trade simply meant that the nations were poorer than they would have been if they had traded freely ; but after Walpole’s reforms of 1721 no great advance was made for over a century. In France, men began writing privately before 1750 against the restraints on the inland trade in corn between the different provinces; but not till about 1775 was the great statesman Turgot in a position to attempt to abolish them ; and the aristocratic and financial opposition aroused by his reforms was so great that when he had been only twenty months in power the king had to dismiss him. Had his policy been maintained, the Revolution would probably have been averted.