A history of tariff wars

To a non-economist like me, blind to the subtleties, it seems that the basic debate over trade hasn’t changed for centuries. Today, we are in the middle of a trade war that Louis XIV’s great minister, Jean-Baptiste Colbert, the leading practitioner of mercantilism in the mid-17th century, would have thoroughly understood. Grab for your country a bigger share of world trade, reduce imports and increase exports, and you will be richer and more powerful. There is a brutal common sense to this idea that has enabled it to survive the exhaustive critique of Adam Smith a century later. After all, two of the most powerful men in the world, US president Donald Trump and his counterpart in China, Xi Jinping, remain in the Colbertist camp.

Smith, a far greater intellect, published The Wealth of Nations in 1776 not merely as economic theory, but also as a blueprint for modernity – a ‘commercial society’ superseding feudalism, violence and oppression. Freedom of trade would increase overall wealth, international cooperation, individual liberty and equality. Not least, it would prevent producers’ lobbies from conspiring against the public, including by abuse of political power – as 19th-century French economist Frédéric Bastiat put it, candlemakers would put a tariff on sunlight.

Smith’s view of unlimited expansion of wealth through increasing economic activity from which all could gain was the opposite of the mercantilist assumption of violent competition for limited resources. Mercantilists equated wealth with the accumulation of gold, of which there was a limited quantity. After Smith, this seemed absurd. Perhaps it seems less so today: what if the wealth and power of states in the future depends on the seizure of limited resources, most obviously rare minerals and energy sources?

We might, as economic liberals have always argued, see this long and evidently unresolved debate between mercantilism and free trade as a conflict between oppression and enlightenment. We might equally see it as a contrast between intellectual theory and material interest, or even between utopianism and realism. But I don’t think it can simply be seen as intelligence versus stupidity or altruism versus selfishness. For one thing, self-interest has always motivated both sides. For another, the vested interests that are undermined by free trade may be legitimate interests, including the interests of the poor and weak.

This moral ambiguity is clear in the classic 1846 debate in Britain over the repeal of the Corn Laws – a tariff system that ensured a minimum price for domestically grown cereals. The Tory prime minister, Sir Robert Peel, had come to accept – as had the ‘official mind’ of Whitehall – that the Corn Laws would one day have to go. The onset of the Irish potato famine in 1845 pushed him first to suspend and then to abolish them against the will of the Tory Party and its voters.

Peel was a prescient and intellectually brave politician. He knew that the United Kingdom, a group of relatively small islands whose already sizeable population was growing faster than ever, had not been self-sufficient in food for many years. It was the only country where more people worked in industry than in agriculture. It had to export manufactured goods to feed itself, so logically it should import the cheapest available food, both to increase mass living standards and keep costs of production low. He accepted that this would cause profound political and social change. It was not a matter of choice but of necessity. He thought one ‘might on moral and social grounds prefer cornfields to cotton factories [but] our lot is cast, and we cannot recede’.

It is worth looking at the issue through the eyes of Peel’s opponents, led by fellow Tories Benjamin Disraeli and Lord George Bentinck. Disraeli claimed they were defending ‘the cause of labour – the cause of the people – the cause of England!’. For him, agricultural society founded on community, Anglicanism and upper-class paternalism was the bedrock of the nation. Agriculture provided ‘the revenues of the church, the administration of justice and the estate of the poor’. The Tories – unlike their Whig opponents – accepted high spending on social welfare through the surprisingly generous and frequently humane Poor Law, based on local taxation and local administration in every parish. This kind of paternalism could include grants not only for clothing, food, fuel, rent, medical care and a decent burial, but also marriage costs and money to set up small businesses.

Indeed, it was the Tories who pioneered legal protection for factory workers, women and children, which many free-trade liberals condemned as damaging to productivity. Tory poet Samuel Taylor Coleridge once said to the utilitarian feminist writer, Harriet Martineau: ‘You seem to regard society as an aggregate of individuals.’ She replied: ‘Of course I do.’ That was the heart of it.

Most Tory MPs voted to keep the Corn Laws, but Peel won thanks to Whig and Radical support. This has gone down in popular legend as a triumph of social justice: the defeat of selfish landlords in the interests of poor consumers. It was also, however, the triumph of no less selfish employers who wanted to use the cheaper price of imported corn to justify keeping workers’ wages low. Moreover many of them were Dissenting enemies of the Church of England and of the landed gentry, and were glad to undermine both. What of the agricultural workers themselves? They would have to get jobs in industry or coalmining – or emigrate.

Liberals made free trade a moral cause, supported by religious groups, the anti-slavery movement, trade unions, women’s associations and peace campaigners. They were convinced that commercial freedom would bring political freedom and international harmony, the liberation of serfs and slaves, and the end of the ‘antagonism of race, and creed, and language’.

Vestiges of this view might be seen in reactions to Trump’s tariffs today. The prophet of free trade was Richard Cobden, the co-founder of the Anti-Corn Law League. He toured Europe and America as the self-appointed ‘ambassador of the people’, declaring free trade ‘the greatest revolution that ever happened in the world’s history’ and ‘the only human means of effecting universal and permanent peace’. Ironically, one of his leading disciples, Sir John Bowring, as governor of Hong Kong, supported using armed force to defend opium exporters in the 1850s. As Bowring had it, the Chinese Empire had to be opened up to the benefits of free trade.

At home, the Whig triumph over the Corn Laws was not an unalloyed blessing for the poor. The same utilitarian spirit that was ready to sacrifice agricultural interests to those of industry cut back savagely on Poor Law spending – the number receiving benefits dropped by half. The Whigs legislated for a system of poor relief confined to deterrent ‘workhouses’ – a reform that Disraeli said ‘disgraced the country’. For this was the age of Thomas Malthus, whose 1798 Essay on the Principle of Population terrified several generations. He argued that population growth inevitably outran food supply until eventually ‘checked’ either by limiting births or by famine and war. This, said one contemporary, was ‘the fixed, axiomatic belief of the educated world’, and reducing benefits was seen as a way of lowering the birth rate of the unproductive. Economic freedom had its iron laws.

Yet it took a generation to seal the decline of British agriculture. It survived the repeal of the Corn Laws but not the railways and steamships (mostly built in Britain), which from the 1870s brought cheap food to Europe from newly settled continents. In France and Germany, and over much of Europe, cheap food imports led to the routing of free-trade liberalism and the raising of agricultural tariffs to protect domestic producers. Not in Britain.

French protectionists had an explanation for the divergence between Britain and France, which had briefly followed Britain into free trade during the authoritarian reign of Napoleon III. He had concluded a free-trade treaty negotiated by Richard Cobden (him again) in 1860, inaugurating what has been called ‘the first common market’. But after Napoleon III’s fall in 1870 the French reverted to protectionism as quickly as possible. Their explanation was simple: democracy. Britain, they said, was ruled by its great aristocrats, who had sacrificed their own economic interests in order to keep political control. But France, a true democracy after 1870, could not sacrifice agriculture, because unlike in England, millions of peasants had the vote.

This may not be an entirely accurate analysis. But it is worth considering in today’s climate, because it points to perhaps history’s first link between democracy (or populism) and protectionism. Yet in Britain the political effect of democratisation was the opposite, because the urban working class wanted cheap food.

They got it, but not without risk. Britain from the early 19th century needed to import food, but it deliberately increased its dependency on imports by accelerating the shift from cornfields to cotton factories, in Peel’s words. As early as the 1850s, hostile observers rubbed their hands at the prospect of Britain one day being starved, perhaps by a naval coalition of France, America and Russia. So Britain’s taxpayers maintained the world’s largest navy to protect its trade routes. The threat of starvation only materialised with the widespread adoption of the submarine. Yet though frightening, the German submarine blockades during both world wars never came close to succeeding. Today, we can’t be so confident: 95 per cent of our visible trade goes by sea, not to mention undersea data cables, electricity supply and offshore windfarms. We cannot protect them.

It was geopolitical fears rather than economic pressures that first pushed Britain back towards protectionism. Surprisingly, it was Joseph Chamberlain – the radical Liberal, industrialist, former mayor of Birmingham and Unitarian to boot – who campaigned for tariffs to consolidate the British Empire in the face of Germany, the US and Russia, all rising protectionist powers. Chamberlain shifted to the Tories, and pushed them towards cautiously advocating tariffs. This brought electoral disaster in 1906 – voters wanted cheap food and therefore free trade, even if other countries’ protectionist policies were threatening Britain’s economic position.

Public opinion began to shift towards protectionism during and after the First World War. The Liberal Party and Labour both stuck to the ‘cheap food’ argument, but postwar Britain, with global demand for its traditional products such as textiles collapsing, was no longer strong enough to practise free trade in a protectionist world. Even the empire had adopted tariffs against British manufacturers.

The change came after the 1929 Wall Street Crash and a global banking crisis, which pushed many countries to raise tariffs. America’s adoption of the Smoot Hawley Tariff Act in 1930 caused further damage. It was widely opposed by economists, business and the president, Herbert Hoover, who dared not resist his own Republican Party in Congress. Retaliation by America’s trading partners, with Canada in the lead, caused a fall in trade, domestic political reaction and a Democratic victory in 1932, ending over 70 years of Republican ascendancy. The Smoot Hawley average tariff over total American imports was 20 per cent, about the same as the general rate announced by Donald Trump. Amid the disastrous world depression and a decline in its exports, Britain adopted a system of ‘imperial preference’ in 1932, with higher tariffs on goods from outside the empire. Commonwealth trade remained important until Britain joined the Common Market in 1973. But the ‘beggar my neighbour’ effects of high global tariffs certainly reduced world trade and growth until the Second World War provided a huge boost to production.

What, if anything, is the moral of this complex story? Most obviously, that neither free trade nor protectionism is a panacea, and when applied dogmatically tends to be harmful. Neither has the moral high ground: both can be used to favour some interests and harm others, and both can be exploited by predatory states. The utopian version of free trade favoured by progressive Victorians never materialised. Britain’s gains and losses from unconditional free trade seem to have largely balanced out. Successful protectionist countries such as Germany and the US used tariffs to foster new industries, but their economic advantages were already great and probably made tariffs unnecessary.

Democracy tends towards protectionism when those harmed by free trade are numerous enough to count. But democracy also demands cheap goods. No one has yet squared that circle.

Robert Tombs is the author of This Sovereign Isle: Britain In and Out of Europe, published by Penguin.