Protectionism in a Globalized World: Is Free Trade Really Free?

"John Bull Kicking Away the Ladder" Canadian caricature poking fun at the hypocritical relationship United Kingdom had with her colonies in regards to economic self development. 18 June 1870,

“John Bull Kicking Away the Ladder” Canadian caricature poking fun at the hypocritical relationship United Kingdom had with her colonies in regards to economic self development. 18 June 1870,

Background

If you look throughout human history, we have been motivated to innovate by variety of different factors. Over our 10,000 year journey we have established ourselves at the top of the food chain and we never looked back since. Upon closer inspection, three main motivators particularly stand out.

Firstly, motivation for appeasement of a deity or royalty have induced us to build countless wonders such as the pyramids and the churches and castles of Europe. Not so much relevant in the modern world. Secondly, humans have been motivated to modernize at the prospect of war. Through recognition of war, we have built the Great Wall or commence the Manhattan Project. Thirdly, we have been spurred to advance at an expectation of economic returns. For the promise of profit humans have been driven to innovate. The silk road or the “New World” were founded upon such provocations.

Based on above, we can see how all the great feats we have accomplished have been motivated by one or all three factors. By the dawn of 18th century, extensive world trade and colonization, the histories of most civilizations had become substantially converged giving rise to what we know as globalization. In the last quarter-millennium, the rate of growth in population, knowledge, technology, commerce, weapons destructiveness and environmental degradation has exponentially accelerated, creating opportunities and perils that now confront the planet’s human societies.

Introduction

These instrumental last two century has been shaped by the Anglo-American sphere of influence due to the innovation and expansion they have achieved in pursuit of the latter two of the three motivators. Through its influence, the Anglo-American sphere has spread its culture and its ideologies and have fashioned the world’s move to globalization according to their interests.

The geo-political landscape has essentially remained static until the recent phenomenon, ‘the rise of the rest’. Out of this rise, China has been the only one to elbow themselves into the world power structure due to their industrial capacity and its economic volume.

According to the popular narrative, besides the key exports of ‘democracy and capitalism’, the Anglo-American sphere’s greatest gift to world is the economic policy of ‘free trade’. In the name of ‘free trade’, its opposite ‘protectionism’ has been demonized by most developed nations.

In this paper, I will closely examine the cultural history of the dichotomy between protectionism and free trade and how its utilization have shaped the developed world. More specifically, I will focus my report on is the current rise of renewables, specifically photovoltaic or solar energy as a fledgling industry and the clash of cultures that have been occurring as a result. And finally, I will analyze the current backdrop of the geo-political and socio-economic scene where the future history will be written.

With that being said, I want to analyze the trends of protectionism that can be seen in European and American markets in response to the influx of cheaply manufactured Chinese solar panels. Moreover, I want to critically look at the roots of this political and economic reality through the lens of culture and identify the middle ground where nations and economies can coexist and compete without driving each other into the ground.

Race for Renewables

Over the last few years, economies across the world, especially developed nations, have looked to expand the use of renewable energy sources. As it becomes more apparent that our exponential growth is having a negative effects on our environment, the need and call for sustainable sources of energy has been becoming more vocal. Across the globe, players have been jockeying for the position of prominence in this developing sector. According to data compiled by the Renewable Energy Policy Network, the “total investment in renewable energy reached $257 billion in 2011, up from $211 billion in 2010.”

The top countries for investment in 2011 were China, Germany, Spain, the United States, Italy, and Brazil. Continued growth for the renewable energy sector and promotional policies helped the industry weather the 2009 economic crisis better than many other sectors. Out of the lot, two economies that have persevered to become a major players in the renewable energy sector are United States and China. Besides the fact that both governments highly subsidize and protect their domestic renewable sectors, each country traveled a different road to this summit. United States have achieved this position due to their bleeding edge R & D sector and its investment environment. On the other hand, China using its industrial capacity and the intellectual properties of others to establish a vast solar panel manufacturing industry.

History of Protectionism

According to Encyclopaedia Britannica, protectionism by definition is a “policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors.” In contrast, “free trade, also called laissez-faire, a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports).

In the industrial era, (usually dated starting in the 1800s) protectionism as an economic instrument have been utilized by various nations across the globe. With the onset of “Industrial Revolution”, Great Britain catapulted itself as the first true global power. With assets in all five continents and the navy to enforce their rule on the high sea, Great Britain’s ascent to prominence is well documented. With that being said, it is easy to assume that Great Britain reached this zenith by employing free trade policies. However, upon closer inspection of the country’s history and economic policies, it is clear that Great Britain participated variety of initiatives to protect their infant-industries whether that be through import tariffs or export subsidies.

According to Ha-Joon Chang, an economics professor at Cambridge University “Britain entered its post-feudal age (thirteenth to fourteenth centuries) as a relatively backward economy. It relied on exports of raw wool and, to a lesser extent, of low-value-added wool cloth to the then more advanced Low Countries. Edward III (1312–1377) is believed to have been the first king who deliberately tried to develop local wool cloth manufacturing. He only wore English cloth to set an example, brought in the Flemish weavers, centralized trade in raw wool, and banned the import of woollen cloth.”

These policies had continuation under the Tudor monarchs. Daniel Defoe, the world famous merchant, politician and the author of the novel, Robinson Crusoe was contemporary of these events. He recounted in his book A Plan of the English Commerce about the numerous measures the Tudors took to elevate England from a raw-wool exporter into the most prominent wool manufacturing nation in the world.

According to Defoe “from 1489, Henry VII implemented schemes to promote wool manufacturing, which included sending royal missions to identify locations suited to wool manufacturing; poaching skilled workers from the Low Countries ; increasing duties on the export of raw wool; and even temporarily banning the export of raw wool.”

Despite its widening technological lead over other countries, Britain continued its policies of industrial promotion until the mid-nineteenth century. It was only after 1860 that most tariffs were abolished. However, the era of free trade did not last very long. It ended when Britain finally acknowledged that it had lost its manufacturing eminence and re-introduced tariffs on a large scale in 1932.

Friedrich List, the nineteenth-century German economist succinctly put his observation in his famous quote:

“It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth”

American Perspective

Britain may have been the first country to successfully use a large-scale infant industry promotion strategy to protects it’s domestic industries. But, its most zealous user was the United States. If you listen to the modern popular narrative, it is rarely acknowledged that United States have used protectionist policies to elevate itself to the summit. However, the importance of infant industry protection in U.S. development cannot be overstated.

From the early days of colonization, industrial protection was a controversial policy issue. To begin with, Britain did not want to industrialize the American colonies, and duly implemented policies to that effect like banning of high-value-added manufacturing activities. Around the time of independence, the southern agrarian interests opposed any protection, and the northern manufacturing interests wanted it.

A significant shift in policy occurred in 1816, when a new law was introduced to keep the tariff level close to the wartime level. Specifically protected were cotton, woollen, and iron goods. Between 1816 and the end of the Second World War, the U.S. had one of the highest average tariff rates on manufacturing imports in the world. Given that the United States enjoyed an exceptionally high degree of “natural” protection due to high transportation costs at least until the 1870s, it is evident that the U.S. industries were literally the most protected in the world until 1945.

It was only after the Second World War, with its industrial supremacy unchallenged, that the U.S. liberalized its trade and started advocating the cause of free trade. The American decision makers were very aware of this “ladder kicking”. Ulysses Grant, the president of the United States from 1868 to 1876 stated:

“For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”

The role that U.S federal government played in industrial development continued well into the post-war era. The large amount of defence related procurements and research and development spending, which have had enormous learning and spill over effects to establish the supremacy of the American state.

Chinese Perspective

It should be no surprise that the BRIC countries have utilized protectionist policies. Thanks to their embrace of state capitalism, the line between industrial policy and export subsidy is blurred or non-existent. China has long used compulsory joint ventures, technology transfer and access to cheap land and loans from state-owned banks to boost companies in strategic sectors. In the mid-2000s, China invited foreign manufacturers, including Germany’s Siemens and Japan’s Kawasaki, to supply locomotives for its high-speed rail network. Later it switched to Chinese companies, which now compete with Siemens and Kawasaki in foreign markets.

A similar story unfolded in wind power. A decade ago foreign companies such as Spain’s Gamesa had a significant share of China’s market for wind-power turbines, but now Chinese companies, many using skills acquired as partners or subcontractors to Western suppliers, along with subsidised land and credit, dominate the Chinese market and compete fiercely with those original Western suppliers.

When the same thing started to happen in solar power, China’s competitors hit back. In 2012, U.S, embarrassed by the bankruptcy of Solyndra, which had received federal loan guarantees, slapped tariffs on Chinese solar-panel exporters for offering illegal subsidies and dumping.

The often confusing landscape demonstrates how difficult it is to identify and punish protectionism in an industry where industrial policy is the rule, not the exception. According to He Waiwen of China Association of International Trade, a Beijing based think tank “Solar energy is subsidized in almost all countries, The important thing is not whether we have subsidies but whether they are illegal,”

The controversy over Chinese government support for solar has been rumbling for some time now, and even Chinese manufacturers have suffered from these market distortions. Data from the China Renewable Energy Society state that the country’s top 10 solar panel makers are up to 100 billion Yuan ($16.34 billion) in debt, with a debt to asset ratio above 70 percent on average.

Beijing has said it wants to consolidate the industry, but the sector continues to enjoy protection at the central and local level; the latter is particularly strong because solar power companies are frequently major employers. But weak demand and trade rows have resulted in overcapacity, leaving leading firms with huge debts.

Indeed prices have been coming down dramatically in recent years. And though it may sound counterintuitive, getting too cheap, too soon can be a major problem. The US and European panel makers have blamed Chinese firms for playing a big role in that. They have accused the Chinese companies of flooding the market and of selling the panels below fair price, a practice known as “dumping”.

There have also been claims that China provides subsidies to its firms, which helps them keep their costs low and as a result sell goods at lower prices, resulting in tariffs from countries such as the US. Many American manufacturers from Solyndra bet on thin-film thinking it would be cheaper than traditional silicon solar panels. They bet on thin-film and lost as the Chinese drove down the price of silicon cells. China currently produces 1.5 times more than the global demand for solar panels.

Analysis

Competition across differing economic systems and cultures is one of the inherent challenges of a globalized economy. At the moment, the prevailing discourse on globalization is that free trade is the best economic policy suited for global prosperity. The fervour of the proponents of free trade can be attributed to the belief that economic theory has proven without a shred of doubt the superiority of free trade.

Moreover, proponents of free trade asserts that one only has to look at history for proof. After all, the defenders of free trade ask, isn’t free trade how all the world’s developed countries have become rich? What are some developing countries thinking, they wonder, when they refuse to adopt such a tried and tested recipe for economic development?

A closer look at the history of capitalism, however, reveals a very different story. When developing themselves, virtually all of today’s developed countries did not practice free trade. Instead, they promoted their national industries through tariffs, subsidies, and other measures. Particularly notable is the fact that the gap between “real” and “imagined” histories of trade policy is the greatest in relation to Britain and the United States , which are conventionally believed to have reached the top of the world’s economic hierarchy by adopting free trade when other countries were stuck with outdated mercantilist policies. Debunking the myth of free trade from the historical perspective demonstrates that there is an urgent need for thoroughly re- thinking some key conventional wisdom in the debate on trade policy, and more broadly on globalization.

I believe, the first step in ensuring proper dialogue is to drop the rhetoric that free trade exists and acknowledge that protectionism is the reality we live in. As summed succinctly, in an article by the Economist, Fred Hochberg, head of America’s government-backed Export-Import Bank stated that “It’s time to drop the fantasy that a purely free market exists in the world of global trade. In the real world our private enterprises are pitted against an array of competitors that are often government-owned, government-protected, subsidized, government-sponsored or all of the above.”

Conclusion

As the pace of globalization quickens largely thanks to the technological advancements we have achieved over the last two hundred years, it is forcing us to come to grips with the new reality that we have created. A reality where our standards of living, life expectancy and access to information and knowledge are unbridled in comparison to just a century ago when we were limited only limited to steam power. This progression can only be described as an exponential increase fuelled by human curiosity and ingenuity.

However, other factors have been increasing exponentially as well. Our impact on our environment have forced us to look for more sustainable sources of energy for sustenance. Prospect of readily available renewable energy is a big bargaining chip on the geo-political poker table. Then it is understandable how United States and China have tried to gain an advantage over another.

According to Denny Roy, contributor for The Diplomat “the differences are irreconcilable between China and the U.S. Strategic trust, therefore, is not attainable. The two countries should strive to manage their inevitable bilateral strategic tensions by reaching agreements where both see a benefit and where compliance is measurable. . . for these inherent rivals and potential adversaries, the emphasis belongs on ‘verify,’ not ‘trust.”

Firstly, we must recognize that use of the buzz worthy term ‘free trade’ and the rhetoric associated with it is a hypocritical concept when it is clear that all developed nations around the world achieved their position due to clearly protectionist policies and not the benevolent ‘free trade’ which we are led to believe.

Secondly, we must recognize that countries around the world will take actions to protect their interests and will react accordingly to the perceived competition.

And finally and most importantly, leaders around the world must look at its neighbours, not as competitors but as long term partners whose economic well being is interconnected to your own.

Bibliography

Ulysses S. Grant, president of the United States, 1868–1876, cited in A.G. Frank, Capitalism and Underdevelopment in Latin America , New York, Monthly Review Press, 1967, p. 164

“The hidden persuaders.” Economist. 12 Oct 2013: n. page. Print. <http://www.economist.com/news/special-report/21587381-protectionism-can-take- many-forms-not-all-them-obvious-hidden-persuaders>.

Roy, Denny. “U.S.-China Relations: Stop Striving For “Trust”.” The Diplomat. N.p., 07 Jun 2013. Web. 1 Nov 2013. <http://thediplomat.com/2013/06/07/u-s-china-relations-stop- striving-for-trust/>.

Gershman, John, and Ha-Joon Chang. “Kicking Away the Ladder: The “Real” History of Free Trade.” Foreign Policy In Focus (2003): n.pag. Web. 1 Nov 2013. <http://fpif.org/kicking_away_the_ladder_the_real_history_of_free_trade/&gt;.

Web. 29 Oct 2013. <http://www.britannica.com/EBchecked/topic/479643/protectionism&gt;. Web. 29 Oct 2013. <http://www.britannica.com/EBchecked/topic/218403/free-trade&gt;.

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