IMPURE THOUGHTS | Global Trade Magazine
International Trade
  November 8th, 2017 | Written by

IMPURE THOUGHTS

TRADE, THE GLOBAL DIVISION OF LABOR, AND PROSPECTS FOR INDUSTRIALIZATION

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  • Export booms that use widely dispersed resources do better at creating long-term development.
  • Export booms relying on resources owned by just a few people don't do as well.

In most contexts, it is not hard to imagine that terms negotiated between two self-interested parties with vastly different amounts of wealth and power might well work to the disadvantage of the weaker party, leaving it even farther behind. But since the days of Adam Smith and David Ricardo, economics has told us that such worries are misplaced in the area of international trade: free trade will benefit both parties by forcing them to specialize in the activities that are most profitable for them, while maximizing the total amount of wealth created. This might well mean, for some countries, a prolonged period of specializing in primary products, but only if it was beneficial to them—it would in no way lock them into continuing such a specialization once circumstances made it more advantageous to them to industrialize.

Ricardo’s famous example drew on the trade in wine and wool between England and Portugal, showing how much better off both were than if they tried to produce some of both commodities themselves. On the blackboard, the argument works even when one country is more efficient than the other at everything—the laggard still gains from specializing in the thing(s) where it is least far behind and importing the others, compared with what it could achieve through self-sufficiency. In the abstract, it is hard to make a case for protectionism. 

But reality is not always so clear-cut. Indeed, Ricardo’s own example could make one wonder: How well did Portugal do during its centuries of free trade with England? Are we sure it would have done worse otherwise? The matter gets more complex when we realize that there are virtually no examples of successful industrialization with “pure” free trade (or for that matter with pure self-sufficiency). Even in the supposed heyday of free trade, the United States and Germany achieved their impressive late nineteenth- and early twentieth-century growth behind high tariff walls; many other countries also had some kind of protection.

Even Britain’s record is mixed. For most of the nineteenth century, Britain championed free trade, but its own textile industry was sheltered from cheap Indian imports in the seventeenth and eighteenth centuries by tariffs of roughly 100 percent; only after it had become the world’s most efficient producer did it dismantle those walls. Even at the height of free trade in the late nineteenth century, Britain’s Indian empire remained an important exception, with markets for various industrial goods essentially closed to non-Britishers. This guaranteed market became more, not less, important, as British industry began to lose its competitive footing against the United States and Germany. 

Oddly enough, one of the best examples of agricultural and raw materials exports fueling industrial growth comes where we might not expect it—in Japan. Though hardly a resource-rich country, Japan did export large amounts of silver in the late nineteenth century, and even more silk. Taking advantage of a silkworm blight in Europe and of homegrown technical innovations that enabled them to coordinate rice growing and silkworm rearing better than before (basically by heating silkworm sheds to trick the worms into producing earlier in the year, when the rice paddies were not so busy), Japanese farmers seized a huge worldwide market share and provided much of the country’s foreign exchange; meanwhile, the high rents they paid became both the capital that landlords invested in spinning mills and the taxes that the state invested in its pilot projects, mostly in heavy industry. Thus, while more recent experience has made us think of Japanese (and Korean and Taiwanese) agriculture as economically inefficient vestiges subsidized by payments from powerful industrial economies, just the opposite was true earlier in the century. To whatever extent we wish to speak of a pre-1945 “Japanese miracle,” that miracle looks very different from the post-1945 pattern often taken to be typical of East Asia. (It was also different from postwar patterns in that the heavy industrial sectors of the pre-1945 Japanese economy, which had the closest ties with the government, were the least successful in economic terms—though they did help create an impressive military machine. It was the less coddled light industrial sectors that succeeded.)

In many other cases, even larger surges in agricultural exports have failed to lay a basis for industrialization. The Philippine case may be extreme, but it is hardly unique in kind. In this case, the goal of British consul Nicholas Loney was to destroy the handicraft textile industry in the Philippines so as to open a market for British goods; the development of sugar plantations was essentially an afterthought, which he pursued at first largely in order to provide a return cargo for boats bringing in cloth. Workers on the sugar plantations that developed were paid dismally, while a small landholding elite preferred European to domestic goods. The one relatively large group whose incomes did rise—longshoremen—tended to be single men who spent heavily on entertainment and services, in sharp contrast to the female weavers, whose earnings, much higher before Loney’s arrival, tended to support household consumption. Under these circumstances, it is hardly surprising that a boom in export earnings did nothing to promote industrialization and may even have retarded it. It is not only the effects of trade on total national income that matter, but the effects on distribution as well. While there are no hard and fast rules, export booms that use lots of labor and/or resources whose ownership is widely dispersed (e.g., Japanese silk, which is arguably a light industrial product rather than a “natural resource,” or Scandinavian timber) seem to do better at creating the conditions for long-term development than booms in resources owned by just a few people. 

The effects of primary product exports on government may matter even more, but they are not easily predictable. Enormous oil revenues made it much less necessary for various regimes to extract fiscal sustenance from taxes on the mass of their citizens, while making relations with foreign companies and a particular subset of workers crucial. The results could vary from populist politics and the subsidization and protection of industrialization efforts (as in Mexico) to a system with many welfare benefits but no political rights, an easily demobilized set of “guest workers,” huge amounts of imported foreign manufactures, and very limited industrialization at home (as in Saudi Arabia). A gusher of mineral royalties may also make exporting states feel they have more interests in common with their industrialized customers overseas than with their own people, especially if the foreigners also provide military security for the regime. But such states may also feel that producing a vital industrial input enables them to stand up to foreigners with whom they do not perceive shared interests. Confusingly enough, most cases involve some of both tendencies.

Excerpted from The World That Trade Created: Society, Culture and the World Economy, 1400 to the Present by Steven Topik and Kenneth Pomeranz (Taylor and Francis).


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