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Protectionism: We’ve Been Here Before

What makes some countries adopt protectionism? And in what circumstances do they prefer free trade, even during a recession and indeed in periods of deflation? The answer doesn’t depend on the judgment of the experts, even when they are almost unanimous in their opinion; the 1,028 economists who signed a petition in 1930 against the protectionist Smoot-Hawley Tariff Act couldn’t stop it being voted into law by the US Congress.

Every economic crisis has a variety of possible responses: protectionism, monetarism, nationalisation, devaluation, revolution and so on. Guessing which one will be favored (which rarely comes down to the whim of one man) entails examining the interaction of five “black-box” elements. First there is the economic position of a country’s major social forces and the strength of the structures through which they express their will, such as unions and employers’ organizations. Next there is the ability of political parties to create coalitions between diverse groups and associations. Then there is the readiness of the state to intervene in business and the means it has at its disposal to do so. Finally there are the nation’s historic traditions (and the degree to which they are liberal) and its position in the international order.

A crisis or a challenge of the same type may thus result in different responses according to such factors as the relative power of the workers and the unions, the political orientation of the coalition in power and how willing the state is to leave the supply of vital commodities such as wheat, steel and electronics to the international market.

At this level of generality and dealing with five hard-to-pin-down variables – social, political, institutional, ideological and strategic – we might think we are making only modest progress. Thankfully, Politics in Hard Times, a book published in 1986 by the political economist Peter Gourevitch, makes it possible to cut through the fog. Before setting out the analytical model sketched out above, Gourevitch studies the responses of five countries – the United States, France, the United Kingdom, Germany and Sweden – to the great economic crises which shook the western world between 1873 and the 1980s.

In each case study he evaluates the role of the five variables – whether its role was decisive or not – in the choices made by the country’s government. If the Depression in the 1930s gave rise to both the New Deal in the US and Nazism in Germany, it was because each country’s “black box” had a different mix of contents. The same goes for the 1980s: the second oil crisis favored the election of the conservative Ronald Reagan in the US and six months later that of the socialist François Mitterrand in France.

Going back to the great European crisis of 1873-96, which Gourevitch studies at length, makes it possible to reflect on protectionism. It was around the question of protectionism that the major political and social coalitions of the time were formed and the responses of different states determined.

In 1873 prices began to fall, sending economies into a long deflationary cycle. Rather like today, the trend affected economies that had relentlessly opened up to the free market and embraced its theory of comparative advantages. (According to this theory, everyone benefits when each state specializes in the areas it excels in and buys from abroad everything which others can produce more efficiently.) At the end of the 19th century, no one ascribed deflation to protectionism; in most countries it was in fact seen as one of the few ways to curb its effects.

The crisis of 1873 was caused by global overproduction in agriculture and industry occurring at the same time as technological progress (profits soared as a result of mechanization), a race for investment (during which they became riskier and less profitable) and a transport revolution. Peasants in France and Prussia lost their comparative advantage when machines, fertilizers and new varieties of wheat meant grain could be produced at a better price on the great plains of North America, in Argentina or Ukraine and be transported cheaply by sea and rail.

The market crisis also affected industry: the rail network, which had brought a boom in demand for steel, was now fully mature. Its needs would continue to grow, but at a slower pace. Gourevitch sums up the overall challenge thus: “In the crisis of 1873-96 prices plummeted, levels of unemployment gyrated widely, production soared, profits were squeezed, some businesses exploded in size while great numbers of others collapsed, millions emigrated from Europe, new parts of the world entered the industrial economy, and countries wrangled over what to do.”

What indeed were countries to do? The liberal view was that the invisible hand of the market should be allowed to take its course; in other words, to shift men, factories and machines towards new sectors for which there were markets by, for example, turning grain-producing peasants into specialist farmers or livestock breeders. But this would entail a profound transformation of society and a challenge to the political power relations which society had given rise to. Fewer peasants and more workers posed a threat both to the Jules Méline’s “opportunistic” republic in France and Kaiser Wilhelm’s empire in Germany. The process of economic modernization may be held back by public power. After Great Britain industrialized, as Barrington Moore’s masterful analysis has shown, the ruling classes of other countries took stock of what they risked in following Britain’s pioneering example without taking all possible precautions.

What some have presented as Marx’s advocacy of the free market only makes sense when seen in this historical context. Marx intended to take advantage of the expansion of commerce in a revolutionary sense, in the manner of a battering ram against the conservative, pastoral social order. It was a social order that could count on the support of the mass of peasants, attached to their property and ready to serve as reserves to put down workers’ uprising, as Louis Napoleon’s coup d’état and the Paris Commune had shown. Many hidden calculations go into the decision to set import tariffs.

From 1879 all the countries Gourevitch studies bar one – Britain – imposed protectionist measures. In doing so they protected their producers from cheap imports, softened the violence of the required social adjustment and preserved the political status quo from the repercussions of social chaos. Britain’s decision is easy to explain, whatever criterion you put at the top of the list (economic, political, institutional, ideological or strategic). Choose economic and you find that English textiles and steel still dominated the world market; the City of London financed both export industries and overseas investments; shipping and insurance were both major economic sectors; agriculture had begun its process of transformation; no other country had such a high proportion of industrial workers, nor ones whose livelihoods faced so little threat from free trade (they even reckoned that free trade would give them cheaper food).

Add to all these economic considerations the fact that Britain’s two main political parties were liberal – indeed, one of them was even named the Liberal Party (4) – as was the dominant ideology; that the state was open to the requests of interest groups; and that, thanks to its fleet, Britain didn’t have to fear that in times of war it would need to depend on supplies from abroad. And the uniqueness of the UK’s rejection of protectionism makes sense.

Such was its acceptance that it was not questioned, even when other countries started imposing tariffs that penalized British exports. Those in the UK who reacted to this anomaly by calling for a policy of “imperial preference” failed. The social group likeliest to oppose free trade – the landed aristocracy threatened by grain imports – had in fact been weakened by four decades of agricultural imports, after having provoked the population shift from country to town. In any case, landowners were by now ambivalent about protectionism, given that gentlemen farmers had invested significant sums in mining, manufacturing and commerce.

What’s more, as Gourevitch notes, “meanwhile their younger sons and impecunious daughters had intermarried with the rising industrial bourgeoisie, thus blurring further the boundaries between the groups. At least some British aristocrats thus derived income from a wide range of sources and had strong psychological linkages to the new industrial order. […] For a large fraction of British landowners, the interests of advanced, free-trade-oriented industry and those of modernizing farming converged.”

In Germany, things were quite different. In theory, there was nothing stopping the Junkers, the big landowners who were the mainstay of the imperial regime, the Prussian state and the army, from also turning to a more intensive and specialized form of agriculture, which would require fewer laborers and be more profitable. But they reckoned that in times of war, Germany, as the continental power, had to be self-sufficient. Its large internal market moreover provided sizeable demand for its industrial and agricultural production. And peasants made excellent soldiers: they were reliable and healthy, not attracted to radical ideas, attached to the land and heeded nationalist appeals. Yet more decisively, a Danish-style agriculture of small units turning out high-quality products would have required the break-up of the big cereal farms and a society based on large landed estates.

Junkers weren’t ready to become chicken farmers. That being so, they fought to prevent change which would have meant their disappearance as a class – with protectionism as their weapon.

Otto von Bismarck, German chancellor for 20 years, was himself a Junker and perfectly placed to defend such a policy. It gave him the cement which he had long been searching for to build a conservative coalition between the aristocracy and the upper middle classes, who didn’t see eye to eye. Both groups sought protection, though the Junkers would have been happy for free trade to have been applied to manufactured goods (agricultural equipment would have cost less) and industrialists would have appreciated cheaper food, which would have enabled them to keep workers’ pay down. So each side had to make sacrifices in the agreement Bismarck negotiated. German advocates of free trade who opposed them, already at a disadvantage because they came from disparate parts of society, couldn’t count on a shrewd politician like Bismarck, who was also head of the executive, to get their way.

In the US, only industrial imports were subject to tariffs. This means that ideology played very little part in this decision and that small farmers, obliged to buy in a market protected from competition while forced to continue selling on the open market, were politically vanquished. On the face of it, their economic situation was strong, but their candidate in the 1892 presidential campaign, William Jennings Bryan, failed to expand his social and geographical base. His populism, anti-intellectualism and religious fundamentalism alarmed industrialists, city-dwellers and Catholic immigrants alike. And far from seeing in him an ally against the bosses and the bankers, workers dreaded him as a threat to the sector of the economy that paid their wages. As Gourevitch says: “Bringing together farmers, workers, and consumers was difficult everywhere in the industrial world, and in America it was made even harder by ethnic, geographic, and religious differences.” Moreover, just like the British free traders, American industrialists largely controlled the two main parties.

If protectionism impedes globalization, it doesn’t contradict capitalism. Setting producers who focus on the home market against those who seek overseas markets, it crosses class divisions and doesn’t call into question the prerogatives of capital or the power relationships in business. Nonetheless, in times of crisis it can divide the ruling class and give rise to passionate conflicts of interest. The outcome often depends on the power of the workers, which determines their ability to make a part of the economic elite pay the price of the support, which can in turn be the undoing of another sector of the middle classes. Again, this assumes that the two sectors of the ruling class come into conflict. But that’s almost always the case in times of economic crisis.

SERGE HALIMI is the editorial director of Le Monde Diplomatique. He can be reached at Serge.Halimi@monde-diplomatique.fr  This full text appears by agreement with Le Monde Diplomatique. CounterPunch features one or two articles from LMD every month.

 

 

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Serge Halimi is president of Le Monde diplomatique

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