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Friday, 29 February 2008 06:33

Ha-Joon Chang's 'Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism'

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THOM HARTMANN'S "INDEPENDENT THINKER" BOOK OF THE MONTH REVIEW

EXCUSLIVELY ON BUZZFLASH.COM

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
by Ha-Joon Chang
Reviewed by Thom Hartmann

The fundamental myth of the Milton/Thomas Friedman neoliberal cons is that in a "flat world" everybody is not only able to compete with everybody else freely, but should be required to. It sounds nice. America trades with - and competes with trade with and for - the European Union. France against Germany. England against Australia.

But wait a minute. In such a "free" trade competition, who will win when the match-up is Canada versus the Solomon Islands? Germany versus Bulgaria? Zimbabwe versus Italy?

There are two glaringly obvious flaws in the so-called "free trade" theories expounded by neoliberal philosophers like Friedrich Von Hayek and Milton Friedman, and promoted relentlessly in the popular press by (very wealthy) hucksters like Thomas Friedman.

First, "infant" economies - countries that are only beginning to get on their feet - cannot "compete" with "mature" economies. They really only have two choices - lose to their more mature competitors and stand on the hungry and cold outside of the world of trade (as we see with much of Africa), or be colonized and exploited by the dominant corporate forces within the mature economies (as we see with Shell Oil and Nigeria, or historically with the "banana republics" of Central and South America and Asia and, literally, the banana corporations).

Second, the way "infant" economies become "mature" economies is not via free trade. It never has been and never will be. Whether it be the mature economies of Britain (which began to seriously grow in the early 1600s), America (late 1700s), Japan (1800s), or Brazil (1900s), in every single case, worldwide, without exception, the economic strength and maturity of a nation came about as a result not of governments "standing aside" or "getting out of the way" but instead of direct government participation in and protection of the "infant" industries and economy.

The modern history of protectionist trade policies goes back to ancient Rome, stretches through the reigns of a series of King Henry's in the UK, through Alexander Hamilton's tenure as Secretary of the Treasury under George Washington, through the trade policies of Dwight D. Eisenhower and JFK, and continues today with China, Korea, the Middle East, and the rapidly-growing Brazilian economy.

The way economies go from being underdeveloped, anemic, and uncompetitive to becoming developed, strong, and aggressively competitive is simple and straightforward: government steps in.

Government first determines which industries are worth growing and which are not. Having a strong machine-tool industry in the United States both creates good jobs and is in our strategic interest - machine tools are necessary for virtually every other form of heavy manufacturing (and even light/sophisticated/electronics fabrication), and being dependent on Italy or China or Japan for them is crazy. On the other hand, do we really need to spend the resources of We The People to encourage and grow a sandalwood-carving industry (actually a substantial industry in Thailand) when we neither grow sandalwood nor have a long and historic tradition of carving it into both artistic and utilitarian forms?

Once "strategic" and "important" industries are identified, government both encourages and protects their domestic growth in a variety of ways. These include subsidies, legal protections (like patent laws), import tariffs to protect against foreign competition, strong industry regulation to ensure quality, and development of infrastructure to ease manufacture, distribution, sales, and use of the product.

As Ha-Joon Chang points out in his brilliant book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," in 1933 a clothing manufacturing company decided to branch out into the manufacture of automobiles. They had everything going against them - their nation had no really serious domestic auto industry, the company had no experience with the product, and other nations (particularly the US and Great Britain) were already making world-class vehicles that had captured most of the world's markets.

But the company caught the imagination of its country's leadership, and a ministry of trade decided to help it along. Government subsidies helped the company develop their first car. Decades of high import tariffs protected it from foreign competition as it grew into a serious contender. Domestic content laws both made sure the company used parts made within the country, and also guaranteed that domestic competitors would have to, thus building a strong base of domestic companies supportive of an auto industry, from tires to plastic components to precision machine tools and electronics.

In 1939 the country even kicked out both GM and Ford from sales within the country, and the nation's single wholly-owned bank bailed out the struggling textile manufacturer as it moved relentlessly forward in the development of an automobile.

That company, originally known as The Toyoda Automatic Loom Company, is today known as Toyota, and manufactures the infamous Lexus that Tom Friedman mistakenly thought was successful because the world is "flat" and trade is "free." In fact, the success of the Lexus (and the Prius and every other Toyota) is entirely traceable to massive government intervention in the markets by Japan over a fifty-year period that continues to this very day.

To illustrate how infant industries must be nurtured by government until they're ready to compete in global marketplaces, Chang points to the example of his own son, Jin-Gyu. At the age of six, the young boy is legally able to work and produce an income in many countries of the world. He's an "asset" that could be "producing income" right now. But Chang, being a good parent, intends to deny his son the short-term "opportunity" to learn a skill like street-sweeping or picking pockets or shining shoes (typical "trades" for six year olds in many countries) so he may grow up instead to become an engineer or physician - or fully reach whatever other potential his temperament, abilities, and inclination dictate.

Somehow this is lost on Thomas Friedman and the whole "free trade" bunch. As Chang writes, "[E]ven from a purely materialistic viewpoint, I would be wiser to invest in my son's education than gloat over the money I save by not sending him to school. After all, if I were right [in sending him out to work at age six], Oliver Twist would have been better off pick-pocketing for Fagin, rather than being rescued by the misguided Good Samaritan Mr. Brownlow, who deprived the boy of his chance to remain competitive in the labor market.

"Yet this absurd line of argument is in essence how free-trade economists justify rapid, large-scale trade liberalization in developing countries. They claim that developing country producers need to be exposed to as much competition as possible right now, so that they have the incentive to raise their productivity in order to survive. Protection, by contrast, only creates complacency and sloth. The earlier the exposure, the argument goes, the better it is for economic development."

But history proves the free-traders wrong. Every time, without exception, a developing nation is forced (usually by the IMF, WTO, and/or World Bank) to unilaterally throw open all their doors to "free trade," the result is a disaster. Local industries, still in their developmental stages, are either wiped out or bought out and shut down by foreign behemoths. Wages collapse. The "Middle Class" becomes the working poor. And in the process the largest corporations and wealthiest individuals in the world become larger, stronger, and more wealthy. It's "Monopoly" (the game) on steroids.

Even worse, opening a country up to "free trade" weakens its democratic institutions. Because the role of government is diminished - and in a democratic republic "government" is another word for "the will of the people" - the voice of citizens in the nation's present and future economy is gagged, replaced by the bullhorn of transnational corporations and think-tanks funded by grants from mind-bogglingly wealthy families. One-man-one-vote is replaced with one-dollar-one-vote. Governments are corrupted, often beyond immediate recovery, and democracy is replaced by a form of oligarchy that is most rightly described as a corporate plutocratic kleptocracy.

When this corporate oligarchy reaches out to take over and merge itself with the powers and institutions of government, it becomes the very definition of Mussolini's "fascism": the merger of corporate and state interests. As China has proven, capitalism can do very well, thank you, in the absence of democracy. (You'd think we would have figured that out after having watch Germany in the 1930s.) And as so many of the Northern European countries show so clearly, capitalism can flourish and generate great wealth and a high standard of living within the constraints of intense regulation by a democratic republic answerable entirely to its citizens.

Consider the United States of America.

In the earliest days of our nation, George Washington's Secretary of the Treasury Alexander Hamilton, with some writing and editing help from Tench Coxe, outlined what came to be the foundation of American industrial policy. At its core was the protection of what Hamilton referred to as "infant" industries.

Although the invention of the term "infant industry" is usually credited to Friedrich List (in 1841 to support the idea of protecting new industries in Germany by government actions), the man who originated the phrase (and most aggressively promoted the idea in the USA) was Alexander Hamilton. In his "Report on the Subject of Manufactures," written together (but not credited to) Hamilton's friend and sometimes-assistant Tench Coxe, Hamilton wrote:

Bounties [subsidies] are sometimes not only the best, but the only proper expedient, for uniting the encouragement of a new object of agriculture, with that of a new object of manufacture. It is the interest of the farmer to have the production of the raw material promoted, by counteracting the interference of the foreign material of the same kind. It is the interest of the manufacturer to have the material abundant and cheap ... By either destroying the requisite supply, or raising the price of the article, beyond what can be afforded to be given for it, by the conductor of an infant manufacture, it is abandoned or fails; …

It cannot escape notice, that a duty upon the importation of an article can no otherwise aid the domestic production of it, than giving the latter greater advantages in the home market.

Hamilton's point was that there are two things needed for an "infant industry" to turn into a genuine manufacturing power. The first was cheap raw materials, the second protection from foreign competition.

To provide the cheap raw materials - for example, cotton or wool, if we were talking about the manufacture of clothing - Hamilton suggested both short-term subsidies for the production of the raw material, and tariffs (import taxes) on cotton or wool brought in from overseas. This would both provide a sure and inexpensive supply of raw material, and ensure that the raw materials were - and would continue to be over the long term - produced here at home.

To protect the nascent clothing industry (in this example), Hamilton also strongly advocated short-term supports to the budding industries (for example, government support or gifts of land for the production of factories) and tariffs on foreign-made clothing. This would make domestic products cheaper for the consumer and foreign ones more expensive, thus encouraging Americans to buy American-made clothing, thus building up a strong domestic fabric and clothing industry (remember the mills that John Edwards' dad worked in?).

As Hamilton noted (this is only referenced in the book - I'm filling in Hamilton's actual words here):

    It is a primary object of the policy of nations, to be able to supply themselves with subsistence from their own soils; and manufacturing nations, as far as circumstances permit, endeavor to procure, from the same source, the raw materials necessary for their own fabrics.

As to how to accomplish that, Hamilton and Coxe had a straightforward plan, which was adopted by the Founders of this nation:

    I. Protecting duties.

    Protective duties, or duties on those foreign articles which are the rivals of the domestic ones, intended to be encouraged. [B]y enhancing the charges on foreign articles, they enable the national manufacturers to undersell all their foreign competitors.

    II. Prohibitions of rival articles or duties equivalent to prohibitions.

    Considering a monopoly of the domestic market to its own manufacturers as the reigning policy of manufacturing nations, a similar policy on the part of the United States in every proper instance, is dictated, it might almost be said, by the principles of distributive justice; certainly by the duty of endeavoring to secure to their own citizens a reciprocity of advantages.

    III. Prohibitions of the exportation of the materials of manufactures.

    The desire of securing a cheap and plentiful supply for the national workmen, and, where the article is either peculiar to the country, or of peculiar quality there, the jealousy of enabling foreign workmen to rival those of the nation, with its own materials, are the leading motives to this species of regulation. …

    IV. Pecuniary bounties [industry direct financial subsidies].

    This has been found one of the most efficacious means of encouraging manufactures, and it is in some views, the best. Though it has not yet been practiced upon by the government of the United States (unless the allowances on the exportation of dried and pickled fish and salted meat could be considered as a bounty) and though it is less favored by public opinion than some other modes. Its advantages, are these -- It is a species of encouragement more positive and direct than any other, and for that very reason, has a more immediate tendency to stimulate and uphold new enterprises, increasing the chances of profit, and diminishing the risks of loss, in the first attempts.

    V. Premiums [incentives for production, innovation, or quality].

    These are of a nature allied to bounties, though distinguishable from them, in some important features. Bounties are applicable to the whole quantity of an article produced, or manufactured, or exported, and involve a correspondent expense.

    Premiums serve to reward some particular excellence or superiority, some extraordinary exertion or skill, and are dispensed only in a small number of cases. But their effect is to stimulate general effort. Contrived so as to be both honorary and lucrative, they address themselves to different passions; touching the chords as well of emulation as of interest. They are accordingly a very economical mean of exciting the enterprise of a whole community.

    VI. The exemption of the materials of manufactures [raw materials] from duty [import tariffs].

    The policy of that exemption as a general rule, particularly in reference to new establishments, is obvious. It can hardly ever be advisable to add the obstructions of fiscal burdens to the difficulties which naturally embarrass a new manufacture; … exemptions of this kind in the United States, is to be derived from the practice, as far as their necessities have permitted, of those nations whom we are to meet as competitors in our own and in foreign markets.

    VIII. The encouragement of new inventions and discoveries [patents and copyrights].

    The encouragement of new inventions and discoveries at home, and of the introduction into the United States of such as may have been made in other countries; particularly those, which relate to machinery.

    This is among the most useful and unexceptionable of the aids, which can be given to manufactures. The usual means of that encouragement are pecuniary rewards, and, for a time, exclusive privileges. The first must be employed, according to the occasion, and the utility of the invention, or discovery: For the last, so far as respects "authors and inventors'' provision has been made by law.

    IX. Judicious regulations for the inspection of manufactured commodities [regulation and inspection].

    This is not among the least important of the means, by which the prosperity of manufactures may be promoted. It is indeed in many cases one of the most essential. Contributing to prevent frauds upon consumers at home and exporters to foreign countries--to improvement quality and preserve the character of the national manufactures, it cannot fail to aid the expeditious and advantageous sale of them, and to serve as a guard against successful competition from other quarters.

    The reputation of the flour and lumber of some states, and of the potash of others has been established by an attention to this point. And the like good name might be procured for those articles, wheresoever produced, by a judicious and uniform system of inspection; throughout the ports of the United States. A like system might also be extended with advantage to other commodities.

    X. The facilitating of pecuniary remittances from place to place [a stable currency and banking system].

    The facilitating of pecuniary remittances from place to place is a point of considerable moment to trade in general, and to manufactures in particular; by rendering more easy the purchase of raw materials and provisions and the payment for manufactured supplies. …

    XI. The facilitating of the transportation of commodities [transportation infrastructure].

    Improvements favoring this object intimately concern all the domestic interests of a community; but they may without impropriety be mentioned as having an important relation to manufactures. There is perhaps scarcely any thing, which has been better calculated to assist the manufactures of Great Britain, than the ameliorations of the public roads of that kingdom, and the great progress which has been of late made in opening canals. Of the former, the United States stand much in need; and for the latter they present uncommon facilities. …

This understanding of the role of government in helping "infant industries" grow to become mature industries capable of international competition was well-known by Americans for most of the history of our country. After Hamilton published his "report" during the George Washington administration, Congress, at Hamilton's and Coxe's urging, raised tariffs on imported finished manufactured products from 5 percent to 12.5 percent. Three presidents and two decades later, Congress doubled them in response to the War of 1812, when the British and Canadians made their way all the way to Washington, DC and set fire to the White House just a few days after President James Madison left to command troops (the only sitting president to do so in our history). The War of 1812 exposed the weakness of our industrial base's ability to shift to wartime footing, leading directly to the increase of import tariffs from 12.5% to 25%.

As these tariffs made foreign-manufactured goods more expensive and increased demand for domestic-manufactured items, American industry began to take off. Not being idiots, Congress saw this cause-and-effect and raised tariffs two more times, in 1816 and 1820, to 25% and 40% respectively. It set the stage for one of the greatest industrializations in world history - from the 1830s straight up to and through World War II - and also produced the world's first truly large-scale middle class.

During the Civil War, Abraham Lincoln raised tariffs to a full 50%, where they stayed - the world's highest, as Chang notes - until 1913 when Teddy Roosevelt's defection from the Republican Party led to a three-way split and Republican defeat and the anti-tariff Democrats (of that day) dropped them to 25%. After World War I and the 1921 Republican victory, tariffs were again raised back up, hitting 37% in 1925, and then raised slightly higher still a year into the Republican Great Depression when Herbert Hoover and the Republicans in Congress pushed through Smoot-Hawley, raising tariffs back to the more-or-less average rate during the industrialization of America, 48%.

FDR ran, in part, in the election of 1932, on slightly lowering the Smoot-Hawley tariffs back down to the 37%-45% range. As Chang notes in Bad Samaritans:

[T]he stupidity of the Smoot-Hawley tariff has become a key fable in free trade mythology. … but this view is misleading. The Smoot-Hawley tariff may have provoked an international tariff war, thanks to bad timing, especially given the new status of the US as the world's largest creditor nation after the First World War. But it was simply not the radical departure from the country's traditional trade policy stance that free trade economists claim it to have been. Following the bill, the average industrial tariff rate rose to 48%. The rise from 37% (1925) to 48% (1930) is not exactly small but it is hardly a seismic shift. Moreover, the 48% obtained after the bill comfortably falls within the range of the rates that had prevailed in the country ever since the Civil War, albeit in the upper region thereof.

And tariffs are only one part of the equation. As Chang notes, "Between the 1950s and the mid-1990s, US federal government funding accounted for 50-70% of the country's total R&D funding …" Lacking such assistance, Chang notes, "the US would not have been able to maintain its technological lead over the rest of the world in key industries like computers, semiconductors, life sciences, the internet and aerospace.

Country by country, region by region, era by era, Chang shows how countries that rose to become industrial or trade superpowers did so only by totally repudiating the Milton Friedman/Tom Friedman "free trade" and "small government" mythos, and instead following Alexander Hamilton's tried-and-true formula. Hamilton, after all, hadn't invented it - he simply observed what the British had been doing since the year 1601 when Queen Elizabeth chartered the British East India Company, and she had simply been observing what the Spanish, Portuguese, and Dutch had been doing for a hundred years before that. And all of them had the example of the Roman and Greek empires, which rose and maintained their economic power by similar Hamiltonian policies.

America held such policies, too, until the 1980s when Ronald Reagan became president and his economic advisers began advancing the radical Libertarian views of Milton Friedman, and the (Ayn Rand) Objectivist views of Alan Greenspan (who had been inducted into Rand's cult in her New York apartment in the 1960s). Reagan began his overt push during the Uruguay Round of the General Agreement on Tariffs and Trades (GATT) talks in 1986, suggesting what was needed was a radical worldwide leveling of tariffs and reduction of government participation in everything from R&D funding to support for higher education (Reagan had ended the nearly-free tuition rates at the University of California while Governor of that state). As the Uruguay Round was about to get underway, Reagan's speech writers had him suggest "new and more liberal agreements with our trading partners - agreement under which they would fully open their markets and treat American products as they would treat their own."

George H.W. Bush, initially decrying Reagan's economic world view as "Voodoo Economics," embraced it, as did Bill Clinton, who really kicked the door of tariffs and "protectionism" down by signing the United States up for both the full GATT, the creation of the World Trade Organization (WTO), and the North American Free Trade Agreement (NAFTA).

For the first time in its history, our country's industries stood essentially naked and defenseless against those of other fully developed nations, most of which were still holding in place tariffs, R&D supports, and intense support of the commons infrastructure including free higher education and free health care.

The result was just what Alexander Hamilton feared - the rapid unraveling of the American middle class as the nation bled its industrial base into the gutter of cheap labor countries. While today both China and India have import tariffs that average between 20% and 30% on manufactured goods (to protect their domestic industries and markets), we've dropped our average tariffs from a 1973 average of 12% to today's average of around 2 percent.

If you want to understand how - and why - America has become so rapidly and radically deindustrialized, read Bad Samaritans. And buy an extra copy to send to Tom Friedman. He needs it.

Thom Hartmann is a New York Times bestselling author and host of "The Thom Hartmann Program" syndicated nationally by Air America Radio. His website is ThomHartmann.com. You can find information on how to listen to his program (online if you don't have a radio station that carries it) and read more about his great books.

THOM HARTMANN'S "INDEPENDENT THINKER" BOOK OF THE MONTH REVIEW

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