Lecture 10. The Emergence of Protectionism
Recommended post : 【Economic History】 Economic History Table of Contents
1. Theories that explain the gains from trade
2. Theories that explain why protectionism emerged despite gains from trade
3. The rise of protectionism in the 1870s and the collapse of international trade in the interwar period
4. Limitations of the Stolper–Samuelson theorem
1. Theories that explain the gains from trade
⑴ Theory of comparative advantage : Proposed by David Ricardo (1772–1823)
① (Note) Ricardo considered capital to be the source of growth.
② Assumption : Countries trade in order to obtain the benefits of their comparative advantage.
○ Absolute advantage : The ability to produce the same good with a smaller amount of inputs than another producer.
○ Comparative advantage : The ability to produce the same good at a lower opportunity cost than another producer.
Figure. 1. Production capabilities of Frank and Ruby]
Figure. 2. Opportunity costs of meat and potatoes]
Figure. 3. Expansion of consumption possibilities through trade]
③ Clarification : What matters is not whether one country produces something better than another country, but whether it produces it better relative to other goods.
④ If a country produces the good it is relatively better at and trades for goods it is relatively worse at producing, gains from trade arise.
⑵ Heckscher–Ohlin theorem
① In the early 20th century, Ricardo’s theory was refined by Sweden’s Eli Heckscher and Bertil Ohlin.
② Comparative advantage is based not on differences in labor productivity, but on the relative abundance of factors of production.
○ A country abundant in capital exports capital-intensive goods such as manufactured products.
○ A country abundant in land exports land-intensive goods such as agricultural products.
③ Application 1. Factor price equalization theorem : Did not gain much support.
④ Application 2. Rybczynski’s theorem : Fits most cases well.
○ If the amount of labor increases, labor-intensive industries grow; if the amount of land increases, land-intensive industries grow.
○ Example 1. Immigration or population growth promotes the production of manufactured goods.
○ Example 2. An increase in land supply promotes the production of agricultural goods.
○ In 1948, a gold rush occurred in the United States.
○ Most Americans did not become rich and settled there because they could not even afford the fare to return.
○ However, the soil quality was so good that it became a breadbasket region.
⑤ Application 3. Stolper–Samuelson theorem (see below)
⑥ Limitation : Not only factor endowments but also protection policies played an important role.
○ The United States and Canada export many primary products but not many manufactured goods.
○ U.S. imports include many primary products, but compared with the United Kingdom they are fewer.
○ One reason U.S. manufactured imports were not large was also the influence of protectionist policy.
⑶ Krugman’s New Trade Theory
① Develops the classical theory of Adam Smith.
② Even if production technology and factor endowments are similar, gains from trade arise if each side specializes by industry.
③ Limitation : The gains from trade through specialization are not a sustained source of growth; they are only temporary gains.
2. Theories that explain why protectionism emerged despite gains from trade
⑴ Stolper–Samuelson theorem : A theory that explains protectionism
① If comparative advantage lies in capital goods, agricultural products will be imported and capital goods will be exported.
② People who produce capital goods domestically will benefit.
③ Those who produce agricultural products will see prices fall due to imports and will be forced onto a path of decline.
④ Conclusion 1. Goods with low productivity due to lack of resources/factors are imported, so domestic producers of those goods lose.
⑤ Conclusion 2. Gains from trade exist, but they are not enjoyed equally by everyone.
⑵ Endogenous growth theory (New growth theory) : Another theory that explains protectionism
① Why do scientists develop technology?
○ To accumulate wealth by obtaining patents.
○ Reputation also plays a significant role : “Great ideas” or general-purpose technologies such as the theory of relativity cannot be patented, yet are extremely important.
② Why do capitalists invest in technological development?
○ Factors of production such as labor and capital can beinvested into R&D or production processes, thereby inducing technological innovation.
○ Recognizing that the source of current growth lies in innovation, the amount of capital invested into innovation has been increasing.
③ Trade can also contribute to growth by expanding market size.
④ However, it can suppress growth if it reduces the source of monopoly profits or prevents the recovery of benefits from technological development.
⑤ Patent law is emerging as an alternative, as it provides one incentive for investing in R&D.
3. The rise of protectionism in the 1870s and the collapse of international trade in the interwar period
⑴ This can be explained by the Stolper–Samuelson theorem.
⑵ The rise of protectionism in the 1870s
① Significance of the 1870s
○ Before the 1870s, only the United Kingdom had completed the Industrial Revolution.
○ After the 1870s, the era of competition among multiple industrial countries began.
○ Notably, Germany and the United States pursued protectionism.
② European countries other than the UK shifted to protectionist policies within about 20 years starting in the 1870s.
③ Cheap grain imports from the United States led landlords to campaign for agricultural protection.
○ In Germany, the so-called “iron and rye” alliance provided protection to both industry and agriculture.
○ (Note) Tariff rates were not high; tariff revenue was even lower than before 1850, and did not exceed 10% even in Germany and France.
④ The U.S. case
○ Landlords benefited from free trade, but manufacturing interests advocated protection.
○ Early 1860s Civil War : To finance the war effort, fiscal revenue needed to increase, which led to higher tariffs.
○ Early U.S. government : Because government revenue was needed, protectionist policy was sometimes pursued intentionally.
○ The Civil War
○ Pre-war U.S. South : Produced cotton and sold it to the UK; favored free trade.
○ Pre-war U.S. North : Pursued self-reliant industrialization for industries competing with the UK; favored protectionism.
○ Although the North’s per-capita GDP was much lower than the South’s, the North won the war.
○ Reason 1. The coalition allied with the North was larger than the coalition allied with the South : i.e., the North had a larger population.
○ Reason 2. The trade blockade policy was more fatal to the South.
○ The victorious Northern states with emerging industries chose to protect domestic industry rather than the export-oriented agriculture of Southern cotton and tobacco producers.
⑶ The collapse of international trade in the interwar period
① (Note) Interwar period : The era in which trade was dismantled through World War I and the Great Depression.
② (Note) Even in the interwar period, the UK, Denmark, and the Netherlands remained trading nations.
③ Even before World War I, protectionist sentiment was growing worldwide.
○ There was also a sense of moral unease about protecting and promoting domestic industry at the expense of foreign competitors.
④ Free trade lasted only until the 1920s, and after experiencing war, countries became more protectionist.
○ (Note) During the war, food tariffs decreased in most countries.
⑤ During World War I, agricultural output increased and an agricultural depression appeared : the situation of farmers in the U.S. worsened.
○ This happened because demand for food in Europe was high, leading non-European regions to produce a great deal of food.
⑥ In 1930, the United States enacted the Smoot–Hawley Act, imposing trade-prohibitive tariffs on nearly 2,000 goods.
○ As a result, tariff rates became very high by the mid-1930s.
○ It was politicians begging for votes, not a system that benefited farmers.
○ It did not greatly affect meeting domestic demand, so it did not have a large impact on the United States itself.
⑦ Because the Smoot–Hawley Act reduced the sense of moral unease about protectionism, other countries also took retaliatory tariff measures.
○ In 1932, the UK created an imperial preference tariff system.
○ Canada also took retaliatory measures.
○ Later, people began to recognize that the Smoot–Hawley Act was a bad law.
⑧ In the 1930s, combined with the gold standard, the Great Depression broke out and thinking reverted to mercantilism.
⑨ Consequences of the collapse of international trade
○ In real terms, world trade fell, and in almost all countries the ratio of exports to GDP also fell.
○ The trade–income ratio did not recover to its pre-1913 level until 1960.
○ This is noteworthy because from 1850, trade had been growing faster than the annual growth rate of per-capita income.
4. Limitations of the Stolper–Samuelson theorem
⑴ It is not easy to create a good measure of the degree of protection.
① A representative measure currently used is the share of imports among the goods on which tariffs are imposed.
② Consider a country that imposes a 20% tariff on all goods versus a country that imposes a 50% tariff on only one good.
○ Clearly, the former is more protectionist, but the measure would be larger for the latter.
⑵ The relationship between protection and the growth rate is not simple.
① Before World War II : growth rates and tariff rates were positively correlated.
○ Reason : The representative high-tariff countries were the United States and Germany.
② After World War II : growth rates and tariff rates were negatively correlated.
③ The relationship between protection and growth cannot be explained theoretically alone; it must be understood in historical and political context.
○ Because a uniform relationship between the degree of protection and growth cannot be set, controversies have continued.
○ Gains from trade such as specialization and paths of technology transfer certainly exist.
○ Trade can also weaken the source or incentives for R&D investment, so protection can be advantageous in some respects.
○ Proper protection may be beneficial.
○ Extreme protection clearly produces disastrous outcomes.
⑶ The pattern of protectionism may differ by industry.
① Protecting competitive infant industries can contribute to growth.
② Protecting uncompetitive declining industries does not contribute to growth.
Entered: 2020.07.22 00:03