Protectionism


Protectionism
   A set of economic policies promoting favored domestic industries by using high tariffs and regulations designed to discourage imports. Historical variants of protectionism have included mercantilism, a trade policy aimed at maximizing currency reserves by running large trade surpluses, and import substitution, a trade policy in which targeted imports are replaced by local manufactures to stimulate local production. Mercantilist policies of Britain created a major burden on the colonies; thus protectionism became a significant cause of the revolution in America. Having achieved independence, however, many Americans advocated protectionist policies similar to those that they had earlier condemned.
   Alexander Hamilton laid the theoretical basis for economic protectionism and modern economic nationalism. He set forth a dynamic theory of comparative advantage based on an import-substitution industrialization strategy of economic development, which supports the superiority of manufacturing sector over agriculture. In his work, National System of Political Economy, German economist Friedrich List argued that: (1) the free trade theories of classical British economists were the economic policy of the strong; (2) there was no “natural” or immutable international division of labor based on the law of comparative advantage; (3) the division of labor was merely a historical situation resulting from prior uses of economic and political power. List and other German economic nationalists advocated political unification, development of railroads to unify the economy physically, and erection of high tariff barriers to foster economic unification, protect the development of German industry, and create a powerful German state.
   The Netherlands was among the first countries to take trade as a route to prosperity and developed into the commercial center of Europe as a consequence. Shipping and shipbuilding grew, giving Amsterdam control of the Baltic grain trade and making it a naval center and entrepôt for heavy goods. By the seventeenth century, the Dutch were the richest people on earth. By the late 1600s taxes and tariffs nevertheless began to creep upward, which had the twofold effect of diminishing trade while increasing wages, as workers demanded more money to compensate them for the increased cost of living. Skilled workers and commerce gradually moved to new locations, such as Hamburg, where taxes and tariffs were lower. By the end of the 1700s, the Netherlands even abandoned its traditional neutrality and suffered major defeats in war with England.
   As the Dutch were removing medieval restrictions on trade in the sixteenth century, England was beginning to open its market as well. In the early part of the century, usury laws were no longer enforced, restrictions on the export of unfinished cloth were relaxed, and certain differential duties were abolished. Enforcement of remaining trade restrictions was also generally reduced. Unfortunately, this initial era of free trade was short-lived. The end of the seventeenth century saw another revival of protectionism. In the decades after the 1776 publication of Adam Smith ’s The Wealth of Nations, free trade wholly won the intellectual battle. The remnants of mercantilism were extensive, however, as were restrictions on domestic trade dating back to the Middle Ages. The free-trade campaign began in 1820 and concluded with the repeal of the Corn Laws in 1846 and of the Navigation Acts in 1849. The Anglo-French Commercial Treaty of 1860 cemented the principle of freedom to trade. From then until World War I, Great Britain practiced a largely free-trade policy.
   The U.S. Congress adopted the first tariff in 1789 with its principal purpose being to raise revenue. Rates went from 5 to 15 percent, with an average of about 8 percent. In 1816, however, Congress adopted an explicitly protectionist tariff, with a 25 percent rate on most textiles and rates as high as 30 percent on various manufactured goods; however, the first wave of protectionism peaked in 1828. In the late nineteenth century, Republicans called for tariffs to protect American manufacturing. Benjamin Harrison’s defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. Protectionist tariffs remained the bedrock of economic policy of the Republican Party for the next 20 years. The Underwood tariff of 1913, passed early in the administration of President Woodrow Wilson, liberalized trade somewhat; but as soon as the Republicans returned to power after World War I, they raised tariffs again.
   During the Tokugawa period, from the seventeenth through the nineteenth centuries, the era of shogun rule, Japan was almost totally isolated from the outside world. Although they had some limited contact with the Dutch and Portuguese, the Japanese were forbidden to travel abroad or even build oceangoing ships. Thus, Japanese feudalism lasted hundreds of years after its collapse in Europe, and industrialization there was nascent long after the industrial revolution that swept Western Europe. Trade played an important role in Japanese economic development after the Meiji Restoration. Although foreigners initially dominated trade, the Japanese quickly learned how to compete; they imported foreign technology and techniques and rapidly incorporated them into Japanese industry. By the late 1800s, Japan almost practiced a policy of free trade because treaties with foreign powers generally prohibited any restraint on trade and because the government was not heavily involved in the economy.
   Germany has often been cited as a model of protectionism. However, an examination of German history, as well as a deeper reading of List, does not confirm the efficacy of protectionism as a path to prosperity. Although List favored protection against imports from outside Germany, he was adamant about abolishing all trade barriers, including tolls, within Germany itself. Eventually, List’s view prevailed with the establishment of the German customs union, the Zollverein , in 1833. By 1854, virtually every German state had joined the union. List favored protection primarily for political reasons - to further the cause of German unification. Insofar as he had an economic rationale for restricting imports, it was based on the now-discredited infant industry argument. But protection, in List’s view, was only temporary. Until 1879, Germany’s tariffs were comparatively low. In that year, however, Germany adopted a protective tariff policy for the first time. Although protectionism was promoted by the usual special interests, such as the iron and steel industry, it was held in check by the large agricultural sector that sought open world markets and increased agricultural productivity. What tipped the political balance toward protection was the central government’s need for revenue. World War I brought a complete breakdown in trade between Germany and its European enemies.
   FURTHER READING:
    Barbour, Violet. Capitalism in Amsterdam in the Seventeenth Century. Baltimore: Johns Hopkins University Press, 1950;
    Henderson, W. O. The Zollverein. Chicago: Quadrangle, 1959;
    Hilton, Boyd. Corn, Cash, Commerce: The Economics of the Tory Governments, 1815–1830. New York: Oxford University Press, 1977;
    List, Friedrich. The National System of Political Economy. New York: A. M. Kelly, 1966;
    O’ Rourke, Kevin H., and Jeffrey G. Williamson. Globalization and History. Cambridge, MA: MIT Press, 1999;
    Pierenkemper, Toni, and Richard Tilly. The German Economy during the Nineteenth Century. New York: Berghahn Books, 2004;
    Wallich, Henry C. Mainsprings of the German Revival. New Haven, CT: Yale University Press, 1955.
   JITENDRA UTTAM

Encyclopedia of the Age of Imperialism, 1800–1914. 2014.

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