"Kicking Away The Ladder": Ha-Joon Chang on tariffs and development

[MatthewWilliam]

Oxford economist Ha-Joon Chang has won several awards for his book Kicking Away the Ladder. According to Chang, 18th century Britain and 19th century USA are two prime examples of countries reaching the top through heavy protectionism and State-led development. He also sees similar trends in Asian development in the 20th century. Writes Chang:

Almost all of today’s rich countries used tariff protection and subsidies to develop their industries. Interestingly, Britain and the USA, the two countries that are supposed to have reached the summit of the world economy through their free-market, free-trade policy, are actually the ones that had most aggressively used protection and subsidies.

Contrary to the popular myth, Britain had been an aggressive user, and in certain areas a pioneer, of activist policies intended to promote its industries. Such policies, although limited in scope, date back from the 14^th century (Edward III) and the 15^th century (Henry VII) in relation to woolen manufacturing, the leading industry of the time. England then was an exporter of raw wool to the Low Countries, and Henry VII for example tried to change this by taxing raw wool exports and poaching skilled workers from the Low Countries.

Particularly between the trade policy reform of its first Prime Minister Robert Walpole in 1721 and its adoption of free trade around 1860, Britain used very dirigiste trade and industrial policies, involving measures very similar to what countries like Japan and Korea later used in order to develop their industries. During this period, it protected its industries a lot more heavily than did France, the supposed dirigiste counterpoint to its free-trade, free-market system. Given this history, argued Friedrich List, the leading German economist of the mid-19^th century, Britain preaching free trade to less advanced countries like Germany and the USA was like someone trying to “kick away the ladder” with which he had climbed to the top.

Between the Civil War and the Second World War, the USA was literally the most heavily protected economy in the world.

Now I’m aware of the stock response to this goes something like:

[Under protectionism] The standard of living and the real income of the American consumers of foreign products would be forcibly reduced. The cost to all U.S. producers who employ the protected industry’s products as their own input factors would be raised, and they would be rendered internationally less competitive. Moreover, what could foreigners do with the money they earned from their U.S. imports? They could either buy American goods, or they could leave it here and invest it, and if their imports were stopped or reduced, they would buy fewer American goods or invest smaller amounts. Hence, as a result of saving a few inefficient American jobs, a far greater number of efficient American jobs would be destroyed or prevented from coming into existence."

But apart from this, how would you go about arguing against Chang’s standpoint?

What is a good theoretical challenge to the “infant industry” argument?

Are there significant empirical counterexamples I could use in an argument?

[Snowflake]

@MatthewWilliam

But apart from this, how would you go about arguing against Chang’s standpoint?

Look at other causes for the growth of those industries. NEO-IMPERIALISM cough. Also look at the effects of tarrifs on the quality of life of the citizens in those countries. Did the common man get richer or poorer…

@MatthewWilliam

What is a good theoretical challenge to the “infant industry” argument?

Private investment >>> gummint

@MatthewWilliam

Are there significant empirical counterexamples I could use in an argument?

Compare products from unregulated, internationally competitive industries with subsidized protected industries. Just look at the state of health care. Its super protected, government regulated, and all it does is cause grief for americans. Yeehaw burgeoning industry for the win!

[JAlanKatz]

I’m a bit confused by the question. Why is the growth of some particular industry supposed to be a prior good if it comes at the expense of consumer choice, and is only brought about through violence?

[Snowflake]

@JAlanKatz

Why is the growth of some particular industry supposed to be a prior good if it comes at the expense of consumer choice, and is only brought about through violence?

Yeah. I mean, of course an industry will grow if you force people to buy from it. Derp.

[Vitor]

Mercantilism FTW!

[Sphairon]

How big were the domestic US or British empire markets compared to other domestic markets? Could a significant increase in standards of living have been achieved despite, not because of heavy protectionism, simply due to the large size of otherwise “protected” economies?

What’s the point of citing examples of economic policy which predate even the mercantilist era? Britain had pioneered protectionism, so what? Britain was also the first country to industrialize. How would trade restrictions have served the first nation to industrialize?

Generally, what happens if one protects a domestic enterprise against more efficient foreign competition? One forces market participants to spend more than necessary on a particular good. In other words, one nourishes inefficiency and waste. If nation A already has the technology and capital available to efficiently produce good A, why should nation B subsidize its own production of A when it could be way more profitable to use the resources currently employed for the production of good A for the production of a good B that nation A demands? If subsidization ensues, when is it to end? When nation B is “better” than nation A in producing A? Who wins in this scenario? Nobody, except the producers of A in B.

[Prashanth_Perumal]

@MatthewWilliam

how would you go about arguing against Chang’s standpoint?

It depends on what one aims at. If consumer(which includes people of all countries) well-being is what one aims at, free trade wins hands down.

If Chang’s point is that countries are better-off because they were supported by the State to possess a temporary monopoly, then the opposers of free trade clearly give up on the fact that production does not happen just for it’s own sake, but only for consumption. But if the aim of the State is to support a special interest group, their policies are perfectly right.

And if any protectionist points out that consumers are actually better-off due to the closing down of trade in order to encourage domestic industries, he is outright wrong. Investments which are directed into particular industry, via government sops/incentives, distort with the market which purely works according to consumers’ preferences. Without government distortion the investments would have been directed into more urgently needed industries. So it wouldn’t be a wise thing to produce in the country what could be bought at a cheaper price from outside the country.

A good way to analyze world trade can be through the lenses of the market process. The market basically allocates resources(like labor) towards the most urgent needs. The advantage of such allocation of resources towards the most valuable ends maximizes welfare of the world as a whole. For example, flooding of Chinese goods into India happens only because Indians are ready to pay more than the Chinese for the products.

[ThreeTrees]

@Sphairon

How big were the domestic US or British empire markets compared to other domestic markets? Could a significant increase in standards of living have been achieved despite, not because of heavy protectionism, simply due to the large size of otherwise “protected” economies?

I like the track you’re on but I’d be inclined to go with “because of”. Sure you’ll hurt the domestic consumer and other businesses at the expense of particular groups but how much of an effect is it really going to have if you can just buy your goods cheap from overseas? It’s just going to induce a shift of capital into the protected industries away from the ones that can’t compete with foreign imports. However, and this is the key point, it really only works if you’re capable of running up a (massive) trade deficit to get the goods it’s no longer profitable to produce yourself. This implies the ability to expand the monetary base without limit.

The way I see it, the ability and willingness of one country to expand its level of consumption indefinitely tilts the international marketplace in its direction. Through cheap money, enough demand from consumers and businesses is stimulated to continually bid up the prices for various goods eventually pricing them out of the reach of an increasing number of individuals who do not have the luxury of raising their own incomes through unfettered competition (usually because of various barriers to trade/entry, currency pegs, etc). Such economies are typically “developing” and so options and wealth are limited, making it ever more appealing to outsource various forms of production and take advantage of the cheap labour. It’s true that the standards of living begin to rise in these countries due to the foreign investment and job creation but still, the consumer there has to compete for goods against the insatiable appetite of the bigger economy across the pond who’s ability to direct goods to itself is being continuously grown through an expanding supply of money or credit. This effect is only exacerbated when the producing economy’s government actively caters to the consumer’s economy.