Free Trade & Britain’s Economic Decline: What Can America Learn?
March 7, 2017 Spencer P Morrison
Like Father, Like Son: On Britain’s & America’s Economic Decline
If history repeats itself, why the hell don’t we learn from it?
Good question. I wish I had the answer.
I don’t—but I have a good guess. I think it’s because:
Most people don’t know history. They don’t teach it in schools, and when they do, they teach it wrong—even university history classes are mostly just political propaganda taught by partisan hacks.
We’re arrogant. We think we’re exceptional. We think we’re smarter and more knowledgeable than our forefathers, and therefore history’s lessons don’t apply to us. For example, every communist dictator looked at the last guy and said “he did it wrong, I won’t”—and then he does it wrong. Again.
It boils down to ignorance and arrogance.
With that in mind, let’s learn some history and stop thinking we know better: let’s actually apply its lessons.
Specifically, let’s look at America’s economic collapse.
We’ve been here before: America’s decline mirrors that of Great Britain’s during the late Victorian Era, both in its outcome, and its causes.
In this article, I’ll fill you in on the history, and show you why it’s still important today.
Spoiler: free trade killed Britain’s economy, and it’s killing ours. Alright. Let’s jump in.
British Empire Victorian Era
Britain’s Economy In The 19th Century Was Unmatched
Great Britain was the supreme political and economic power of the early and mid-nineteenth century.
This was because (i) her victory in the Napoleonic Wars solidified her place as the world’ unrivaled military hegemon, and (ii) her economy was red-hot, fueled by the molten iron, and coal-fires of the burgeoning Industrial Revolution.
I’ve covered the Industrial Revolution in another fairly comprehensive article, which you should check out for background and context. But to give you a taste of just how rapid the economic growth was, consider this:
In 1785 Edmund Cartwright invented the power loom (a textile-weaving machine). This, combined with Jame Watt’s steam engine, kicked off the Industrial Revolution by making British weavers 40 times as productive as their European competition.
Power looms not only caused exponential economic growth in their own right, but their adoption shows how fast the economy as a whole grew.
In 1803 only 2,400 operated, while in 1820 there were 14,650, and by 1829 there were 55,500. The peak came in 1857, when 250,000 looms operated.
This kind of rapid technological change, and increases in economic productivity was enabled by, and created, an investment boom.
In 1700 only 4% of British income was reinvested (most of it went towards consumption), but by 1800 this had more than doubled, reaching 8.5%. It peaked in 1840 at 10.8%. This investment allowed Britain to create its industrial infrastructure, driving the economy to new heights.
Long story short: Britain’s economy was unmatched: steam power and cast iron ushered in a level of prosperity never before enjoyed by the likes of men. Britain was the world’s shipyard, its laboratory, its factory—if something existed, Britain made it.
Because of this, she grew rich, and powerful. Britain’s empire grew seemingly without limit, eventually spanning one-quarter of the world’s land and population. Hers was a realm of perpetual daylight—all made possible by her economic might.
But all good things come to an end. By the middle of the century, Britain’s fortunes were changing.
Free Trade & Britain’s Decline
Power follows money: no money, no power. During the late Victorian Era, Britain’s economic decline coincided with Germany’s and America’s rise.
Because Britain abandoned its hitherto conservative trade policies, based on the wisdom of experience and practice, in favor of a radical new ideology: free trade.
Politicians speculated and deliberated, insults were exchanged, but ultimately free trade became Britain’s credo—after all, it looked good on paper (even if it quickly failed in practice).
Britain’s tariff walls on manufactured goods were dismantled in relatively short order following the repeal of the Corn Laws by Prime Minister Robert Peel in 1846—with help from the liberal Whigs, and to the chagrin of most of his governing conservative members of Parliament.
The drop was dramatic: it came down from highs of over 50% in the 1820s, to just 5% decades later. Britain embraced free trade.
For a time, it worked. Britain convinced its less-industrialized European neighbors to practice free trade, and open their markets to cheap British goods. Britain prospered during the time of “liberal Europe.”
But as Britain prospered, its trade partners watched their nascent industries wither and die on the vine—they just couldn’t compete with cheaper, higher quality British products.
And for those who think this was good for Europe’s economies, because their consumers gained access to cheap British goods: you’re wrong. Economic and political strength derives from production, not consumption. In fact, continental Europe’s weakest average economic and industrial growth in the entire nineteenth century was during the free trading liberal period: GDP growth averaged 1.7%, industrial growth averaged 1.8%.
Europe’s leaders realized if they didn’t do something fast, their domestic industries would evaporate, and they would become completely dependent on British imports.
They thought strategically: sure cheap goods are nice now, but they won’t be so cheap when everyone in France is unemployed. Nor will they be so cheap when you have a conflict with Britain, and realize you depended on them for your weapons imports. For them, it was a question of long-term economics and political reality.
Otto Von Bismarck was a supporter of protectionism
Otto von Bismarck was Prussia, and the German Empire’s greatest statesman, and the architect behind the protectionist (mercantile) policies that made Germany rich.
Europe’s Response: Economic Protectionism
During the 1870s to 1890s Europe returned to the trade policy which had worked for them historically: mercantilism (importing raw materials, exporting manufactured goods). Basically, economic nationalism.
Between 1891 and 1911 GNP growth in continental Europe averaged 2.6%, while industrial output grew at 3.8%— over twice as fast as during the liberal era.
Britain, however, stuck to its guns.
It doubled down on free trade, keeping its markets open and its tariffs low. You can guess what happened next.
Britain’s manufacturing supremacy eroded as their factories were forced to compete with an unholy alliance of European companies and governments. This unfair competition caused exports to fall, and imports to rise: a trade deficit was born.
Between 1873 and 1883 the value of British exports fell by 6%—the days of endless growth were over. This led to a full-blown “made in Germany” crisis—Britain even found itself importing steel from Spain, for the first time since the Middle Ages, when Spanish swords were in vogue.
In the late Victorian Age Britain’s economic growth stagnated—growth was 55% slower than it was during the middle of the century.
This slowing growth was caused by a sluggish manufacturing sector, which was forced to compete for market share with government-backed foreign rivals. Between 1870 and 1913 British manufacturing grew by only 2.1% on average, whereas German manufacturing grew by 4.7% on average.
Adding to this problem was the fact that British investors chased higher returns abroad, rather than reinvesting their profits in Britain (which you will recall was one of the keys to their success during the Industrial Revolution).
Consider this: in 1815, the British invested only £10 million abroad, but by 1825 this had increased to £100 million, and by 1870 over £700 million left the country. By 1914, fully 35% of British wealth was held abroad.
Northern Britain became a rustbelt, and cities like Glasgow or Manchester were the “Detroits” of their age.
True, some of this increase was because Britain was getting richer, and had more money to spend abroad. However, by the 1870s, domestic investment actually started falling (even as it picked up steam abroad).
By the outbreak of the First World War, Britain was merely first among equals, as opposed the unrivaled superpower she had been a half-century earlier.
The Decline Of Great Britain Is Mirrored By America’s Decline
This was Britain’s fate, and America’s will be no different—the same arrogance afflicts us, while global free trade eats away at our prosperity like an incurable infection.
We must learn from history.
Frankly, Britain’s economic decline was caused by its adoption of free trade, while its rivals adopted protectionist policies—this is what’s happening to America currently. Let’s compare the two situations.
During the nineteenth century Britain shifted from running a trade surplus to a trade deficit.
This was because Britain’s market was open to foreign competition, but their trade partners didn’t reciprocate. Basically, Britain practiced free trade, while its partners (particularly Germany, America, and Argentina) practiced protectionism).
This led to offshoring: British production was displaced by foreign production, which led to the closure of British factories, and unemployment—it culminated in the “made in Germany” crisis.
Britain’s exports decreased in absolute terms (by 6% between 1873 and 1883), and relative terms (the trade deficit grew).
Britain’s economic and industrial growth slowed both absolutely (by half) and relative to Europe.
The UK suffered capital flight (money was invested abroad rather than domestically), which led to an investment shortage, hurting long-run economic growth.
The parallels are so obvious they almost don’t need repeating. Just think of the “made in Japan” crisis in the 1980s, or the current “made in China” crisis and you’ll get the picture.
Speaking of pictures, here’s a graph of America’s trade deficit: it’s been growing out of control (due to offshoring), just like Britain’s did a century earlier.
America’s GDP and industrial growth have also slowed. Just look at how our GDP growth (and growth per capita) has plummeted since we abandoned our tariffs, and started pursuing free trade deals in the 1970s and 80s—it’s been downhill ever since. The same thing happened to Great Britain.
GDP growth chart
Finally, like Britain, Americans have been chasing higher returns abroad, rather than investing in America: this may be good for the individual investor (short term), but it’s bad for the country (and the investor in the long run). For example, Americans have invested $5.2 trillion in China since 1985 indirectly (buying their products). But of course, the Chinese didn’t invent these products: the factories were created by American investors in order to sell them in the US market. You can read more on that here. Of course, it’s not just China. Between 2000 and 2015 America invested $4 trillion abroad directly (in foreign direct investment)—an average of $250 billion per year—and $15 trillion indirectly (trade deficit).
History repeats itself: the US is the new Great Britain, China is the new Germany.
If we keep doing what we’re doing, we will end up like Britain. It’s that simple.
Why Did Britain & America Adopt Free Trade?
It is funny though, the similarities as to why both countries adopted free trade.
Sure, some genuinely believed it was a panacea, but others were more Machiavellian.
For example, Lord Goderich said of Britain’s free trade policy that:
…other nations knew… that what we meant by free trade, was nothing more nor less than, by means of the great advantages we enjoyed, to get the monopoly of all their markets for our manufactures, and to prevent them, one and all, from ever becoming manufacturing nations.
He recognized that many British politicians thought they could weaponize free trade in order to lock their rivals into agrarian servitude. Perhaps it would have worked if the other nations played ball.
Either way, Britain did not adopt free trade for purely economic reasons, and neither did America.
We became a bastion of free trade to oppose the Red Menace. Free trade was a propaganda tool, an ideological weapon to wield against the USSR. We used trade deals to contain Soviet expansion, knowing that the economic benefits went disproportionally to the developing country, not America—free trade was never about helping the American people, it was about something bigger.
But the USSR’s dead. We’re free to do what’s in our own self interests.
We’re free to abandon free trade (which just doesn’t work).
We should do it, before we end up like Great Britain.