Free trade and control mechanisms - I

Friedrich List, 19th century German economist, argued that "on the development of the German protective system depend the existence, the independence and the future of the German nationality." Germany at that time was a relatively weak developing country in 19th century Europe. It was trying to develop its own manufacturing capacity like its rich neighbours, who were advocating free trade.
The same tension still exists today between the aspirations of developing countries and the expectations of developed countries about free trade. This column will examine issues relating to the free trade regime in two separate parts.
Let us not forget that all developed countries had gone through the stages of protectionism at one time or another until they became strong enough to enjoy free trade. Freedom of trade enables the stronger to win the game. The United States, the contemporary guardian of freedom of trade, was a staunch protectionist against European countries when the former was struggling to develop its manufacturing capability. So was Britain when she was competing against Holland. Germany was no exception.
I would like to suggest the usefulness and necessity of control mechanisms to protect the diversity of national economies of developing countries against the overbearing inroad of globalism. By control mechanisms I refer to engineered artificial devices to compensate for the shortcomings of domestic industries from foreign competition.
Incidents of controlled trade abound in trade disputes. The so-called voluntary restrains of Japanese automobiles export to the US decades ago is now a standard bearer in control mechanisms in spite of the WTO regime: export restrains of Chinese garments and shoes to the EU in 2005 and 2006, respectively.
The proponents of free trade argue that the greater the production of goods and services, the better the world becomes; and that new technology and skills, if properly applied, will produce and distribute goods and services at much cheaper rates and in a more efficient manner, which would otherwise remain untapped and unutilised without any benefit to anyone.
The doctrine of free trade assumes, as List noted, "the existence of a universal union and a state of perpetual peace, and deduce[d] therefrom the greatest benefits of free trade."
The freedom of trade regime constructed on the premise of the existence of a universal republic at the expense of national economies with "their distinct nature and interests," enables the strong to win the game. It is the survival of the stronger at the expense of the weaker. After all, laissez-faire means, in the words of E.H. Carr, "an open field, and the prize to the strongest."
The entire ethical foundation of free competition is built at the expense of the weak and unfit. Darwinism thus became the mistress of free trade. What is underscored, however, is the state of unconsciousness in which the individual, according to Adam Smith, "neither intends to promote the public interest, nor knows how much he is promoting it.
He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." As long as the market is open, the profitability principle is thought to function as an instrument of self-censorship and self-regulation of the market.
As List observed long ago, "it is evident that as soon as the existence of nations with their distinct nature and interests is recognised, it becomes necessary to modify the economy of human society in accordance with these special interests." List thus warned, "The result of general free trade would not be a universal republic, but, on the contrary, a universal subjection of the less advanced nations to the supremacy of the predominant manufacturing, commercial, and naval power."
To perpetuate the state of nature as embodied in free trade is to deny developing countries an opportunity to uplift the level of development. List therefore suggested, "In order to allow freedom of trade to operate naturally, the less advanced nation must first be raised by artificial measures to that stage of cultivation to which the English nation has been artificially elevated."
These "artificial measures" also abound in the international development community: The transfer of technology and know-how through grant financing and concessional lending are outright subsidies provided to developing member countries by development finance institutions.
The best illustrations of the tension between free trade and control are found within the development that took place in the use of the high seas. The narrower the territorial waters of the coastal state, the larger the area of the high seas for the use and enjoyment of every state.
The market of the high seas was open to all states, regardless of the size or capability of any state. Maritime resources were thus equally exploitable by any state. Warships could maneuver on the larger areas of the high seas without any restriction imposed by any coastal state.
But who benefited most from this doctrine of the freedom of the sea? Only those who had capital, equipment, technology and other resources to use the high seas and exploit maritime resources therein did. It was no coincidence that the most celebrated proponent of the doctrine of the freedom of the sea was Hugo Grotius, a Dutch jurist, considered the father of modern international law.
He was the legal advisor to the Dutch East India Company when he published Mare Liberum (The Freedom of the Sea) in 1608! In response to Grotius's Mare Liberum, an Englishman, John Selden published Mare Clausum (A Closed Sea) in 1635 to protect the interest of England, whose naval and maritime power was inferior to that of Holland.
The concept of the closed sea was intended to install a control mechanism so as to protect the interest of the weaker coastal states from more powerful maritime powers. The "invisible hand" of free trade and navigation did not help weaker maritime powers to develop their economic and technological capabilities adequately to compete against strong maritime powers.
The work of Grotius served extremely well to justify the position of Holland as a rising naval and colonial power in competition with Portugal and Spain first, and later against England.
Consider Adam Smith's famous exceptions to the doctrine of laissez-faire when he approved of the act of navigation. He supported various tariffs that would protect domestic industry and, especially, "some particular sort of industry" that was "necessary for the defence of the country." Smith, however, had "to obviate the objection that could be adduced against his principle from the effects of the Navigation Laws" by forcing a distinction between their political objects and their economic objects.
He maintained that, although the laws had been "politically necessary and beneficial," they were "economically prejudicial and injurious." For countries that did not benefit from the freedom of the sea, Johann Gottlieb Fichte's Der geschlossene Handelstaat (The Closed Commercial State) (1800) presented the alternative ideal, echoing the seclusion policy of 17th -19th century Tokugawa government of Japan.