CONTROL FORMAL DE LA ACUSACIÓN

The emergence of neoclassical economic analysis in the 1870s occurred at a time when trade practices experienced the return of a protectionist trade policy in many regions of the world. This was a reverse of the previous trend, in which a liberal trade policy had been adopted in many countries, especially in Europe following Britain’s adoption of a free trade policy with the repeal of the protectionist Corn Law in 1846. The strengthening trend of a protectionist trade policy continued from the 1870s up to the time of the First World War, which broke out in 1914 (Capie 1994, 10).

In Europe, the sign of shift from the period of a liberal trade policy adopted by many countries following Cobden-Chavalier treaty between Britain and France in 1860, to protectionism started to appear in the late 1870s. As late as 1875, a relatively liberal trade policy was still prevailed in many European countries as depicted in Table 4.1. The first European country to give way to protectionist trade policy was Germany. In 1879, Germany then under Otto Von Bismarck as the Chancellor, who was known as a staunch proponent of protectionism, introduced a

legislation imposing import tariffs on both agriculture and industrial products (Capie 1994, 35; O'Rourke and Williamson 1999, 95). This legislation started with low specific duty on agriculture, equivalent to 6 percent ad valorem on wheat and 8 percent on other cereals. However, import tariffs were raised in 1885 and again in 1887, reaching an equivalent of 35 percent ad valorem on wheat and 47 percent on rye. Tariffs were briefly revised downward during Georg Von Caprivi as the Chancellor in 1890-1894, only to be revised upward again in 1902.

Table 4.1

Average Level of Duties on Manufactured Products in 1875 Countries Percentage Austria-Hungary Belgium Denmark France Germany Italy Norway Portugal Russia Spain Sweden Switzerland The Netherlands United Kingdom Continental Europe Europe 15-20 9-10 15-20 12-15 4-8 8-10 2-4 20-25 15-20 15-20 3-5 4-6 3-5 0 9-12 6-8 (Source: Bairoch, 1989, page 42)

German turn-around to protection was soon followed by France, which began to increase import duties on agriculture products in 1885. France’s agriculture duties were again increased in 1887, at which time import duty on wheat reached 22 percent (Capie 1994, 35). French protectionism strengthened further with the adoption of Melane Tariff in 1892. Under Melane Tariff, not only import duties on agriculture were increased, but it also reimposed duties on a wide range of raw materials. However, important raw materials to the French import-competing

industries such as cotton, wool and flax were exempted from duties due to political pressure exerted by these industries’ players. Tariffs on both agriculture and industrial products were generally specific, but equivalent to 10-15 percent for agriculture and about 25 percent for industrial goods. In 1894, France again raised import duty on wheat to 7 francs per 100 kilogram; this amounted to an equivalent of 32 percent ad valorem, since domestic price of wheat was 22 francs (O'Rourke and Williamson 1999, 96).

Following Germany and France, many other European countries also returned to protectionism. Protectionism returned to Sweden with first the reimposition of duties on agriculture in 1888, and followed by industrial products in 1892. The return to protectionism occurred after the period of a liberal trade policy adopted by Sweden when it had entered the web of bilateral treaties signed in the wake of Cobden-Chavalier initiative (Heckscher 1954, 237). Similarly, Italy moved toward protectionism starting with the introduction of moderate tariffs in 1878, followed by the imposition of more severe import tariffs in 1887 in which most duties were specific. Duties were increased further in 1895, whereby duty on grain reached 75 lire per ton or about 36 percent ad valorem (Bairoch 1989, 77). In Spain a new tariff structure was devised in 1877, introducing minimum tariffs for products originating from countries with whom it had signed trade treaties while maximum tariffs were imposed on other countries.18 Initially, under this new tariff structure the difference between the maximum and minimum tariff was fairly small of about 10 percent. The tariff policy reform of 1892 witnessed an increase in duties and marked the real return to protectionism in Spain. The gap between maximum and minimum tariffs remained small, but the minimum tariff was sharply increased to 80-100 percent for agriculture and 300-400 percent for manufactured goods (Bairoch 1989, 63). Norway which adopted a fairly liberal trade

policy from the 1860s until 1880s, succumbed to protectionists’ pressure in 1895 with the imposition of import duties on machinery and meat. Norway turn-around happened when Sweden unilaterally abrogated the Sweden-Norway trade treaty which they signed in 1827. In Norway, a more significant move towards protectionism occurred in 1905 when tariffs on agriculture were introduced while duties on animal products were further increased.

Nonetheless, there were few European countries which continued to cling to free trade policy throughout the period of 1870s-1910s. Great Britain managed to maintain free trade despite enormous domestic pressure to adopt a protectionist trade policy similar to its neighbouring countries. One source of demand for protection came from National Fair Trade League, which existed from 1881 until 1891. This lobbying group demanded British government to impose retaliatory tariffs against foreign countries which impose tariffs on British industrial goods. A more challenging demand for protection came from British Colonial Secretary, Joseph Chamberlain who proposed for the establishment of preferential trading area among countries within the British Empire. His proposal, outlined in a speech he delivered in Birmingham in 1903, marked the beginning of intense debates over trade policy. The demand for protection caused enormous policy debates in 1904 and 1905. But the debate subdued when the Liberals, who were generally proponents of free trade won the 1906 election with a landslide majority. The issue, however, remain unresolved as protectionist pressure groups continued to argue for the case of protection right up to the outbreak of WW1 in 1914 (Gomes 2003, 226).

Few smaller countries in Europe also managed to maintained liberal trade policy throughout this period. Denmark continued to adhere to a free trade policy in agriculture, made possible due to the change of country’s economic orientation from a net exporter to a net importer of grains. Nevertheless it imposed tariffs on manufactured goods, in particular manufactured

textiles, which attracted duties between 20 to 30 percent (Bairoch 1989, 81). The Netherlands followed a similar path, maintaining a free trade policy throughout the period. Belgium and Switzerland also managed to cling to free trade, with nearly all agriculture products were free from duties, although they imposed some duties on animal products, and moderate duties on industrial goods (O'Rourke and Williamson 1999, 96).

The returns of protectionism in many countries in Europe during this period can be associated with few reasons, which intertwined upon one another in affecting a change in trade policy. Early distress in Europe was evident in 1873 when economic downturn engulfed many countries. There were some improvements in economic conditions in the years that followed, but they were too far from the earlier strength; prices continued a downward trend while profits were squeezed. For the next two decades (from 1870), enormous tensions were experienced in almost all countries in Europe because of economic downturn. Although there had been several drops in business cycles previously, but the ones happened between 1870 and 1890, was not a “normal” business cycle downturn, leading some people to consider it a period of deflation (Gourevitch 1986, 73). As general prices dropped further, many quarters contended that cheap import of grains was the main cause of the deflation and argued that protection was necessary to insulate the economy from outside pressure.

The liberal trade policy adopted by many European countries after 1860 as they followed the example of the British free trade policy caused an influx of cheap imports of agriculture products from the New World especially from the US. Thus the “grain invasion” into Europe threatened to reduce the income of the people that involved in agriculture sector. To the European countries which considered agriculture products as important, because of their contribution both to domestic economic activities and as a source of export earnings, the grain invasion brought

massive distress. In Germany, agriculture producers and estate owners of Prussia east of Elba (Junkers) found this period of time was particularly hard, not only because their sales of grain in Britain slowed down due to competition from the New World (Gomes 2003, 258), but also because of domestic grain prices continued to drop, therefore, threatening the livelihood of many people. Meanwhile, the producers of textiles, iron and steel also sought protection for their products. As latecomers to these industries in comparison to Britain, they advanced infant industry arguments as justification for their demand for protection (Gourevitch 1986, 88). They needed a tariff wall because this industry entailed high start-up costs; thus early competition from foreign established producers endangered their survival. These two groups constituted a powerful lobby to influence political decision in Germany towards granting protection to both agriculture and industrial goods.

Different domestic circumstances experienced by Britain as compared to other major European countries allowed it to maintain a free trade policy throughout this period. Grain invasion from the New World had less significant impact on domestic politics in Britain. In one aspect grain invasion which caused declining grains prices was good for Britain because it translated into higher real income for the general public. From another aspect grain invasion did not bring enormous distress, since from the early nineteenth century the contribution of agriculture sector to the British economy was on the decline, thus transforming Britain from a net exporter to a net importer of agriculture products. Although grain invasion brought bad impact to agriculture sector, by this time British’s economic structure had transformed significantly to become a well- established industrial economy. As a result, much agriculture land was converted into producing higher value added goods for urban industrial markets. By this time, many British aristocrats already derived their income from a variety of sources and also developed “strong psychological linkages to the industrial order” (Thompson 1963, 55). Another important reason why Britain

managed to maintain the free trade policy was the existence of fairly strong interest groups lobbying against protectionism. These groups included consumers, traders, manufactures of iron, steel and other industrial products who wanted to keep the cost of inputs low for the production of specialty products, therefore they could continue to dominate trade in the world market (Gourevitch 1986, 78).

In Denmark and the Netherlands, different forces were at work that helped these countries to cling to free trade policy. The liberal trade policy of the previous two decades pushed down the prices of agriculture products, resulting in the contraction of domestic production of grains in these countries. Notwithstanding this, however, industrial sector continued to expand, albeit in different dimension. Industries expanded into the production of specialised and high quality foodstuffs such as diary, meat and vegetable. Cheap foreign grain was welcomed as the grain being used as input, especially as feed for the animals that produced milk, meat and other products. In addition, cheap grain prices brought another benefit, especially in terms of cheaper bread for consumers, who then spent their surplus income on high quality goods produced domestically (Tracy 1989. 23).

Trade policies adopted by countries in the North and Latin American continent during this period were similar to that of the majority of European countries. In the US, the deepening of protectionism occurred well before the 1870s. After experiencing two decades of liberal trade environment (1840-1860), the US returned to protectionism with a tariff revision made in 1861. Protectionism strengthened further by the tariff reform of 1866, in which it remained in force until 1883, imposing import duties averaging 45 percent for manufactured goods. Another major revision of trade policy was undertaken in 1890, through the introduction of the McKinley tariffs. This new tariffs not only increased both specific and ad valorem duties, but also enlarged the number of items subject to tariffs. From 1890 to 1913 series of tariff modifications were made,

which alternately reduced and increased import duties, although by only small amounts. There were two important modifications undertaken in this period; the Dingley Act of 1896, which annulled certain small reduction in duties and the Payne-Aldrich tariff of 1909, which introduced the system of double tariffs. The double tariffs system remained in force until 1913, when a slight departure of trade policy occurred. In 1913 a more liberal trade policy was adopted under the Underwood tariff, providing a fairly big increase in the number of goods allowed to be imported at zero duty into the US, and a substantial decrease in the level of import duties. By this time overall import duties fell from 33 to 16 percent, with the decrease of duties on manufactured goods was a slightly higher, dropping from 44 to 25 percent. Nevertheless, at this time the average import duty of the US, comparatively, was still the highest in the world (Bairoch 1989, 144).

In the US, the whole period of 1870s-1910s was characterised by protectionist trade policy, especially on industrial products, although trade policy on agriculture was far more liberal. This happened because the US was always a major producer of agriculture products, thanked to the abundant availability of land in the country. But the case was different for industrial products; the US was a latecomer in comparison to European countries, Britain in particular. Therefore, arguments in favour of industrial protection were all the while strong the United States. The most prominent argument was that protecting infant industries was necessary to avert competition from established foreign competitors. In addition, import duties had been a very important source of revenue to the Federal Government in this period, since only in 1913 the country managed to introduce corporate income tax. The previous attempts to introduce corporate tax were unsuccessful because the initiative was blocked by powerful and politically influential industrialists. This indicates that free trade ideology never had a strong foothold in the US in comparison to the situation in Britain (Gourevitch 1986, 110).

Canada was on the path of a liberal trade soon after Britain adopted free trade policy in 1846, and at that time about 65 percent of Canada exports went to Britain. However, the year 1878 marked a major turning point for Canada when the National Policy was adopted by the Conservative government. It was followed by the new tariff legislation of 1879 which provided protection for both agriculture and industry. By this time import duties on agriculture were between 20-50 percent, and 20-30 percent on manufactured goods. This caused an increase in the intensity of protection; in 1878 the collection of import duties had amounted to 14.4 percent of the value of imports, whereas in 1880 it increased to 26.3 percent (Urquhart and Buckley 1965, 173).

By the second half of the nineteenth century, Argentina’s trade policy was already leaned towards protectionism. A new tariff structure which was adopted in 1854 contained some protectionist elements. This tariff structure was simple, containing only 60 items, but it was fairly progressive. Import duty was low at 5 percent for raw materials and semi manufactured goods, but higher at 15-20 percent for manufactured items. Protectionism strengthened in the 1870s with the revision of duties aimed at promoting industrialization. For the period 1873-1875 bounties were offered to the first few companies that involved in certain targeted industries. The elements of protection were further strengthened by the tariff reform of 1876, imposing 40 percent duty on manufactured goods, 10-20 percent on semi-manufactured, and 20 percent on raw materials. Again the tariff revision of 1891 resulted in a further increase of duties for varieties of goods. Import duty for wholly manufactured goods was 60 percent, slightly lower at 40 percent for semi finished, and low duty at 5-15 percent for semi-manufactured items, while machinery was exempted (Alejandro 1967, 75-98).

In Australia, increased pressure for the introduction of tariffs was evident among the colonies of independent states in the 1860s. In Victoria, the 1867 legislation allowed the

introduction of import duties aimed at protecting domestic industries (Carmody 1952, 51-65). By this time, although the tariff levels were moderate, if one took into account the distance of Australia from other major exporting countries, the distance alone would constitute a natural protection of about 10 to 20 percent (Blainey 1975, 35). Import duties in Victoria were revised upward by the subsequent tariff reforms, the first in 1871, and again in 1877, to provide additional protection for local industries. The Federal tariffs of 1902 marked the deepening of protectionism, with import duties ranged from 5 to 25 percent. In 1906, the Industries Preservation Act was passed, of which the major provision was the introduction of anti-dumping measures. The tariff of 1908 introduced double tariffs in Australia aiming at protecting domestic industries, while retaining preferences for goods coming from Britain. Nonetheless, in 1913 the Australia level of protection was lower in comparison to that of Canada and other countries in continental Europe, if one put aside the remoteness of Australia as a barrier to trade (Bairoch 1989, 147).

Japan’s seclusion from the world economy officially came to an end in 1858 when it signed a formal trade agreement with the US. A similar treaty was then signed with nearly all trading powers in the subsequent years, which forced Japan to impose low import duties, at an average of 5 percent. While the elements of protection started to emerge after the restoration of Meiji in 1868, but effective protection was introduced only in 1899 (Bairoch 1989, 157). Between 1894 and 1897 the treaties that Japan signed earlier were renegotiated with all signatories. This resulted in the signing of new treaties, which came into force in 1899, allowing an increase in import duties and providing for Japan’s complete tariff autonomy in 1911. The first autonomous tariff of 1911 marked a significant increase in protection, whereby, import duties on manufactured goods were varied between 15 and 50 percent. In 1913, import tariffs for the majority of semi-manufactured goods were between 20-30 percent, while that of wholly manufactured items were at 30-40 percent. Import duties on machinery and equipment were lower at around 20-25 percent.

China’s closed imperial economy ended in 1842 following the victory of Britain in the Opium Wars (1839-1842). This forced China to sign the Treaty of Nanking in the same year. One of the important elements of this treaty was to provide fair and consistent tariffs for British goods and to open up four new ports – Amoy, Foochow, Ning Pong, and Shanghai – in addition to Canton and Macau, which were already operating. In the next few years, China signed similar treaties with the US (1844), France (1844), Belgium (1845) Sweden (1847) and Russia (1851). Another treaty, signed in 1858 between China and Britain provisioned for the opening up of more ports for foreign trade and explicitly authorised the import of opium into China. In addition, this new agreement had a provision restricting the imposition of import tariffs of only up to 5 percent