Manchester Liberalism was an early 19th century school of thought that combined belief in free-trade and consensual politics. Rooted in the work of Hume and Smith , and championed by Cobden it lead to the repeal of the corn laws in 1846 and the Cobden-Chevalier treaty for free-trade in 1860.It opposed mercantilism .The Washington Consensusarising from the economic leanings of Thatcher and Reagan advocated free trade, liberalising markets and capital flows, privatisation and falling barriers; however, America’s determination to effect open trade and promote the world economy had been evident since the late 1940s.This paper will argue that the effectiveness and willingness of both Britain and America to influence other countries with free-trade policies (namely the Manchester school and Washington Consensus) was conditional not just on their hegemon status but also when they acted in a cooperative manner with trading partners. In other words, when Britain and America were not cooperative, world trade and business would suffer from protectionism, myopia and lack of leadership.
The 1st era of Globalisation from 1870 to 1914 was championed by Britain as the Hegemon. Britain’s ability to have minimal tariffs when the international average was 15%demonstrated her being a “strong state”. Government had overcome landed-interests to reduce tariffs, promote free-trade and raise revenue with more equitable higher income- taxes. America in this period had tariffs set considerably above the 15% average. America’s share of Customs revenue to total revenue was 51% from 1870-1910 compared to Britain’s 22%. America was not anti-free-trade per se but in a labour scarce economy preferred openness in immigration to the removal of trade barriers. As Irwindemonstrates, customs revenue was an efficient way of collecting taxes in a country (like America) which had a low population density. Her influential land-owners were able to pressure the taxation of imports over the direct taxation of their land.
The 1980s Washington Consensus that suggested lower tariffs, and almost demanded capital account liberalisation, was seen as the policy mix to best promote world trade. This mix was not necessarily true 100 years earlier. Estevadeordal, Frantz and Taylor showed that the decline in transport costs alongside a well run monetary system were more trade-creating forces than lowering tariffs. They demonstrated that the correlation between high growth and high tariffs was misleading. Britain played a major part in both reducing transport costs and supporting the Gold Standard. Before the steam ship, Britain’s superior navy ensured safe-cargo and her mature insurance market kept insurance rates to a minimum. The steamship and the opening of the Suez Canal led to dramatically lower transport costs and quicker journeys. The pre-eminent position of the City of London to discount bills, transact in sterling (rather than bullion) and most importantly, to be fully committed to the Gold standard , was the 2nd key to increased trade .Lopez-Cordova and Meissner showed that 2 countries on the Gold Standard were likely to trade 60% more than 2 countries who did not. Therefore the success of trade between 1870 and 1913 owes as much to the commitment that Britain gave to monitoring the Gold Standard and lowering transaction costs as to her actual trade policy. This cooperation was matched by other countries’ policies acceptable to their own political interests; America was open to immigration, Northern European countries joined the Gold Standard to standardise their currency regimes and Asian countries lowered tariffs on imported British textiles. Britain, in turn, recycled her Gold through the capital account investing in crucial infrastructure (particularly railroads and canals) in primary producing countries.
America’s U turn on tariff policy was evident soon after the 2nd World War with the establishment of GATT and a desire to see some European trade barriers come down; however she did not advocate that total free trade be imposed everywhere. Her cooperative position was evident with the Marshall Plan and the creation of the EPU as the necessary institutional support to bring Europe out of its economic devastation. Ruggie showed that America was not so dogmatic that her free trade-policy should be replicated as a quid pro quo for aid. For example, France was allowed protection for agriculture, Britain a more interventionist government in building the welfare state. The growth of the European Union from a coal and steel alliance between Germany and Belgium to a fully integrated currency union was always endorsed by America, but at no time did America insist on laissez-faire free trade. America’s position was always pragmatic and respectful of the European desire for a larger welfare state. America used her dominant position not to eulogise free-trade but to run Bretton Woods (and overcome the problems of lack of convertible currency) help Europe and benefit her mass-producing home industries. The large plants which had helped the allies in the War still needed an export market when they switched from armaments in 1945.In the post war period the “Washington Consensus” was indeed consensual.
The interwar period was the opposite. Both Britain and America resorted to more insular policy and withdrew from the International Political economy. Although Britain imposed the deflationary policy of re-joining the Gold Standard supposedly to promote world trade, it has been argued by Baines and others that it was also trying to move resources and labour from the old and inefficient businesses of coal, ship building and textiles to the more modern sectors like power, motors and durable goods. This was called “Rationalisation”. In September 1931 when Britain withdrew from the gold standard, not only did she break with 200 years of Gold convertibility she also imposed higher tariffs at the same time.
After the First World War, America did not use her new premier economic position in a cooperative way. Firstly she withdrew from the political economy by neither attempting to rebuild a safer Germany nor by arguing against the dangerous level of reparations set at Versailles. From 1926, America and France chose to hoard their Gold rather than recycle it through the capital account. In 1929 USA and France had over 50% of the World Gold reserves and after the 1929 Crash, America imposed even higher tariffs (Smoot Hawley) and did not help the allies until Pearl Harbour.
The misleading correlation between higher growth and higher tariffs is also prevalent from the 1980s under the Washington Consensus. The USA did successfully persuade many western countries to join GATT as well as Bretton Woods. GATT an international institution aimed at the promotion of free trade did effect an impressive decrease in tariffs from 34% in 1980 to 12.6% in 2000 and world exports as a percentage of World GDP rose from 11% to 18.8%. However, the increase in trade had less to do with tariff reduction than assumed. Baier and Bergstrand demonstrated that 67-69% of Trade Growth in that period could be explained by GDP growth but only 23-26% by tariff reductions.
The growth in world income is the major part of America’s contribution to free-trade, not her supposed adherence to free trade per se. Since the 2ND World War, America has contributed to world growth with Marshall Aid, the EPU (to overcome problems in currency convertibility) GATT, Bretton Woods and a strong military presence. She has been a large importer of world products and facilitated new countries which had been restricted under the iron curtain. During financial crises of 1987 and 2001/2 she added liquidity. In other words, unlike the 1914-1939 period, the USA since 1945 has largely tried to be cooperative as Britain was in the 19th century. America tried to be the “Leader of the Orchestra”. However, since 2008 there have been less consensual policies .America is critical of Chinese currency manipulation and is retaliating with QE and the latest round of GATT, the Doha round, has broken down. If there is to be a continuation of the Manchester School and the Washington Consensus, a “Shanghai View” ,say, later this century, then the lesson for China is that simply advocating free-trade is not enough. China would need to use its Hegemon status to cooperate with the rest of the world and create new institutions to successfully manage the economic well- being of the world as well as her own primary economic position.
Simon GILLIS 4 XI 2010
Baier and Bergstrand: The Growth of World Trade; tariffs, transport costs and income similarity.
Baines. The 1920s P Johnson (ed.) Twentieth Century Britain; Economic, Social and Political Change
Estevadeordal, Frantz, and Taylor: The Rise and fall of world Trade 1870-1939
Hatton and Williamson (2005).A dual policy paradox: Why have trade and immigration policies always differed in labour-scarce economies?
Irwin (2002): Interpreting the Tariff –Growth Correlation of the late 19th century.
Irwin (draft 2010) “Did France Cause the Great Depression”?
Lopez-Cordova and Meissner: Exchange Rate regimes and International Trade.
Maddison (1995): Monitoring the World Economy
Matoo and Subramanian: Currency undervaluation and Sovereign Wealth Funds.
Overy (2005): Why the Allies Won.
Ruggie 1994: Trade, Protectionism and the Future of Welfare Capitalism
Williamson (2000): What should the World Bank think about the Washington Consensus?
EPU. An institution that overcame the problem of a shortage of hard currency in post-war Europe. Countries settled their trade monthly at the BIS allowing multilateral trade and with the aid of US credit.
Britain did withdraw convertibility during times of War. This was an acceptable contingency of the Gold Standard. (1814 Napoleonic War, 1914 WW1) but always intended to re-join after hostilities ended.