Free Trade

Free Trade, in the largest meaning of the phrase, consists in the liberty of individuals to buy and sell commodities of all kinds in such markets and at such prices as they think advantageous for themselves. Owing to historical circumstances, the expression has become limited to international commerce, and can be applied to the domestic trade of a country only in the qualified form "internal free trade." As attempts on the part of Governments to regulate foreign commerce now usually take the form of indirect encouragement or discouragement of exportation and importation respectively, Free Trade is best defined under its negative aspect as the "absence of artificial restraints on international exchange." When customs duties do not have this effect, but merely furnish a source of revenue, they do not interfere appreciably with freedom of trade.

The economic advantages of universal Free Trade are now generally recognised by economists; but within the last hundred years men's minds were still dominated by a very different set of ideas. England, the country destined to emancipate commerce, was herself under the sway of the Mercantile System, and strove to obtain the exclusive advantages which foreign trade, when judiciously managed, was supposed to bring. Chief among these was a plentiful supply of the precious metals, for the command over all kinds of wealth exercised by money as the medium of exchange, and the fact that the value of wealth is measured in money, had led to the notion that money is identical with wealth, or, at any rate, is the most desirable form that wealth can take. Stress was laid on the importance of a large stock of specie on which the sovereign could draw for his foreign wars and other extraordinary expenses. The main aim of the Government, therefore, was to secure a "favourable balance of trade" - i.e. an excess of exports over imports - and for this purpose exportation was encouraged by bounties and drawbacks, while differential duties were placed on goods imported from foreign lands. The same policy was pursued in the negotiation of commercial treaties and the treatment of colonial dependencies. [Mercantile System.] The Mercantile Theory gradually fell into disrepute, partly owing to the practical experience of merchants, but mainly through a closer study of economic questions. Adam Smith's Wealth of Nations (1776) was the first work that displayed a firm grasp of the subject in all its bearings. His advocacy of Free Trade is based on three main arguments. In the first place, he struck at the root of the Mercantile System by showing that not only does money not constitute wealth, but little gold and silver change hands in the course of international commerce. Imports are paid for by exports, through the medium of bills of exchange. In like manner, when it is desired to transfer wealth from one country to another, it will naturally take the form of commodities rather than that of bullion. During the war with France a merchant who undertook to supply money abroad for the payment of the English troops would do so by drawing a bill on a foreign correspondent and exporting goods to the amount, the only way in which he could benefit himself by the transaction. Thus the troops were paid out of the "money of the mercantile republic," which circulated more about the seat of war; for money obeys the same law as other commodities, and flows to those places where it is most in demand. In the second place, Adam Smith dwells on the beneficial effects which result from applying the principle of Division of Labour to international commerce. Just as the specialisation of industry in a single community, by economising time and skill, leads to the production of more wealth, so the sum total of wealth in the civilised world would be increased if the people of each country always followed those trades in which the natural products of the soil and their own acquired capacity give them the greeetest advantages. By freely exchanging the surplus of their respective products, all countries would derive equal benefit from the new wealth thus created. But trade will never flow into the channels necessary to effect such a result while a false direction is given to it by the interference of the State. Self-interest appeared to Smith to be the true source of economic progress, for he believed that the individual, in seeking his own advantage, unconsciously promotes the welfare of the community to which he belongs. The direction of commerce should therefore be left to private traders, since each is a better judge than the State can be of the course most adapted to further his own interests. We are thus led from Smith's great positive argument to his negative argument, in which he maintains that the State never has, as a matter of fact, succeeded in procuring for a nation those advantages which it professed to have in view. Subsequent writers have done little more than amplify these two arguments, which must be regarded as economically true, even by those who deny the salutary effects of "natural liberty" in the sphere of morals or politics.

Adam Smith's work made a deep impression on thoughtful politicians, and in Pitt he found a disciple who was anxious to remodel the fiscal policy of the nation in accordance with his views; but Pitt's plans of reform were cut short by the outbreak of the French war, which gave full scope to the growth of vested interests and left behind it a strong feeling against any proposals that savoured of Free Trade. This feeling was not shared by the manufacturers and traders. In 1820 petitions for Free Trade were presented to Parliament by the London merchants and the Edinburgh Chamber of Commerce, and the report of the Committee appointed to examine them commented favourably on the views which they contained. The way was thus paved for the first instalment of reform, which was carried out by Huskisson as President of the Board of Trade (1824-27). His measures included a reduction of the duties on raw silk and wool, and the establishment of Free Trade between Great Britain and Ireland. The work of reform was resumed by Peel in 1842. There were then 1,150 items on the tariff, but 10 articles produced £20,871,136 out of a total revenue of £22,962,610. Besides lowering prohibitive duties so as to make them productive of revenue, Peel aimed at reducing those on raw materials to a nominal amount, and subjecting manufactured articles to duties averaging 20 per cent., which would not exclude foreign competition. In 1845 the duties on silk, cotton, and other raw materials were abolished, and the differential duties on sugar were considerably reduced. Peel displayed his usual caution in attempting a gradual reform of the tariff, chiefly in those directions where it would arouse the least opposition ; but subsequent events showed that he overestimated the strength of the great protected interests, and the credit of establishing Free Trade has fallen to Cobden and others, who had the courage to adopt a bolder course. [Corn Laws.] After the repeal of the Corn Laws (1846), which involved the surrender of the landed interest at home, the colonial and shipping interests could not long hold their ground. The duties on foreign and colonial sugar and timber were gradually equalised, and converted into revenue duties, and the attempt to keep the carrying trade to England in the hands of British subjects was abandoned. [Navigation Laws.] The reform of the customs was completed by Mr. Gladstone in 1852-53 and 1860, when the protection of manufactures entirely ceased, and all differential duties and nearly all those on foodstuffs were abolished. Our commercial treaty with France in the same year gave a great stimulus to Free Trade on the Continent, where it had hitherto been confined to small States, such as Sardinia, Holland, and Belgium. The example set by France was soon followed by the Zollverein or Customs Union of the German States, and in the course of a few years treaties were concluded between all the chief European countries. They generally contained a provision, known as the "most favoured nation clause," stipulating that any commercial privileges granted by one of the negotiating parties to a third Power should be extended to the other party. This promoted Free Trade by creating a "conventional" tariff, as opposed to the ordinary tariff, which, owing to the number of treaties, would seldom need to be applied.

It seemed as though the hopes of Cobden would speedily be realised, but during the last twenty years a reaction has taken place on the Continent, while the policy of the United States for the thirty years preceding the Presidential Election of 1892 has been increasingly and even fanatically Protectionist, and a strong leaning towards Protection has manifested itself in our own colonies. The reactionary movement on the Continent has been due, among other causes, to the growth of a stronger feeling of nationality, and the panic occasioned by the decline of agriculture, and the increasing stress of the competition between the manufactures of different nations. In so far as these are symptoms of a period of transition both in the economic and the political sphere, they may be regarded as disturbing influences of a temporary character, and a return to Free Trade may be looked for as soon as the political and economic stability which favour its progress have been restored. American Protection is to be ascribed in great measure to commercial ambition and the feeling of hostility to England, which originated in our attempts to check their industrial development, and led to the War of Separation. Protection naturally suggests itself to young countries, like our self-governing Australian colonies, as an easy method of hastening on their political and social development. It may sometimes have this effect, although the evidence so far does not tend to support the theory. The "political" arguments in favour of Protection carry great weight in America as well as in Australia, but, as they have only an indirect bearing on the general question of Free Trade, they cannot be discussed here. [Protection.]

But those who support a restrictive policy for political reasons attempt at the same time to justify their action on economic grounds. They assert that "Protection gives employment," but employment requires capital, and the immediate effect of protection is merely to withdraw capital and labour from some undertaking in which they were profitably employed, in order to embark them in another to which they were not previously attracted, because there was less prospect of success. It is indeed conceivable that the establishment of new enterprises under Government sanction might increase capital by encouraging saving, but experience shows that its growth has always been greater under a system of Free Trade. Capital is then rapidly diverted from a declining industry to the production of other goods for foreign markets, and the increased returns stimulate fresh accumulation; whereas Protection, by creating vested interests, tends to prolong its unproductive employment. Without examining the "Infant Industry" and "Variety of Industry" arguments on their political side, it may be well to point out some economic fallacies of a grosser kind involved in the assumption that a Government can benefit the community by giving an artificial direction to the investment of capital. The nominal earnings of those engaged in the favoured industries will at first be exceptionally high, while the real wages and profits of all other producers will be diminished, for they will receive a less amount of the protected commodities in exchange for their own products. They will exclaim that their treatment is unfair, and the Government will be obliged to resort to universal Protection, so that the values of all goods will return to their original balance. If it refrains from this course, and the protected industry, in spite of natural drawbacks, makes some progress, the high prices at first realised will soon be cut down by competition. A point will at last be reached at which it may fairly be contended that the duty should be withdrawn, but those who are benefited by it will not readily consent to its removal. Combinations of manufacturers and mine-owners to keep up duties exercise a disastrous influence on trade in the United States, and, it may be added, are also a powerful source of political corruption.

A more serious objection to Free Trade is brought forward by those who assert that, where the movements of capital are unfettered, it will tend to emigrate from old countries to lands where it can obtain a higher rate of interest; that labour, though more slowly, will follow the same course, and that thus the prosperity of a nation may be undermined.

Adam Smith thought that everyone would, in his own interest, always prefer to employ his capital at home, but the danger and delay attending foreign investments have greatly decreased since he wrote. However, national feeling will probably always be strong enough to supply a country with as much capital as it really requires.

England has reaped so much benefit from Free Trade that she is not likely ever to return to deliberate and systematic Protection. But there is a class of politicians, who, while they would not go so far, maintain that, since foreign countries persist in protecting their industries, England must do so also in self-defence. The "Fair Trade" argument is based on the old fallacy that the seller derives more advantage from trade than the buyer. We should gain nothing by reducing our imports; these must always be paid for in exports, though the latter may fall short of the amount wc desire.

The case against "fair trade," or "reciprocity," was graphically summed up by John Bright in his question, "whether two wrongs make a right?" Others recommend "retaliation" rather than "reciprocity;" they would tax imports, not because they think them injurious, but because they believe that by excluding the goods of foreign countries from our markets we should induce them to admit our own. It is far more likely that foreign nations would triumph over our conversion to their principles than that they would be inclined to adopt a policy which we had ourselves abandoned.

Most Free Traders, while denying the necessity for reciprocity or retaliation, would allow that under certain circumstances it may be advisable to set aside their principles for a time. If, for example, it can be shown that the threatened exhaustion of our supplies of coal and iron, on which our commercial supremacy depends, can be averted by checking their exportation, a case is clearly made out for Government interference. Still more is this so where the issue at stake is the moral or intellectual welfare of the community. Political economy is concerned only with the material aspects of life, and must give way when it comes into collision with matters of higher import.