by Francis Lee for the Saker Blog

The customary argument that ‘free-trade’ promotes global growth will, given an appropriate policy mixture of specialisation and comparative advantage, result in a rise in the maximisation of growth in particular and trade in general. Well, this is the conventional wisdom that is usually trotted out in the textbooks and university lecture halls. Moreover, governments across the board continue to be heavily engaged, either directly or indirectly, in trying to stimulate their industrial centres. Indeed, there are whole areas of the economy – notably those dependent on large, long-term investments in science and technology – where government and government policy are absolutely central. The real distinction then is between an overt and covert stance for example over whether a government can or should attempt to ‘pick winners’ which would involve states manipulating their import-export ratios; but this would bump up against the theory of free movement of goods and services. A problem in search of a resolution, no less.

In fact, states seem fixated as to whether or not there is really such a thing as ‘free trade’, and if it is even possible at all. In order to work, it seems some degree of equality between trading partners must exist and this we have seen at the global level is simply absent. That being said it is the nation state as an active mediating formation which makes the strategic difference between winning and losing in highly volatile and competitive international markets. It is thus a fallacy to reduce minimal state intervention to Keynesian fine-tuning, and even less to open markets and a hands-off economic regime. Modern government and the modern economy need all the basic ingredients for competitiveness. Essential state inputs into the modern economy will include, education, health, job training, R&D policies, infrastructure support, competition policy and so on and so forth. This is hardly a minor role for government for the post-millennium. But from the left to the right there is little discussion in this strategic area. Unfortunately, the policies promoted and put forward by the political/economic powers-that-be have merely tended to make a bad situation worse.

Subsidiary problems which have also arisen are the patterns of trade between developed and developing states. Most exports, certainly in the long run, face elastic demand – that is a positive value of Price Elasticity of Demand PED>1. Which is to say that exports which are greater than 1. In developing countries, however, if the demand for imports is inelastic then a change in price of one will lead to a smaller proportional change in the demand for them. PED<1. This is primarily because many commodities (raw materials, such as oil, copper, coffee, cotton, steel, rice, sugar, and rubber) tend to have an inelastic demand.

Thus, international trade openness will only work if the playing field is relatively level – which clearly it isn’t. And it also has to work both ways – which clearly it does not. In addition, tariffs imposed by developed countries on imports from developing country products remain very high. It is common for tariffs to increase with the degrees of processing (so-called ‘tariff escalation’) so that higher value products from developing countries are discriminated against. At the same time agricultural subsidies from developed states make imports from developing countries uncompetitive. In short, the odds are stacked against the developing states.

Downturn and Recovery 1

The big economic slumps and recoveries of the 1930s up to and including 2022 have borne witness to the current contraction of world output and trade particularly, both in the West and the peripheries of the global South. This was caused by multiple tendencies which have risen to the present situation and have been attended by a series of financial collapses and subsequent contraction of economic growth in domestic and global markets. It was the contraction of growth in the early 20th century which had the knock-on effect of a collapse in world trade. There were no tariffs, no protectionism until after the downturn. Back in the US the Smoot-Hawley tariffs mandated by the US authorities were an example of the collapse of growth resulting in the global trade breakdown. (1) In fact, both the US, Germany and the UK had effectively maintained mercantilist or protectionist policies since the end of WW1, so the Smoot-Hawley legislation was nothing new.

There has never been an example of industrial development and a sustained path of growth and raising of living standards based upon a policy of free trade. This is a simple empirical and historical fact. But the emerging nations in the late 19th century, most importantly the United States and Germany, were not about coming to terms with a subsidiary role in the world economy, with Friedrich List (Germany) and Alexander Hamilton 1755-1804 (the US) who both challenged and eventually overcame the British stranglehold on world trade. (2)

Alexander Hamilton 1755-1804

The Korean economist Ha-Joon Chang, writes in this connexion in his books Kicking Away the Ladder, and Bad Samaritans that ‘’ … all catching-up economies’’ firstly in the 19th century and then principally in East Asia in the 20th, ‘’looked at policies which had been used by the now developed countries. A consistent pattern emerges, in which all the catching up economies have used activist, industrial, technology and trade (ITT) policies, but not simply tariff protection, to promote economic development as had been the case since before Friedrich List’s time.’’ (3)

The much touted free-market, and free-trade policies worked for some (of the already developed) but hindered the development of many other lesser developed states. As a matter of fact, all the ‘newly industrialising economies’ of the 19th century – in particular the UK (the first) then USA, Germany, France, and other European nations as well as Japan, adopted a set of policies that were strongly protectionist and members only of a developmental capitalism predicated on the increasing restriction of price competition, oligopolistic market structures, monopolistic practices, and the avoidance of risk.

What became to be called ‘Actually Existing Capitalism’ was a system based not upon free trade but on its exact opposite. It pretty much always was with the world increasingly dominated by regional trading blocs – EU, NAFTA, ASEAN, MERCUSOR – whose whole object is to impose punitive entry conditions into their markets by outsiders. Moreover, up to 60% of world trade is now conducted between multinational companies and their subsidiaries – this intra-firm trade is carried out for various reasons the most egregious of which is the transfer pricing scam. Only about a quarter of global trade approximates to the classical Ricardian paradigm, and even here there are restrictions – clothing, textiles etc. This is the reality of actually existing capitalism.

Export led growth – as successfully practised in the past and present by the East Asian countries – is a particularly novel form of free-trade. Of course, it is a one-way street type of free trade where these countries rely on overseas export markets but restrict imports and inward investment. To repeat: the policy has been the classical mercantilist approach of Germany and the US in the 19th century, protection of infant industry until such industry was fit enough to compete globally. Whether this strategy is now, in light of the collapse of world trade, viable is another question. See below an interesting comment by J.M.Keynes:

‘’I sympathise, therefore, with those who would minimize, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel – these are things which should of their nature be international. But let goods be homespun wherever it is reasonably and conveniently possible; and above all let finance be primarily national.’’ ( Keynes, Biography – Skidelsky)

Bretton Woods. Rise, Decline and Fall

The Bretton Woods System 1944-1971. This arrangement between the Western/European-US bloc – I.e., the growth, development, and integration of a number of key states of the north Atlantic and Australasia came to form the basis of trade solidarity and currency affiliation. The US$ shaped the bedrock of monetary stability based on the fixed alignment of the satellite currencies of western Europe and Australasia. The system lasted until the US$ was delinked from gold and the satellite currencies floated freely from the dollar, although the rates fluctuated. This marked a definitive change in the post-war global set-up. The change had been brought about by the US’s decision to cut its losses and winding up its military interventions firstly in Korea and then in Indochina. Moreover, there were also domestic imperatives of US policies at the time pursued by the incumbent ministries under the leadership of President Lyndon Baines Johnson. Johnson the Democrat resigned in 1969, and in the same year leadership passed to Nixon, the Republican candidate-cum-President.

The post-war period of reconstruction and retrenchment lasted until the beginning of the 1970s. This social and political stability had been initially made possible (particularly during the war period) that had constrained the ill-effects of markets on society.

However, such post-war stability was not based upon the extension of unfettered markets; it was made possible by institutional reforms that constrained the deleterious effects markets may have on society. On the one hand, final and intermediate product markets were organized according to oligopolistic competition, cartel formation at the national or global levels as well as in accordance with sophisticated public regulations. As a consequence of this price wars were replaced inter alia by gentlemen’s agreements between large firms which adopted mark-up price formation and cosmetic product differentiation. Moreover, this ‘freeing-up’ of post-1971 market conditions and the impact until the present times, represented a rolling-back of all the gains made by the mass of ordinary folk since WW2. Implicit in the Second World War was a genuine capital-labour compromise that codified the respected benefits drawn from the implementation of Fordism. Managers were free to organize production and labour processes, whereas workers were from an implicit (or explicit) indexation of nominal wages with respect to consumer prices as well a sick leave and holiday leave, along also with productivity schemes.

This entire set of agreements and their co-ordinating mechanisms has been severely challenged post 1970, and a fortiori in the 1980/90s. It would not be an over-statement to say that the counter-revolution that has been a feature of the late 20th century has now become solidified in the 21st.

The present time and analysis lead to an impressive paradox. At the very moment the post WW2 and its institutions are assessed and found wanting by the powers-that-be. To be sure the State remains the most powerful institution to channel and tame the power of markets. But, in the absence of countervailing regulation, economic analysis shows that persisting unemployment, recurring financial crises, rising inequality, underinvestment in productive activities, such as education and research, a cumulative asymmetry of information and power are some possible if not actual results of a complete over-reliance on pure market functioning.

The derisory outcomes of the 1980s up until the present day (2022) should serve to wake us from our Rip Van Winkle world, but the masses sleep on in their induced somnolence and the masters of the Universe carry on with their ill-considered schemes, regardless of their efficacy and impact.

Central to this whole process of production/distribution/location is the uneasy relationship between Transnational Corporations (TNCs) and nation states. Both are continuously engaged in negotiating and bargaining processes. On the one hand, TNCs attempt to take advantage of national differences in regulatory regimes (such as taxation and performance requirements, like local content). Per contra states try to minimise such regulatory arbitrage and to entice mobile investment through competitive bidding against other states. The situation becomes particularly complex because, whilst states are clearly bounded geographically, a TNCs territory is more fluid and flexible. Transnational Production Networks slice through national boundaries – though not as smoothly as some would claim. In the process parts of different national spaces into transnational production networks (and vice versa).

States still have significant power vis-à-vis TNCs, for example to control access to their territories and to define rules of operation. In collaboration with other states, that power is increased (the EU is a prime example of this). So, the claim that states are universally powerless in the face of the supposedly unstoppable juggernaut of the ‘global corporations’ is highly contestable; the question is an empirical one.


It seems reasonable to assume that since the turn of the 20/21 centuries things have taken a turn for the worse. The cyclical movements in the global economy have always been a disagreeable adjunct of the trade cycle, however, in recent years – 1970-2022 – each successive crisis has become more severe and longer lasting than the one before. This is easy to list.

  1. The Dutch Tulip Bulb Bubble 1636
  2. The South Sea Bubble 1720
  3. The Mississippi Bubble 1720
  4. The US Stock Market price Bubble 1927-30
  5. The surge of bank loans to Mexico and other developing countries in the 1970s
  6. The Real Estate Bubble in Japan 1985-89
  7. The 1985-89 Bubble in Real Estate and Stocks in Finland, Norway, and Sweden
  8. The Bubble in Real Estate and Stocks in Thailand, Malaysia, Indonesia, and other Asian Countries in 1997 and the surge in foreign investment in Mexico 1990-1999
  9. The Bubble in Over The Counter (OTCs) Stocks in the US in 1995-2000
  10. The Bubble in Real Estate in the US, UK, Spain, Ireland, and Iceland between 2002 and 2007 – and the debts of the government of Greece.
  11. And at the present time the global crisis of indebtedness, inflation, and war. The Four Horsemen of the Apocalypse.

US debt levels have reached a cool $27 trillion which cannot possibly be repaid. The answer therefore is to print more US$. But of course!

We should take note that each crisis seems more widespread, deeper, and dangerous than the last. The crisis – of 2008 – plastered over the cracks of a deeply dysfunctional features of a system which represented possibly be the last throw of the dice. The system doesn’t work – it is bust. The question is, however? Can it be repairable? Last words.

‘’Paradoxically, the 2008 financial crisis seemed to offer a real opportunity for change. For the first time in several decades, both the economic inefficiencies and social limitations of free, unregulated markets were exposed for all to see. In particular, an economic system based so heavily on financial speculation is, in any social or moral sense, dysfunctional. It has failed. The opportunity must be taken to build a new system to redress the imbalance that has developed between states and markets, between the people and institutions and between the immensely wealthy and the rest. Such a project is global in both scale and scope, hence the need for coordinated international policy initiatives rather than individual national measures that would lead to destructive competition rather than collaboration. At the height of the crisis in 2008-2009, it seemed that such a building might, indeed, be on the agenda. But subsequently, as the worse seemed to be over (or is it?), there is a real danger of going back to the future (my emphasis – FL) It would be a tragedy in every sense if that were to happen. We can – we must – do better. (Erica Schoenberger 2014)


(1)The Tariff Act of 1930, commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, was a law that implemented protectionist trade policies in the States. Sponsored by Senator Reed Smoot and Representative Willis C. Hawley, it was signed by President Herbert Hoover on June 17, 1930

(2)The same mercantilist policies initially carried out in England (as it then was) were then also in time operationalised in both the United States and Germany who played catch-up with the UK in the late 19th century. The architect of US mercantilism was Alexander Hamilton (born 1755 or thereabouts – died 1804) who overcame the free-trade preferences of Thomas Jefferson in the early stages of US economic development; but it was the civil war – 1861-65 – essentially a conflict between the protectionist north and the free-trading south, which settled the issue. Ex Commander-in-Chief of the Union Army of the Potomac, Ulysses Simpson Grant, later to become US President argued that:

“For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”

(3) Ha-Joon Chang – Kicking Away the Ladder – pp.25.26

(4) Furthermore, in Germany, Friedrich List (1789-1846) who also had scant regard for any ‘free-market’ nonsense and the Ricardian corollary of comparative advantage was instrumental in promoting a system of political guidance from above as a policy for economic development.

The first stage (of such a long-term policy) is one of adopting free-trade with more advanced nations as a means of raising themselves from a state of barbarism, and of making advances in agriculture; in the second stage, promoting the growth of manufactures, fisheries, navigation and foreign trade by means of commercial restrictions; and in the last stage, on after reaching the highest degree of wealth and power by gradually reverting to the principle of free-trade and of unrestricted competition in the home and in foreign markets’’

This was the policy instrumentalised by Bismarck during the middle and late 19th century which enabled Germany to outperform its European rivals, principally the UK. And still today in many ways German nationalist mercantilism which it rests upon has dominated the EU and is even now still much in evidence.


The Essential Saker IV: Messianic Narcissism's Agony by a Thousand Cuts
The Essential Saker III: Chronicling The Tragedy, Farce And Collapse of the Empire in the Era of Mr MAGA