FPIF Special Report
December 2003

Kicking Away the Ladder: The “Real” History of Free Trade

By Ha-Joon Chang

4. Comparison with Today's Developing Countries

Those few neoliberal economists who are aware of the records of protectionism in the NDCs try to avoid the obvious conclusion--namely, that it can be very useful for economic development--by arguing that, while some minimal tariff protection may be necessary, most developing countries have tariff rates that are much higher than what most NDCs used in the past.

For example, Little et al. (1970) argues that “[a]part from Russia, the United States, Spain, and Portugal, it does not appear that tariff levels in the first quarter of the twentieth century, when they were certainly higher for most countries than in the nineteenth century, usually afforded degrees of protection that were much higher than the sort of degrees of promotion for industry which we have seen, in the previous chapter, to be possibly justifiable for developing countries today [which they argue to be at most 20% even for the poorest countries and virtually zero for the more advanced developing countries]” (pp.163–64). Similarly, World Bank (1991) argues that “[a]lthough industrial countries did benefit from higher natural protection before transport costs declined, the average tariff for twelve industrial countries ranged from 11 to 32% from 1820 to 1980. . . . In contrast, the average tariff on manufactures in developing countries is 34%” (p. 97, Box 5.2).

This argument sounds reasonable enough, but is actually highly misleading in one important sense. The problem with it is that the productivity gap between today's developed countries and the developing countries is much greater than what existed between the more developed NDCs and the less developed NDCs in earlier times.

Throughout the nineteenth century, the ratio of per capita income in purchasing power parity (PPP) terms between the poorest NDCs (say, Japan and Finland) and the richest NDCs (say, the Netherlands and the United Kingdom) was about two or four to one. Today, the gap in per capita income in PPP terms between the most developed countries (e.g., Switzerland, Japan, the United States) and the least developed ones (e.g., Ethiopia, Malawi, Tanzania) is typically in the region of fifty or sixty to one. Middle-level developing countries like Nicaragua ($2,060), India ($2,230), and Zimbabwe ($2,690) have to contend with productivity gaps in the region of ten or fifteen to one. Even for quite advanced developing countries like Brazil ($6,840) or Columbia ($5,580), the productivity gap with the top industrial countries is about five to one.

This means that today's developing countries need to impose much higher rates of tariff than those used by the NDCs in earlier times, if they are to provide the same degree of actual protection to their industries as the ones accorded to the NDC industries in the past.

For example, when the United States accorded over 40% average tariff protection to its industries in the late nineteenth century, its per capita income in PPP terms was already about three-fourths that of Britain. And this was when the “natural protection” accorded by distance, which was especially important for the U.S. , was considerably higher than today. Compared to this, the 71% trade-weighted average tariff rate that India used to have just before the WTO agreement, despite the fact that its per capita income in PPP terms is only about one-fifteenth that of the United States, makes the country look like a champion of free trade. Following the WTO agreement, India cut its trade-weighted average tariff to 32%, bringing it down to the level below which the United States average tariff rate never sank between the end of the Civil War and World War II.

To take a less extreme example, in 1875, Denmark had an average tariff rate of 15 to 20%, when its income was slightly less than 60% that of Britain . Following the WTO agreement, Brazil cut its trade-weighted average tariff from 41% to 27%, a level that is not far above the Danish level, but its income in PPP terms is barely 20% that of the United States .

Thus seen, given the productivity gap, even the relatively high levels of protection that had prevailed in the developing countries until the 1980s do not seem excessive by historical standards of the NDCs. When it comes to the substantially lower levels that have come to prevail after two decades of extensive trade liberalization in these countries, it may even be argued that today's developing countries are actually less protectionist than the NDCs in earlier times.

They are Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

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