It is now perhaps generally accepted that the classical theory of commercial policy based on comparative costs has to be revised basically in the context of economic growth of under-developed countries.
High rate of growth is consistent with free trade policy under very exceptional circumstances.
If the country is small in size and is such as cannot feed its population with ‘corn’ internally produced except at an abnormally high price; if conditions are propitious for the introduction of mechanical devices in manufacturing industries, offering scope to division of labour and economies of production; if foreign competition in respect of the country’s growing industry is yet distant, so that the international price of export goods is more a function of international demand than of internal cost; if these favourable circumstances exist, the country gains by adopting a policy of free trade. And it is these circumstances that molded British policy in the mid-nineteenth century and were the basis of English Classical Political Economy. So economic growth is important.
In different conditions these principles may not apply. Growth has been stimulated in many other countries, such as the United States or Germany, by a policy of protection rather than of free trade. The famous ‘infant industry’ argument of Frederick List in favor of protection grew out of a realization that a country cannot effect a transition from the agricultural stage to an industrial stage unless its industries are protected by tariff against foreign competition. The classical assessment of gains from international trade is based on static comparative cost conditions; it does not take account of the possibility of changes in these conditions that a push towards economic development may entail.
A country may have comparative advantage in agriculture under given circumstances; and if these circumstances are allowed to persist, the peculiar comparative advantage also persists, resulting in its continued specialization in agriculture. But if steps are taken to shift resources from agriculture to industry, certain developments may take place in the country which alter the entire comparative cost configuration. And it may indeed it often does pay the country to take these steps as transition measures, even though during the period of transition, the domestic consumers may have to pay higher prices for goods that are shut out. So economic growth is important.
Basically it is this Listian principle that has provided inspiration to under-developed countries in their effort towards economic development, although, superimposed upon it, there has been the more recent concept of economic planning. There has been accordingly a switch-over from protection as such to trade and payments regulation. Protection is an over-all measure designed to give encouragement to domestic industries; the allocation of resources within the system is left to private enterprise and is determined by the entrepreneurs’ motive of immediate profit rather than of long-run growth of the economy as a whole. So economic growth is important.
Now, it is true that in an economy where there is an adequate supply of entrepreneurship in the industrial sector which, because of late start, was not allowed to function properly, an over-all measure of protection would lead allocation of resources on to channels which are conducive to economic growth. And this is the assumption on which the protectionist argument is generally based. But there are economies where entrepreneurship itself is lacking, where, therefore, the State has to assume the role of an entrepreneur. In such economies protection by itself may turn out to be an oppressive instrument; by creating monopoly conditions, it may do more harm than good to the economy.
Moreover, just those lines of production that would receive stimulus from a policy of protection in view of immediate profitability may not be the lines that would make for a high rate of growth. Suppose, to take an example, the strategy of long-run economic development of a country dictates a bias on investment in heavy industries destined to produce capital goods, and suppose also that these are the industries which, considering existing resources, rank low from the point of view of immediate profitability. A general policy of protection will in these circumstances fail to achieve the objective of growth for it will divert resources to consumption goods industries which have much less strategic significance from the point of view of long-run growth. If the trade policy of under-developed countries has to be oriented towards economic growth, direct control of imports and exports is indicated rather than just a policy of protection of the Listian variety.
Since the creation of surplus for investment is the way to economic growth, a growth-oriented trade policy must aim at creating the maximum possible trade surplus in consumption goods, and then converting the surplus into capital goods which have strategic significance for growth. This necessarily involves a more searching regulation of the pattern of foreign trade than would be secured by a policy of over-all protection. So economic growth is most important.