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Britain free-traded away its world economic dominance, and the US is well down the same road.

America Aping Britain's Decline Through Free Trade is a provocative post by Ian Fletcher highlighting the parallels between Britain in the second half of the 19th Century and the US now. As told, Britain had become the world's dominant economic power, and they thought they could broaden their markets for manufactures through free trade without a risk that competitors would gain the upper hand. It didn't work out that way, and Britain tried to recoup by financializing its economy.  Sound familiar?  Some key passages from Fletcher:

So despite British preaching, free trade was falling apart. Britain practiced it unilaterally in the vain hope of imitation, but the United States emerged from the Civil War even more explicitly protectionist than before, Germany under Bismarck turned in this direction in 1879, and the rest of Europe followed. During the 1880s and 1890s, tariffs went up in Sweden, Italy, France, Austria-Hungary, and Spain. There was good reason for this: they worked. A recent study by the Irish economist Kevin O’Rourke shows a clear correlation between protection and economic growth rates in Europe in the 1875-1914 period.

. . . . Britain’s economy still grew, but inexorably lagged: from 1870 to 1913, industrial production rose an average of 4.7 percent per year in the U.S., 4.1 percent in Germany, but only 2.1 percent in Britain.

. . . .

But despite the mounting failure of its great strategic gamble, Britain stuck to free trade abroad and a laissez faire absence of industrial policy at home. Fundamentally, the country was lulled by the Indian summer of its industrial supremacy—it was surpassed economically by the U.S. only around 1880—into thinking that free trade was optimal as a permanent policy. The clarity of British thinking was not helped by the fact that certain vested interests had fattened upon free trade and established a grip upon the levers of power that was hard to break. The British establishment, seduced by the City of London’s financiers, turned towards wealth manipulation rather than wealth creation, a story familiar to us on Wall Street today.

Britain’s decline did not go unnoticed at the time, either at home or abroad. Neither did the underlying problem: in the 1906 words of Member of Parliament F.E. Smith, later famous as a friend of Winston Churchill:

    We give to our rivals a free market of 43,000,000 persons in the United Kingdom to add to their own free market. Thus the United States possess an open market of 82,000,000 persons in the United States, plus an open market of 43,000,000 persons in Great Britain, making, altogether, 125,000,000. Similarly, Germany possesses an open market of 43,000,000 in Great Britain. As against this, we possess only such residual of our open market of 43,000,000 as the unrestricted competition of foreign nations leaves unimpaired….We call ourselves free traders, but we have never secured free trade for ourselves; we have merely succeeded in enlarging the area within which our protectionist competitors enjoy free trade.

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