There are many types of industrial policy. In the 18th and 19th centuries, industrial policy often took the form of “infant industry protectionism.” This idea was originally made by the first secretary of the US treasury Alexander Hamilton in 1790, and later by the German economist Friedrich List in 1841.
Infant industry protectionism is the use of selected tariffs on imports of high-value-added manufactured goods when domestic manufacturing is in its early stages of development, particularly where the creation of these industries gives increasing returns to scale, rather than dead-end “diminishing returns to scale.” The goal of protectionism is to allow an industry to develop until it is able to compete in international trade. Once the industry is competitive on global markets, you no longer need domestic tariffs and they can be removed.
An excellent overview of infant industry protectionism can be found in Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective (London, 2002).
It is often asserted that free-trade Britain shows that protectionism is false and unnecessary, since the UK industrialized without the need for tariffs or protectionism. But the fact is that the UK was a pioneer in many manufacturing industries and had no competitors: it is clearly a special case to some extent. Furthermore, the UK did have an extensive tariff regime until trade liberalization in 1846.
Moreover, the fact is that in the case of cotton textiles, one fundamental area of its early manufacturing sector, Britain is a classic example of the success of infant industry protectionism.
In 1750, India produced about 23% of world manufacturing output. China probably produced around 33% of global manufacturing, and Europe about 23% (Marks 2002: 97; Kennedy 1989: 149; Perlin 1983; the source of these figures is the French economic historian Paul Bairoch 1997).
Europe, China and India all accounted for about 80% of global manufacturing output (Marks 2002: 123). It has been estimated that the GDPs of China, India and Europe were roughly 23% each of global GDP in 1700 (see Philip S Golub, “All the Riches of the East Restored”). That is to say, their respective economies were about the same size.
Textiles were a significant part of India’s manufacturing base, and Indian textiles were exported to Europe, Africa, the Middle East, south-east Asia, and the Americas. It has been shown by economic historians that India had a comparative advantage in the production of textiles, namely cheap but high-quality calicoes, because of cheap labour (Marks 2002: 97; Parthasarathi 1998). (As an aside, one can note that P. Parthasarathi 1998 shows that, since food was comparatively cheap in India and agriculture was very productive, free artisans who produced textiles had reasonably good living standards.) Indian production for export was concentrated in four major centres in Gujarat, Bengal, Madras and the Punjab.
India dominated world cotton textile markets in 1750, and Indian calicoes had been popular in Britain since the late 17th century. Contemporary British manufacturers and politicians correctly complained that British labour was more expensive than Indian labour. Yet by 1830 British cotton textiles dominated the world market and the Indian cotton textile industry was in ruins. How did it happen? Was it by the unregulated free market and free trade?
In fact, it was by tariffs and protectionism. The earliest phase of the Industrial Revolution in Britain was founded on the cotton textile industry. It was here that Britain crossed the “threshold” of the industrial revolution (Landes 1969: 82). The second phase of the industrial revolution only started after the early 1800s with the invention of the railroad and the expansion of the coal, iron and steam power. Thus the importance of the cotton textile industry at Manchester in the early Industrial Revolution cannot be underestimated.
If we look at how Britain developed its first significant manufacturing industry which launched the industrial revolution, we find that it did so by severely violating all the modern doctrines of free trade and free market economics.
In the late 17th century and 18th century, cheap high-quality Indian textiles competed with the domestic wool, linen and silk textile industry in Britain. These woolen, silk and linen textile producers demanded and were given import relief from Indian goods by tariffs and sumptuary laws in the early 18th century.
These were some of laws passed to protect British industry:
1685 – 10% import tariff on Indian goods;Britain’s textile industry was able to develop behind tariff barriers, and the home market started to develop a cotton textile industry. In fact, just before the industrial revolution, the tariff on Indian cotton goods imported into Britain had gone up to 50% (Alavi 1982: 56).
1690 – tariff doubled to 20%;
1701 – First Calico Act, legislation banning imports of dyed, painted or printed fabric;
1707 – British textiles manufacturers obtained further tariffs on Indian textiles;
1721 – Second Calico Act, which further banned imports of Indian textiles.
However, the early cotton industry in Britain could not match the quality of Indian textiles. In the early 18th century, Britain generally produced fustians (a mixture of linen and cotton/wool) and linen-cotton textiles, but not pure cotton goods.
Furthermore, the price of raw cotton imports rose in the 1770s and 1780s. It was only after the slave-based plantations of North America started to export to the UK that cotton imports started to fall in price.
I need hardly point out the paradox that the industrial revolution in Manchester through production of textile goods was itself dependent on, and effectively subsidized by, slave labour in the New World (see Pomeranz 2000: 277). How competitive would Manchester textiles have been, if production of cotton in the American south had been carried on by free laborers and farmers?
In the course of the 18th century, a number of technological innovations transformed the cottage industries of Britain into factory systems.
The most important inventions were as follows:
(1) Hargreaves’s spinning jenny (invented c. 1764; patented 1770), which was later made obsolete by 1800 by mules;These technological innovations in textile manufacturing occurred and were applied to the infant industry in an environment of heavy protectionism.
(2) Arkwright’s spinning frame, which was later developed into the water frame (patented 1769);
(3) Crompton’s mule (1779).
According to the conventional view, the technological innovations made British textiles cheaper and able to compete with Indian textiles both in the UK and in the global markets in the late 18th century.
But this is not correct. The inventions of Kay, Hargreaves, and Arkwright did not make British textiles more competitive than Indian goods, and Indian goods were still of a finer quality. Even with the invention and gradual use of Crompton’s mule in the 1780s, British textiles still could not compete with Indian calicoes (Alavi 1982: 56).
The producers were protected with more tariffs, and by 1813 the import duty on Indian cotton goods stood at 85% (Alavi 1982: 56). As Alavi (1982: 56) argues:
“It was the wall of protection that made possible the survival and growth of the British cotton textile industry in the face of Indian competition and facilitated large capital investments in the industry. Without it, the English industry would have found it impossible to get a foothold in the home market, let alone abroad.”It was not until the widespread adoption of the spinning mule and then the mechanized power loom invented by Edmund Cartwright in 1784 that English textiles gradually became more competitive in the early decades of the 19th century.
From 1797–1819 British cotton textile manufacturers were still unable to compete. In 1815, the value of all Indian cotton goods coming into England was 1.3 million pounds (from 1741–1750, it had stood at 1.2 million points annually, at a time when domestic cotton textile competition was still largely non-existent). British producers asked for and obtained tariff increases on Indian cottons on 7 separate occasions in the years from 1797–1819.
In fact, even with the technological innovations, by start of 19th century Indian silk and cotton goods
“could be sold in the British market at a price between 50% and 60% lower than those fabricated in England. It consequently became necessary to protect the latter by duties of 70% to 80% on their value” (Das 1946: 313, quoting Mukerjee 1967).It was only the application of steam power in the period between 1815 to 1830 that allowed English textile goods to be competitive globally (Marks 2002: 100). The power loom, for instance, was initially limited by relying on water power, but by the beginning of the 19th century was able to use steam power (Moe 2007: 34).
The cost of British-made cotton cloth fell by 85%, but only from 1780 to 1850, and it was only in 1835 that steam power fueled 75% of the British cotton industry (Moe 2007: 35).
British textile goods probably became internationally competitive by the mid 1820s (when tariffs were still in place). The British protectionism that lasted until the 1820s allowed British goods to become competitive.
It is estimated that by 1820, 46% of Britain’s exports were cotton textile goods. These exports displaced India’s textile exports in world markets. Thus Britain itself had an “export-led” model of economic growth even in the early stages of the industrial revolution, by taking away the market share of India through technological innovation allowed by protectionism and tariffs.
Yet, according to classical free trade theory, the British should not have bothered to develop a textile manufacturing industry, if they were able get Indian cotton textile goods at a price 50 to 60% lower than domestic textiles. India did have a comparative advantage in production of cotton textiles even around 1810 when the British textile industry was developing. If real free trade had been implemented, the protective tariff would have been abolished and the market for British-made textiles at home would have collapsed. There would never have been a later opportunity to compete internationally.
Yet nobody can seriously deny that having a large productive textile industry was the foundation of Britain’s industrial revolution and in the long run good for the economy.
This is not the whole picture either, because from 1757 the British East India Company (EIC) won control of Bengal, the centre of Indian textile manufacturing.
The Indian states could not impose retaliatory tariffs on British goods in the early 19th century in response to British protectionism, because they were effectively ruled by Britain through the East India Company.
After the successful decades of tariff protection and shelter from competition, British goods succeeded in global markets at the expense of India’s exports. Bengal and the textile manufacturers were ruined and the resultant de-industrialization impoverished the previously prosperous towns.
Contemporary 19th-century British advocates of free trade actually noticed this state of affairs and criticised it. Robert Montgomery Martin was a historian of Irish descent and wrote about twenty-six books on history and the British empire (including a History of the British Colonies). In 1844 he was Treasurer of Hong Kong. He appears to have been a typical liberal and free trader. I quote from the Oxford Dictionary of National Biography:
Martin, Robert Montgomery (1800–1868), author and civil servant … His life was dominated by a self-appointed task—the study of the British empire, which Martin saw in terms of a vast free-trade area of new territories in allegiance to the British crown …. [sc. he wrote a] five-volume History of the British Colonies, followed by such related works as Statistics of the Colonies of the British Empire (1839).Robert Montgomery Martin was called upon to give evidence in 1840 during a British parliamentary inquiry about India:
http://www.oxforddnb.com/view/article/18208, accessed 16 Feb 2009.
“[Before a British Parliamentary Committee in 1840] Montgomery Martin stated that he . . . was convinced that an outrage had been committed ‘by reason of the outcry for free trade on the part of England without permitting India a free trade herself.’ After supplying statistical data of Indian textile exports to Great Britain, he pointed out that between 1815–1832 prohibitive duties ranging from 10 to 20, 30, 50, 100 and 1,000 per cent were levied on articles from India. ... ‘Had this not been the case,’ wrote Horace Wilson in his 1826 History of British India, ‘the mills of Paisley and Manchester would have been stopped in their outset, and could scarcely have been again set in motion, even by the power of steam. They were created by the sacrifice of Indian manufacture. Had India been independent, she could have retaliated, would have imposed prohibitive duties on British goods and thus have preserved her own productive industry from annihilation. This act of self-defence was not permitted her’” (Clairmonte 1960: 86-87).Thus near-contemporary British apostles of free trade were the first to notice the double standard. They were appalled at the hypocrisy of British protectionism and the destruction of India’s prosperous cities built on textile exports.
But they of course failed to notice that the protectionism had been a major cause of Britain’s industrial revolution and that, without it, the UK would have been much poorer. In other words, the success of the cotton textile industry in the early industrial revolution in Britain was an example of infant industry protectionism, or modern import substitution industrialization (ISI).
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