Why Free Trade Is a One-Sided Suicide Pact
The National System of Political Economy by List
Welcome back and thanks for reading! This week’s article is a review and summary of Friedrich List and his The National System of Political Economy, with an eye toward how the general system he emphasizes is relevant to America as Trump begins a tariff fight. Though I generally don’t do book reviews on Friday, I thought it would be relevant, and that the book (you should read it, immediately, if concerned with tariffs) would answer the questions many have about whether free trade or protected trade is better. If you do like this article, please tap the heart at the top or bottom of the page to like this article, so Substack knows to promote it, something that really helps us out at no cost to you. Thanks again.
A clear divide, over the course of the 19th and 20th centuries, is between those world leaders (and their underlings) who imbibed the wisdom of Friedrich List and his The National System of Political Economy and those who did otherwise. The former managed to become largely independent nations and industrial behemoths despite lacking, often quite seriously, any sort of an early mover advantage, whereas the latter fell apart despite often having started out quite far ahead of their future overtakers.
List’s most famous work, The National System of Political Economy, explains exactly why that occurred, despite being published in 1841, well before most nations industrialized: different economic systems are appropriate depending upon a nation’s state of development, and ideologically committing to one or another is a recipe for disaster.1
That is, in essence, the point of the book. With an eye to history — viewing in close detail the rise and fall of the fortunes of Venice, the Hanseatic League, the Dutch, and England — List explores and explains why Adam Smith is wrong, and it is often free trade rather than protection that is the death knell of a nation’s productive capability, and thus its sovereignty and political independence.
The reason for that, in his view, is clear: if the free trade equation is one-sided, or one party is more industrialized than the other, free trade saps the strength of the weaker party. Instead of competing on a fair field and finding what is most efficient, as Smith would contend is the case, that weaker (or less prudent) power tends to see its factories go under as cheaper, foreign goods pour in en masse. That, in turn, gives the party exporting the goods a great degree of power over the party now reliant upon it.
Listen to the audio version of this article here:
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Hence the central contention of List’s work: a nation seeking to be something more than an agrarian producer of raw materials must protect its domestic industry enough to keep it competitive, for the alternative is seeing the stronger power’s industry dismantle your own industry, and thus your capacity for independence and sovereignty. Importantly, the only exception to that is a power so industrialized that free trade won’t harm its own industries, in a case of mutual free trade…which is nearly never actually the case, as Americans are now learning. Otherwise, as List sees it, whatever the level of development, industrial protection is key to national success and survival.
The first nation to intentionally act in the manner List recommended was America, which is to where he fled when forced into exile by his native and beloved principality of Württemberg in the mid-1820s. Writing letters and newspaper columns with an eye toward history, List recognized that America, if it wanted to do anything other than export raw materials — cotton, lumber, fish, and tobacco — to Britain, would have to embark on a campaign of protection and pro-industry policy much in line with what Hamilton recommended in his report on manufactures.2 Meanwhile, he saw the need for massive investments in infrastructure — canals, turnpikes, ports, and eventually railroads — to make that industry as profitable as possible, while using trade deals and colonial ventures to expand potential markets.
And that is what America did. Under the so-called American System that Henry Clay did so much to develop and promote,3 the nascent American republic used high tariffs on non-luxury goods to develop American manufacturing capabilities to the point where we were an industrial power, and the revenue from those tariffs was investing in national infrastructure that made industry all the more profitable. By the end of the 20th century,4 America was an independent industrial power of the List mold, and at that one which greatly exceeded Britain in wealth and industrial capability.
But what makes The National System of Political Economy all the more interesting is that List’s ideas didn’t just outlast his death, but were implemented on a grand scale by some of the greatest powers of the 19th and 20th centuries, thanks to his work.
Namely, in the 19th century, both Prussia (later Germany) and Japan5 followed List’s general plan for becoming independent industrial powers with great success. Both invested in infrastructure — particularly ports and railroads — while using tariffs and imported foreign industrial expertise to create economic success on a scale that soon rivaled Britain. Further, they took List’s advice on creating markets for their goods and bases of raw materials, so as to further stimulate industry. For Japan, this was the conquest of Korea and Manchuria; for Prussia, it was first the Zollverein customs union6 and later the German nation. Because of tariffs, intentional policies, and decades-long investments, both went from being extremely poor agrarian nations, if even that, to industrial behemoths that could challenge powers established for far longer, such as Britain.
Then came the 20th century, in which East and South Asia, with the slight exception of Hong Kong, self-consciously followed List’s recommendations nearly to the letter and were hugely successful because of it.7 Most notably, China under Deng Xiaoping, South Korea,8 Lee Kuan Yew’s Singapore, post-WW2 Japan, and Taiwan all used the Listian combination of steep tariffs on industrial goods, near-zero tariffs on imported foodstuffs and raw materials, intentionally pro-industry policy, and infrastructure development. They also all became hugely successful in the 1980s and 90s when those policies kicked into high gear.
Meanwhile, other nations reneged on their former commitment to Listian policies. England, as I have written about before, abandoned its empire-building Navigation Acts and prosperity-critical industrial tariffs for a policy of Adam Smith-style free trade.9 The result was disaster; by the time the Asian Tigers were rocketing upwards, it was essentially a non-entity because of decades of being hollowed out by free trade policies that saw its industries die, its farms run fallow, its infrastructure degrade, and its merchant marine whither away.
Similarly, America, once the earliest and best practitioner of Listian policies, rejected them in the name of free trade in the Cold War’s aftermath, with HW Bush, Clinton, and their successors embracing NAFTA and offshoring. As a result, we saw the once-titanic factories of the Rust Belt shipped to Mexico and China10 while the textile mills of Massachusetts, which were once our earliest industrial successes, were shipped to China, Vietnam, Thailand, and Indonesia. The List-embracing Asian Tigers rose because we forgot his wisdom and our heritage.
From a historical perspective, List’s work is convincing. Broadly, those countries that embraced recommendations of the sort he wrote about were economically successful and politically sovereign because of it. Without industry, no post-Napoleonic nation was independent. To get that successful industrial development, and thus to become independent, they needed targeted tariffs, particularly on consumer-grade manufactured goods.
But, despite his prescience and the obvious success of his recommended policies, List and his ideas remain controversial. Why? Mainly because of the shopkeeper’s mentality that has dominated in the West, one that makes it very difficult to adopt policies of short-term pain for long-term gain, particularly when paired with democracy.11
Noting as much in The National System of Political Economy, List rhetorically asks whether every nation on Earth should submit to buying cheap British manufactured goods in exchange for raw materials merely because those goods are cheaper than domestic variants. Answering his own question, List notes: “Nothing but unfathomable cosmopolitanism or shopkeepers' narrow-mindedness can give an assenting answer to that question.”
Naturally, such is the answer we are now getting as Trump poses that question about Chinese goods; only the “unfathomable cosmopolitanism [and] shopkeepers' narrow-mindedness” of the powers that be is framed by them as a virtue rather than an obvious and highly deleterious sin.12
As List sees it, only one so provincial as a small shopkeeper would cite the (temporary) lower cost of foreign goods over domestically produced ones as anything close to a virtue. Anyone less myopic would see national independence, only obtainable through industry, as a positive and understand that foreign producers would raise prices as soon as domestic factories went out of business. Countless examples of exactly that abound in The National System of Political Economy, from textiles in the Raj to England’s dealing with Portugal: being reliant on another nation, even a friendly one, is a recipe for disaster. Of course, a century after List’s passing, Britain re-learned this the hard way in its war-related trade dealings with America.13
But while the sane see such reliance as a great sin, the rootless cosmopolitans and shopkeepers of the present don’t. As shown by the chaos and panic over Trump’s tariffs, many of which were lower than the highly salutary tariffs of McKinley,14 the idea that ever-less cheap Chinese junk might be less competitive to import than it is to produce American goods has thrown them into a tizzy. Never mind that America is currently reliant on China for rare earth minerals,15 basic electronics,16 missile components,17 and pharmaceuticals18…which is to say the critical bases of modern economies and warfare, all of which would be unobtainable in the case of a war with China.
No, to the powers that be, the supposed “efficiency” of importing those goods from China instead of producing them here is a virtue that is worth selling out national security and independence for. Hence why Wall Street went insane over the idea that we shouldn’t import F-35 parts from the Red Chinese.19
The value of List’s The National System of Political Economy is that he describes, in easy-to-read and history-supported detail, why the shopkeepers and cosmopolitans are wrong.
Yes, within the borders of a nation, Adam Smith’s The Wealth of Nations makes a great deal of sense. But in the real world, one in which there exist smart and ruthless powers of the Asian Tigers mold, it is the height of lunacy to lose economic and national independence for the sake of temporary economic efficiency. That is a lesson we used to understand, in part thanks to List, but sadly had forgotten until first Buchanan and then Trump repopularized the notion.
Such is the battle we now face. It’s not so much between “elites” and “populists,” as was the fight in the Roman Republic.20 “Conservative” and “liberal” are the wrong terms as well, as most American conservatives are liberals.21
Rather, the fight is between the prudent and the globalists, the nationalists and the shopkeepers. You can have an independent nation, or you can be reliant on another country (or countries) for the necessities of life. HW Bush, Clinton, GW Bush, and Obama, along with the interests they represented, all choose perdition in the form of independence-wrecking globalism. Such is what England’s rulers have chosen since the mid-1800s, with dire results.22
Our chance, under Trump, to re-embrace Listian economics23 in the form of tariffs and domestic investment is our chance to escape that path to perdition and instead remain on the path less taken, one of temporary discomfort for long-term gain, one that leads us back to independence. Fortunately, List, in his The National System of Political Economy, explains how we can do just that.
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In the interest of brevity, I haven’t described those cycles in detail here — really it is the industrial one that is the focus of the work and most relevant to the present — but if you want to read about them, this article summarizes it well: https://www.beren.io/2017-01-31-Reflections-on-Friedrich-List-National-System-of-Political-Economy/
A simple and helpful description of the American System for those who don’t know about it already: https://emergingamerica.org/exhibits/steamboat-barnet/investigations/american-system
An interesting paper on Japan’s use of Listian economic policies in its quest for national independence and prosperity: https://www.researchgate.net/publication/316482539_The_Cosmopolitanism_of_National_Economics_Friedrich_List_in_a_Japanese_Mirror
An excellent study of South Korea’s use of List’s ideas: https://www.econstor.eu/bitstream/10419/129791/1/853877254.pdf
This is the context in which our Vice President grew up:
Though List was against the Corn Laws, the reasons why they were dismantled, and the consequences of doing so, gets to this point:
The libertarians are particularly bad about thinking this way: https://www.mercatus.org/economic-insights/expert-commentary/why-trade-china-good-america
Some discussion of that here:
Discussed here:
In addition to the previously cited articles, some discussion of that here:
Excellent article.
Thank you for this summary.