Political Systems

The history of trading patterns since 1450 demonstrates that international trade does not depend upon any given political system. Long before democracy or political liberalization emerged in the nineteenth century, trade was conducted between authoritarian polities in Western and Central Europe. Thus it is technically impossible for a political system to have dictated trading relationships. More important in this early period were other factors, such as geography, size, and wealth. Countries penetrated by waterways that led to the sea and countries with long coastlines traded more extensively than others. Riverine England did more trade than relatively landlocked France and much more than Russia, whose rivers ran north and south, not east and west. The existence of small and wealthy states also contributed to trade irrespective of political system. Venice, Genoa, Portugal, and Holland traded far more than their large territorial colleagues. This is to be expected on purely economic grounds, because large territorial states could rely on their national markets for many of the wares they needed. Wealthy nations such as Spain and later England also engaged in more trade because they had more money to spend. In some cases, authoritarian polities included "liberalizing coalitions" that favored trade with other countries even when their regimes were not fully liberal. This was particularly true of Holland and England.

HOW DOES TRADE VARY ACROSS POLITICAL SYSTEMS?

It is less clear what effect a change in political systems has upon trade. The historical record has been mixed on this question. Most countries remained formally authoritarian until the nineteenth century. The revolutions in the United States and France in the late eighteenth century interrupted trading ties with other countries, and in both cases favored a rise in tariffs—Napoleon Bonaparte's Continental System, and Alexander Hamilton's tariffs and internal improvements. Thus, in these two instances the rise of a more liberal or democratic elite did not favor free trade. Both nations, of course, were developing countries as compared to their competitor—the first industrial nation, Great Britain—and they both embraced the infant-industry argument for tariff protection, as did early-nineteenth-century Prussia. More recently, the new nations that have been created by the collapse of the Russian and Yugoslav empires are not distinctly more economically liberal than other states, and scarcely more so than their parent empires. Important economic restrictions remain in place. As some of them join the European Union, however, they have been forced to adopt the acquis communautaire (agreed community principles) in which trade policies will be set by community institutions, tending in a more liberal direction.

In the nineteenth century nonrevolutionary political change in Britain did pave the way for tariff reform and economic liberalization. It did so by enfranchising middle- and working-class voters who wanted cheap food and raw materials. British success with an export-led growth strategy was emulated by a host of other nations. Up until the late 1870s, fledgling European nations opted for lower tariffs. When the Great Depression of 1873 to 1896 commenced, however, continuing political liberalization did not prevent higher tariff levies in many countries. When World War I occurred, military planners took control of raw materials and reduced all but strategic imports. This occurred in Britain, France and Germany. The first fully regimented economies emerged from the war. Afterwards, governments were slow to dismantle controls. Nor were the new states freed from the Austro-Hungarian and Ottoman Empires paragons of liberal virtue in terms of trade. They continued restrictions after the war. When left-wing labor and socialist parties achieved power, and particularly after the onset of the Great Depression in 1929, controls were increased on national economies in Europe and America. In the early 1930s governments competed by "beggaring thy neighbor" and shifting deficits to others through tariffs, quotas, and exchange depreciation.

After World War II further political change occurred in Europe, this time encouraging economic openness. The United States sought to protect the societies of Western and Central Europe nations and Japan against Soviet Communism, and it helped to install open economies to achieve this result. The role of the United States as an economic hegemonic power—providing markets and loans to countries in trouble—facilitated the growing structure of free trade. According to the "hegemonic stability argument," free trade needs a "leader" to keep the system open by providing liquidity to those nations that might be tempted to revert to protection. The hegemon also sanctioned miscreants and rewarded cooperators to support an open international economy, at least on the non-Communist side of the ideological fence. The United States performed this function until the 1970s. Though the United States weakened relative to other industrial nations after that, the oil crisis and petrodollar loans in the 1970s brought the developing world into the international financial picture. With the huge oil price increases of 1973 to 1974 and 1979 Arab oil states amassed large funds to invest abroad. They typically lent these "petrodollars" to developing countries at rising rates of interest. Having borrowed in large amounts, the developing nations discovered in the 1980s that they had to sell manufactured exports abroad to pay back their loans. This need quickly stifled the import-replacement strategies that they had been following, and evoked a reduction of tariffs in the Uruguay Round of World Trade Organization (WTO) negotiations, which concluded at the beginning of the 1990s. It remains true, however, that developing nations retain much higher tariffs than their industrial colleagues, and many countries (Western and non-Western) protect their agriculture, a salient issue in the next round of WTO tariff negotiations.

Just as the British model inspired emulators in the nineteenth century, the Japanese model gained many imitators in the twentieth century and afterward. Generally renouncing nuclear weapons, trading states (including Japan, Germany and many other West European states, Korea, Taiwan, Singapore, Indonesia, the Philippines, and others) focused on their commercial vocation and sought influence through greater economic growth. Although a nuclear power, China has followed in their footsteps and developed new trading and investment ties with Japan, European countries, and the United States. In fact, China has proceeded beyond the Japanese model by permitting a huge flow of foreign direct investment into its mainland economy. Foreign direct investment in China has allowed Western and Japanese firms to outsource their production and to manufacture much cheaper goods for the home market. China has benefited from technology transfer, and also from the exports which this investment has stimulated. Although ultimately China will produce largely for its own consumption, it has for a time become a signal representative of the "export-led growth" strategy which Britain pioneered in the nineteenth century.

In China's case, moreover, its "trading" vocation has temporarily substituted for political liberalization as a strategy of modernization. China's leaders deliberately decided to emphasize economic growth to avoid Russian political and economic failures which, they believe, stemmed from premature democratization. This choice permits the Chinese government to decentralize political and economic autonomy to particular provinces, avoiding a crisis at the center. Initiatives in Guangdong, Shanghai, and Dalian thus serve as test cases for policies the regime is not yet ready to embrace at its central core. Such a policy, however, can only succeed for a time. Ultimately, long-term investments by foreigners in China will come to depend upon the liberalization of the regime, the stability of the currency, and the probity of Chinese courts. Investments depend upon "transparency," and transparency in turn depends upon a greater degree of liberalization, both politically and in terms of information. Freedom of contract and the enforcement of contracts in local, impartial courts also require further political change.

More generally, however, the historical record does not suggest that political liberalization leads immediately to more liberal patterns of trade. Initial democratization can favor tariffs as readily as freer trade. Some contend that democracies (which limit rent-seeking) are more likely to pursue free trade and to stabilize currencies than are nondemocracies, but this must allow for a host of exceptions. For democracy to emerge, countries must be convinced that reformed political institutions are consistent with economic growth and trade, and they need examples of successful transitions to make such a choice on their own.

DOES FREE TRADE LEAD TO DEMOCRATIZATION?

There are many political and economic causes of democracy. When authoritarian regimes are defeated in war, their successors may sometimes become more democratic, though this process can take time. Sometimes occupying powers foist democracy upon a pliable enemy population. In other cases, defeated nations reject occupation and opt for repressive measures to regain their strength. Economic crisis also becomes a means of political change. States frequently install new political regimes after a sudden and drastic downturn in the economy. Although these are sometimes authoritarian, they more often move in a liberal direction to gain support for necessary economic change. Yet it is questionable whether free trade itself is the single key factor favoring democracy. Recent writers have claimed that democracy is likely to emerge when the prospect of war declines in a context of greater wealth—states can afford to be democratic when the fear of war recedes. Wealth is also very important. Trade may sometimes lead to wealth, but even countries with relatively low trade to GDP ratios can establish and maintain democratic systems if they are wealthy enough. The United States was in this situation in the 1920s. Although higher trade ratios characterized the small European nations that moved toward democracy in the nineteenth century, again wealth was a foundation of further political change. India is one of the few examples of a nonwealthy democracy, and of course its growth rate has increased rapidly in recent years. Whether formal democracies in Africa or Latin America can sustain their positions again seems to depend upon an assumption of continued economic growth. Econometric studies find that democracy is correlated with high per capita GDP, a high share of income going to the middle class, a high primary-school enrollment, and near-parity in male-female primary-school achievement. Trade does not play a central political role in this outcome.

SEE ALSO Capitalism;Nationalism;Socialism and Communism.

BIBLIOGRAPHY

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Richard Rosecrance