This is the final part of a two part series asking the question, “Can free trade be used for Imperialism?” So far, I have said that the over arching thesis of the article discussed (information can be found on the previous post) is probably true. Britain at this time was still imperialistic. The authors define two types of Imperialism, formal and informal. Formal is exactly Imperialism and at this time is being cash in an anti-Imperialistic shadow. Informal is what we are now going to talk about. Do these countries that are agreeing to trade with Britain becoming economically dependent, thus becoming apart of an informal empire?
My argument here is no. Free trade is not imperialism. When countries become more dependent on each other it happens pretty evenly. Once the countries are engaged in trade, it will only hurt both of them to remove themselves from it. Therefore, one country even if more developed will not have any power over the underdeveloped country.
For example, if under developed country ‘A’ trades bananas to developed country ‘B’ which invests into building factories there they both are benefiting. This also plays into the idea of “Comparative Advantage.” If country ‘A’ feels like it is being taken over and losing it sovereignty to country ‘B,’ then they have three choices, tariff, embargo, or do nothing.
Since this post has “free trade” in it, we will assume they will not tariff as these can act like marginal embargoing. If you tariff incoming goods or tax foreign direct investment then the marginal business or investor will stop sending goods and money to this country.
If country ‘A’ chooses to embargo, then they lose all foreign direct investment (FDI) to build these new factories. This would cause job loss and physical capital would have been wasted. If country ‘A’ is wealthy enough it is possible that they could nationalize these factories and keep both the human and physical capital useful. Even though the country would be getting the factories at a discounted rate, it would still costs a lot to run. You would have to hire bureaucrats and government officials to keep it going. These people would have to be very skilled businessmen and more than likely would come with a high price tag.
Since country ‘A’ choose embargo, they also loose customers in their banana exporting. This would also cause a lost of jobs and domestic investment. Entrepreneurs would have seen that the market for bananas had opened up both with more customers and less tariffs. It could be easy to see how this would be a net loss for country ‘A.’ Country ‘B’ definitely loses here because they have lost all of their investments along with a stable and cheap importation of bananas.
Now if country ‘B’ wants to exert force upon country ‘A’ because they may be politically unstable. They could do the same three things, tariff, embargo, or do nothing. If country ‘B’ tariffs it would be the same as country ‘A’ by being a marginal embargo, so lets focus on that.
If country ‘B’ embargo’s country ‘A’ to try and gain political power then country ‘B’ must close down all the factories and stop buying bananas from country ‘A.’ If we assume that the investors of country ‘b’ were private, now country ‘b’ is going to have angry investors. Country ‘b’ has told them that they are no longer allowed to run their factories. Country ‘b’ citizens are not going to be very happy either because they are no longer provided bananas which could be a good and affordable food item. Country ‘A’ is losing here too. They have lost the factory jobs and the banana customers like in the previous example. In fact, country ‘B’ would feel more hostility towards country ‘A’ for doing this and would not cause them to beg country ‘B’ to come back. In fact, there would be more of a chance of war (Smoot-Hawley Tariff). The main reason why country ‘A’ could survive is because of the substitution effect. They could find foreign investors that would buy these factories and enter in the same agreement. Country ‘b’ would have to find a new substitute for bananas.
If country ‘a’ finds substitutes for their FDI then Britain did not gain any political power. In fact, one could imagine that they would lose much power. This is somewhat what we saw with Cuba and the United States. The United States has no more power than they had on Cuba before the embargo. If anything they have less and Fidel Castro has used the embargo as an excuse to his people to turn them against the United States. Japan on the other hand has had very open markets. Shouldn’t they be controlling the world?