THE BEAR'S LAIR Back to the Kaiser's world
By Martin Hutchinson
As anyone who has played "Diplomacy" knows, the economic and political world
from 1871 to 1914 was one of Manichean struggle: countries attempted to
establish spheres of influence behind high tariff barriers, and multiple power
centers between which war was by no means impossible. As the mildly social
democrat nirvana of the 1990s recedes into history, it is becoming increasingly
clear that weak US leadership and poorly designed policies have led us back
into a similarly unpleasant economic environment.
The great advantage of Pax Americana, as of Pax Britannica between 1815 and
about 1870, was that a single hegemonic power was able to enforce trading rules
and prevent a descent into economically damaging protectionism. In the early
19th century, once Britain's economic position had been righted by the
Liverpool
ministry from the excessive debts incurred in the Napoleonic wars, the move
toward free trade was steady. The Corn Laws were reduced in 1828 and abolished
in 1846, while further tariff reductions culminating in the Cobden-Chevalier
Treaty of 1860 minimized British tariff barriers.
Most of those tariff reductions were unilateral, but the 1860 treaty pushed
France also in the direction of free trade. Meanwhile US tariffs remained
moderate until the Civil War, as the South had the ability to veto tariff
increases by the protectionist North, with a final tariff reduction under the
much maligned president James Buchanan in 1857 reducing US tariff rates to an
average 18%.
Germany was divided between protectionist Prussia and the free-trading
Rhineland, while Austria-Hungary and Russia retained high tariffs both internal
and external. Nevertheless, until the 1860s it appeared that the world was
moving gradually towards free trade, as economists were already recommending.
After 1870 Britain was no longer economically hegemonic - partly because of the
damage done to her economy by her unilateral tariff disarmament in 1846-1860
while other countries retained protection - and tariffs began to rise. The US
Lincoln administration raised tariffs twice, in 1861 and 1862, and further
tariff increases were enacted regularly, culminating in the ultra-protectionist
McKinley tariff of 1890, with a 50% average rate, enthusiastically supported by
Andrew Carnegie seeking to protect his steel business from British and now
German competition.
Germany, united in 1871, increased its tariffs sharply in 1879. Thereafter, it
pursued a policy of protectionism, seeking to draw smaller countries into its
sphere of influence, which was to continue through the Nazi economic order of
the late 1930s. France also increased tariffs after the country's defeat of
1871, passing a particularly protectionist tariff law in 1892.
Thus while 1870-1914 saw the apogee of free international finance, it saw
marked backsliding in the area of free trade. By 1900, all the major powers
except the luckless Britain were thoroughly protectionist and industries such
as steel and automobiles grew up along nationalist lines. World War I
intensified this trend, the Smoot-Hawley Tariff of 1930 carried it to its
absurd destructive extreme, and it was only after World War II, when a new
hegemon emerged, that tariffs once more began to decline.
The rise of tariff protection after 1870 also changed the relations between
states. Before 1870 small states, for example those of western Germany, had
been able to prosper by forming global trade relationships, perhaps with
limited free-trade areas between themselves such as the German Zollverein.
After 1870, this was no longer possible. Germany and Italy were formed as
economically and politically powerful states, and smaller states such as those
in the Balkans prospered only by attaching themselves to a major power.
Outside Europe, the period after the 1870s was the apogee of imperialism, with
countries in Africa and Asia that had remained independent in spite of their
technological backwardness becoming increasingly dominated by one or more
European powers or in some cases, such as China, the subject of diplomatic and
occasionally military conflict between them. It was not an accident that Japan
felt the necessity in 1868 of modernizing itself in order not to fall victim to
one of the Europeans; no such modernization had appeared necessary in 1820.
Kaiser Wilhelm II, to his contemporaries a bogeyman, to modern eyes a figure of
fun overshadowed by his dreadful successor, both epitomized the 1870-1914
period of protectionism and, together with his mentor Otto von Bismarck, was
its most successful protagonist. He believed in a German sphere of influence
including Austria, much of the Balkans, the crumbling Ottoman Empire and, he
hoped, eventually the oil-rich Middle East, held together by the Imperial
Berlin-Baghdad Railway project. Germany's tariffs sufficed to fund a gigantic
army, social security provisions that were generous by the standards of the
time, rapidly improving living conditions and, after 1900, an embryonic navy
that was regarded as a serious threat by British governments.
Kaiser Wilhelm II's world view was to modern eyes thoroughly unpleasant -
witness his speech to troops departing to fight the 1900 Boxer Rebellion "When
you come upon the enemy, smite him. Pardon will not be given. Prisoners will
not be taken. Whoever falls into your hands is forfeit. Once, a thousand years
ago, the Huns under their King Attila made a name for themselves, one still
potent in legend and tradition. May you in this way make the name German
remembered in China for a thousand years so that no Chinaman will ever again
dare to even squint at a German." It was a long way from the civilized waltzing
of the 1815 Congress of Vienna, and protectionism and the lack of a hegemon had
caused the change.
From the 1970s, it became obvious that the world was moving back to a system of
free international finance, similar to that of 1870-1914, but its move to free
trade resembled more the middle rather than the tail-end of the 19th century.
After the fall of communism in 1989-91, the US became a truly unchallenged
hegemon, far more powerful in relative terms than Britain in 1815-1870.
International institutions such as the World Bank, the International Monetary
Fund and even the United Nations spread a center-left, mildly statist
big-government version of the US worldview, the "Washington Consensus" among
the nations of the new emerging markets. Small countries, in particular those
emerging from Soviet domination, could hope to prosper on the basis of
universal free trade, and the success of the east Asian tigers showed that
small size was no barrier to economic success.
Beginning in 2000, and more particularly since the financial crash of 2008 and
the Barack Obama presidency, the world has changed again. The US is no longer
an unchallenged hegemon, far from it. After one barely successful war in Iraq
and another in Afghanistan that seems increasingly likely to end in failure,
the United States' ability to project power is greatly diminished, its moral
authority even more so. The Washington Consensus has broken down, being
replaced on the left by a reversion to out-and-out statism, on the right by a
fierce determination to reassert control over runaway government finances and
rent-seeking banking systems.
Small countries are finding the world an increasingly unforgiving place. Of the
former Russian satellites, Georgia was invaded by Russia without significant
opposition from the US, Ukraine has reverted to Russian domination, Kazakhstan
has reversed its previous tentative opening to the West and Kyrgyzstan appears
to be descending into chaos.
In the Middle East, Iran is increasingly self-confident, Turkey has turned away
from the West, the Iraqi democracy appears likely to be short-lived and Israel
is increasingly beleaguered. In Latin America, increasing numbers of countries
are falling prey to the followers of the sinister Hugo Chavez. Even in Asia,
which had appeared capitalism's most shining monument, Thailand and Sri Lanka
are no longer progressing smoothly to a future of democracy and ever-increasing
prosperity, while Japan appears less and less an example to follow.
As for free trade, the Doha round of trade talks is dead and buried, and even
bilateral agreements with the United States have no chance of being ratified by
the current congress. The economic downturn has produced numerous new trade
barriers of one kind or another, even if full 1930s-style protectionism has so
far been avoided. The financial services sector is wholly unreformed from its
rent-seeking metastisization since the 1980s, and increasing numbers of
governments are erecting barriers to its depredations in the form of capital
controls of one sort or another.
The US is unlikely ever to enjoy again its hegemony of 1990-2008. Its economy
retains the flexibility that had made it so admired, but the burden of state
spending has increased by over one-third since 2005 and taxation will
inevitably rise in response. Most important, a decade and a half of ultra-low
interest rates have de-capitalized the economy, not only leaving American
savers without enough savings to finance their old age, but also leaving
American business starved of capital for expansion, as ever-increasing
percentages of the available finance pool head into the government deficit maw.
Going forward, US living standards will inevitably decline, while politically
the likely result will be a retreat into isolationism and a refusal to get
involved in the intractable problems of the international order. Even if the
United States attempts to project its power under some new president, it will
find financial constraints prevent it from doing so.
The international order has thus returned to the Kaiser's world of multiple
states, high tariff barriers and unfair trade competition. Small countries will
have no alternative but to seek protection in the spheres of influence of their
larger neighbors. Participants in the protectionist new world order will be a
diminished United States, a sclerotic and inward-looking EU, projecting its
power no further than the Balkans, one or possibly two left-leaning Latin
American blocs led by Brazil and Venezuela (which may or may not combine), a
resource-rich and oppressive bloc led by Russia, a highly unstable Middle East
dominated by Turkey and Iran, and an impoverished and unstable south Asian bloc
led by India.
By far the most powerful and successful bloc will be led by China, which will
include much of Southeast Asia and large parts of Africa. There will remain a
few substantial independent states: an isolationist Japan, an unstable
Indonesia, perhaps a modestly prosperous Australia. However, overall the world
will geopolitically look like that of the aggressively competitive 1890s or, if
we are unlucky, the haunted 1930s.
And ironically enough, the new Kaiser Wilhelm II will be Chinese.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-10 David W Tice & Associates.)
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