Nat Dyer is an author.
In December 1703, following a stunning English and Dutch naval victory over the French fleet, a well-connected and cunning English diplomat, John Methuen, convinced the King of Portugal to sign a trade deal. It eliminated tariffs for English woollen cloth entering Portugal and gave Portuguese wine preferential treatment in England. In the decades that followed, trade boomed between the two countries in both commodities.
This exchange of English cloth and Portuguese wine would become the stuff of legend.
The cloth and wine example was used by the stockbroker-turned-economist David Ricardo in 1817 to explain why freer international trade benefited all countries, as long as they specialise in what they make most efficiently. Ricardo’s principle of comparative advantage has been praised by generations of Nobel winning economists as one of the profession’s greatest insights. Paul Samuelson called it a “beautiful” and the “unshakeable” basis for international trade. Paul Krugman, while shaping the pro-globalisation consensus in the 1990s, wrote that Ricardo’s idea was: “utterly true, immensely sophisticated — and extremely relevant to the modern world.”
Ricardo has come in useful again and again. When, White House economist Greg Mankiw got in political hot water in 2004 for saying that offshoring American jobs was “probably a plus for the economy in the long run” he lent on the 200-year-old theory. As The New Yorker explained, economists still rely on Ricardo’s “extremely powerful” insight: the story of “England exchanging its surplus cloth for Portugal’s surplus wine, to the benefit of consumers in both places.”
If only the public and politicians could grasp the counter-intuitive logic of Ricardo’s “difficult” idea, Krugman had suggested, then opposition to free trade would disappear. The problem, Mankiw wrote, was that the public were “worse than ignorant” about good trade policy.
Now, with Trump’s will-he-won’t-he trade wars and tariff brinkmanship, similar voices have been heard again. What we need in the age of Trump, economist Justin Wolfers, wrote recently — betraying a quasi-religious devotion — is “a sermon about Ricardian comparative advantage and gains from trade.”
Yet, curiously, too few economic theorists have interrogated the actual, messy history of trade.
Gold, cloth and chains
All major economic powers — Britain, Germany, and yes the USA, and China — rose to their position while protecting their industries with high tariffs. Even a quick look at economists’ favourite example of win-win trade between England and Portugal reveals a radically different picture.
As I describe in my book Ricardo’s Dream, the classic English and Portuguese exchange was about politics and power, not just economics. The naval victory, at the Battle of Vigo Bay in 1702, was so important because the ailing Portuguese Empire was caught in a geopolitical bind between the rising northern powers of England and France. John Methuen signed two military treaties with the Portuguese before he sealed the commercial deal. With the Cloth and Wine Treaty, Portugal bought not just products but protection.
The deal helped ruin Portugal’s own textile manufacturing, as Methuen predicted, and even its increased port exports left a huge trade deficit with England decade after decade. The trade between the two countries was balanced with a commodity almost never mentioned by trade theorists: gold from Brazil.
The Portuguese had struck gold in its South American colony in the 1690s. The Brazilian Gold Rush lasted most of the 18th century and doubled world production. More than half of this gold ended up in London (enriching, among others, Sir Isaac Newton). The gold flows were no secret. Even Adam Smith, Ricardo’s fellow classical economist, wrote: “Almost all of our gold, it is said, comes from Portugal” or more accurately from “the Brazils”. And, yet, the connections are rarely made.
One more product, excluded from the conventional story, comes into view when we look at how the gold was mined. It is a product no longer legally traded: human beings. Brazil’s gold rush relied on huge numbers of enslaved Africans, transported in chains across the Atlantic. Brazilian gold supercharged the transatlantic slave trade and, as contemporaries observed, turned the West African Gold Coast into a “slave coast”.
That’s not all. Much of the English cloth — in some years around 85 per cent — that landed in Portuguese ports was re-exported to Africa to be exchanged for captive men, women, and children. In the global historical view, the trade in English cloth and Portugal wine appears to be an appendix, and facilitator, of the transatlantic triangular trade.
But, Ricardo’s famous model excluded questions of power, empire, and exploitation from the beginning. As Matthew Watson, professor of political economy at Warwick University, has written, Ricardo’s theory is “a mathematical facade behind which the actual historical social relations of production of the real England and Portugal are deliberately taken out of the equation”. These are “explicitly oppressive social relations of production based on slave labour and the imperial policing of national hierarchies”. Those who hold on to the old story of English cloth and Portuguese wine have the wool pulled over their eyes.
Of course, other episodes of international trade paint a much rosier picture: of how trade has expanded peoples’ worlds, their access to products, and the flow of news and culture. Yet, the English and Portuguese history does fit into a pattern of so-called unequal treaties that Britain imposed on nominally independent states — such as Siam (Thailand), China and Persia — in the 19th century. The political economist Ha-Joon Chang has written that this first period of economic globalisation was “‘made possible, in large part, by military might, rather than market forces”.
The backlash
In the 1980s, fears of the rise of a new protectionism pushed policymakers to create a vast web of bilateral, regional, and global trade agreements. Political parties whether on the right or left embraced a very specific type of globalisation, which was sometimes seen as a universal law akin to gravity. “Free trade” became a dogma that was used, in part, to tilt the global trading system in favour of large multinational corporations and Wall Street, giving them new rights and powers and plumping their profits. CEO pay skyrocketed while regular, working people often lost out, for example, the millions of Americans who lost their livelihoods with the China Shock — after China joined the WTO in 2001 and flooded the US with cheap products.
All the while, economists touted the benefits of trade as long as their models showed that the winners could theoretically compensate the losers, regardless of whether it happened or not. Another aspect excluded from economists’ models was global power competition, making them increasingly less relevant to a political class fixated on a resurgent China.
Fuelled in part by the backlash to globalisation, Donald Trump won the White House and is now back for a second time. He has made good on his promise to turn away from free trade surrounding himself with advisors such as, Peter Navarro, who has argued that: “Ricardo is dead!” Navarro, of course, is not worried about how the West exploited the wealth of its formal and informal colonies but how in the 21st century the USA has, in his eyes, been unfairly taken advantage of by China’s state capitalism. America’s turn to tariffs is a recognition of its fragility, not strength. Progressives will disagree with many of his solutions, but Navarro is surely right that “the economics profession must do a much better job than David Ricardo of modelling trade in the real world.”
Now, Trump is speaking loudly and hitting allies and enemies alike with a big stick labelled ‘tariffs’. He has mobilised a real, justified complaint against hyperglobalisation to promote a highly divisive and potentially damaging policy. Along the way, he has made the power and politics of trade policy, so often concealed or denied, plain for all to see.
The constitutional wrecking ball of Trump’s first few weeks of his second term have rightly outraged many. But on the issue of tariffs, a desire to return to the ”old Ricardian verities” and argue that they are always and everywhere bad is a road to nowhere. Trying to counter Trump with ‘fairy tale’ economic theories that helped fuel his rise is like trying to put out a house fire with matches. Opposition to Trump’s harmful and damaging policies requires a more solid footing.
We need a new, genuinely progressive economics with its eyes focused on the real world and its history, rather than abstract models built on unreality. This has begun to emerge in the past decade. There is a growing acceptance that whether tariffs are good or bad depends on context, that there is a difference between targeted and across-the-board tariffs, and that new forms of protectionism could reduce inequality or ecological destruction.
Much turns on whether economics can continue to evolve into a field of study that is, to borrow a line, genuinely true, sophisticated, and relevant to the modern world.
@natjdyer.bsky.social
Leave a Reply