The theory of comparative advantage is one of the really great theories in the behavioral sciences. It implies that even if country E has an absolute disadvantage at producing every kind of good compared to country P, it can still gain by finding goods for which it has a comparative advantage, and specialize in producing those, and trading for other goods with P.
But the theory of comparative advantage (like another great theory, the theory of kin selection) needs to be handled with care. Even if a country benefits in the aggregate from international trade, there may be losers as well as winners. As the world came to be increasingly tied together by international trade, conflicts over free trade and protectionism moved to the fore of politics. In nineteenth century England, the free traders, representing industrialists and urban workers, took control, opening the country to cheap imported food. But in the 1870s, both Germany and the United States arrived at political settlements that favored protectionism over free trade.
Germany was unified in 1871. The densely populated country had a comparative advantage in labor and a comparative disadvantage in capital and land. Free trade for Germany would have meant specializing in labor intensive goods, and importing capital intensive goods from more industrialized countries like England, and cheap food from the more thinly populated Americas and Eastern Europe. Instead, Germany put up high tariff barriers to protect her industrialists and landowners – a “marriage of iron and rye.” Germany’s industrial working class was pro-free trade (so was Karl Marx), but their main political vehicle, the Social Democratic Party, was excluded from the government. This political settlement lasted right up to the First World War; on some accounts, the fraying of the protectionist ruling coalition was a factor pushing Germany toward war.
The United States had a different protectionist coalition. In the 1870s the country had an abundance of land, but it was short of labor and still in the early stages of industrialization. Protectionism, supported by Republicans, promoted national industry, and kept high-wage American workers from having to compete with low-wage workers overseas. The agricultural South and West were the big losers under this scheme, but there was a compensating advantage for the South. The compromise of 1876 put the Republican, Hayes, in the White House in exchange for ending Reconstruction in the South. White Southerners then had a free hand to set up a one party state under the Democrats, committed to black disenfranchisement and white rule. When the upstart Populists started winning support in the South and West on a free trade platform, they were beaten back by Southern Democrats playing the race card. The condominium between Republicans and Democrats lasted until the Great Depression of the 1930s.
In Latin America at the same time period, the free traders were largely in the ascendant. In Brazil, for example, the ruling coalition stood for café com leite – coffee with milk – São Paulo coffee planters and Minas Gerais cattle ranchers committed to an export oriented economy. Brazil had a lot of vacant land that could be opened up for coffee production, and was able to attract European immigrants to help with the harvest.
In Guatemala by contrast, free trade took a more sinister turn. From 1871, a “liberal” government facilitated the expropriation of Indian lands to promote coffee production, all in the name of progress. Indians were recruited to work on the plantations by a combination of forced labor and debt peonage. The country came to resemble a penal colony under the control of a large standing army.
Joseph Conrad spent his early life as a sailor, and had plenty of chance to see the dark underside of globalization, most famously the Congo rubber trade as depicted in Heart of Darkness. In Nostromo, set in a fictional Latin American republic, he wrote
Liberals! The words one knows so well have a nightmarish meaning in this country. Liberty, democracy, patriotism, government – all of them have a flavor of folly and murder.