Part 1

One of the problems that we have when talking about trade is that trade agreements that are in place between countries and the conditions under which trade takes place is very different from "text book" assumptions and as Industry has developed it has become ever more complicated and far more than reduction of tariffs and custom duties. So, trying to talk about whether countries became rich through "free trade" or "protectionism" is like asking whether Private property that exists in today's Capitalist countries can be justified through Lockean provision. It is not that it is right or wrong, it is just that it does not applicable to the existing conditions. Most countries (both Industrialized and Industrializing ones) have considerable State intervention with regards to Trade Policy.

Having gotten that out of way, it is very much true that the State did use many protectionist measures to allow for buildup and development in Domestic Industry against Foreign Competitors and this measure was very actively supported and encouraged by the Heads of those Industries. However, it was not protectionism alone that was used. What really made them develop was a coherent Industrial Policy without which it is not possible to put 'protectionism' or trade policy in a proper context. Merely using these devices was not enough to step up on the developmental ladder much less create competitive Industries since that requires to be backed up by other policies namely a continuously developing and improving Infrastructure and acquiring of education (since not having those can and have acted as major supply constraints to needs of growing Industries), Banking Industry which can funnel savings of the population to the Industries and yes, trade. The development of Investment Banking was a great force in improving development of Industry through allowing greater and greater number of Large Corporations to mange the vast productive forces that had been created especially in countries like Germany or the United States.

all industrialized nations used protectionism to get their industry started, not universal protectionism, but aimed at what was high tech at the time. True? False? Murky?

This is not exactly a new theory and has been proposed by a variety of thinkers ranging from Alexander Hamilton and Frederich List in the 19th century to Ha Joon Chang today. If you look at articles published by Marx and Engels on the subject of Free Trade you will find that they echo the views of these thinkers though their focus was on the movements in the Capitalist world which would in their view lead towards Socialism. To answer this question, I will start with theoretical explanation and then move on to practical demonstrations. I will be focusing on East Asian Tigers since I know more about them as compared to other countries. It would also be difficult to talk about the experience of each and every developed country. However, Chang has noted that many features of East Asian Tigers were also used by Britain and Germany.

Initially, we begin with agriculture.The savings generated from improved productivity are to be funneled into newly developed manufacturing Industries which owing to the low development of productive forces of the economy are likely to be low value added ones. This is the area where a developing nation has a competitive advantage over a developed one. It makes sense in such a case to adopt relative free trade in order to not only improve productivity but also boost exports which help the State in gaining precious foreign currency to pay for imports required for more advanced Industry. The problem comes when we talk about more advanced Industries like (say) Steel, Automobiles and Aerospace. These Industries require a long period of nurture before they can compete with the established giants in the world market. Like (good) exams, when properly done this can be very useful for fast growth because it can't easily be fudged.This is the economics of development which is required for developing countries and which is different from economics of efficiency.

That dosen't mean that they are isolated from the world economy because that is the surest way to make them rent seekers as is the case with Construction companies in (say) India or Indonesia. By contrast, Chinese and South Korean companies are far more competitive and (for the most part) genuine wealth creators. This is because for the very beginning, the State had put export requirements on them in order to become competitive. Continuously being subjected to rigorous export discipline allows the State to benchmark the progress made by their Companies. Setting standards allows the firms to know what is the ideal which they have to seek.This forces these firms to continuously upgrade their technologies in order to move up the value chain. The policy of simultaneous provision of subsidies, unconditional loans and even Industrial espionage (as a part of Economics of development) and competition in open market abroad and at home through slow removal of barriers on foreign companies (economic efficiency) may sound contradictory but it is not.

No country can remain isolated from the world economy at large and hope to develop. Even in the Soviet Union during the periods of Stalin's Five Year Plan, the State signed contracts with American companies like Ford in order to borrow technology, get to know the technical know how as well as understand the managerial and organizational techniques that would help them to improve the output in their Industry. In 1950's during Khrushchev rule, many people were sent to learn the secrets of the highly productive American agriculture in order to solve the persistent shortage of food in the country and without having to rely on "bourgeoisie" mechanisms that generated inequality in order to allow for rational allocation of those resources.

A more Capitalist example can be seen in Meiji Japan. Humiliated when forced to open up to foreigners, the Japanese Nationalists were determined to get ahead by embarking upon the process of Industrialisation. Japan was prohibited from treaty (which it was forced upon it) from imposing tariffs to protect Domestic Industry and embrace relative free trade. This was useful at least when Japan's main export was silk which could based upon lower costs could withstand competition in the world market. On the other hand, when the Government sought to push into newer Industries they found out that the Capital required was much higher and highly risky. The private sector has mistakenly got the reputation of being "risk takers" where in reality they are risk averse. The Private Sector is good at commercialization of technology which is different from risk taking.In fairness any new venture requires risk.The prohibition of tariffs therefore forced the Government to directly open factories itself and provide all sorts of aid (which I will go in more detail below) above in order to develop Japanese Industry. Imports were liberalized if the export oriented Industries were to require it in order to develop competitive advantage. This was a major success.In true European Capitalist fashion, it later even picked up colonies namely Taiwan and Korea.

Post World War 2, the role of MITI was unintentionally strengthened by the American occupiers in order to break the monopoly of the existing Japanese Conglomerates. This later went on to set the track for rest of East Asian Tigers who learned from the Japanese example. When the Americans gave back control of the country to the Japanese, MITI set to work. It was able to subject the large enterprises to export discipline and plan the development policy through setting terms for Joint Ventures, acquisition of foreign technologies, licensing to firms etc. MITI controlled the banking system by providing loans to the ordinary banks against the loans which they had lent out to commercial enterprises through the Japanese Central Bank. It continued this practise of "overbanking" in parlance of the bankers well it until 2 decades later. In order to develop the Heavy Industry, Japan hiked tariffs in the 1950's and this remained in place until trade liberalization in 1964. Japan developed competitive advantage in Steel, Chemical and later in the fast developing Electronics Industry allowing domestic companies to flourish.

Initially, the domestic Companies had to set up Joint Ventures with Foreign ones in order to get the know how. However, Foreign Companies have no incentive to help their domestic partners by transferring technologies. In comes the State. It forced foreign companies to compulsorily share their technologies and forced content localization as a condition for allowing exports. Companies were also free to re-engineer products from foreign Companies. No country can develop until it develops indigenous technology. The next step is digestion of technology and to become as independent as quickly as possible from foreign partners. One problem that has been noticed in some developing countries (Thailand, Malaysia etc) is that it can rarely remove it's dependence upon foreign firms for technology. Foreign Direct Investment is hugely important but by itself it can never push a country towards being developed. That is why Thailand never developed but South Korea or Japan did. Japan threatened IBM that it will not allow it in the country if they didn't accept "administrative guidance" by MITI and lowered royalty prices.