I have loved tea since I was but a child. So, the apocryphal story goes, did James Watt, the man who revolutionised the steam engine. Watt, when sitting in the kitchen next to his mother, watched the lid of the kettle bob as steam pushed it up and down, and in an eureka moment recognised the power that steam could unleash.
My love for tea burdened me with the inescapable role of being the teamaker of the family. Watt’s gave birth to the Industrial Revolution.
Of course, Watt wasn’t alone. Some say the bigger catalyst was an invention by the other famous James of that time – James Hargreaves. He made the Spinning Jenny, which allowed spinners to run eight spindles at one go, dramatically speeding up the process of making yarn.
Hargreaves laid the foundation of Britain’s supremacy in producing cotton yarn at Manchester, which went on to conquer the world and crown England as the founding monarch of industrial capitalism. At least, that’s what we have been told in our history and economics classes.
In reality, this is utter poppycock.
The True Catalyst: Tariffs, Not Inventions
The real innovation that led to the victory of Manchester cotton and unleashed the Industrial Revolution was import tariffs.
In fact, the history of ‘free markets’ has a shamefaced prehistory of tariff protection.
Before the Industrial Revolution, Indian cotton ruled the world. By the 1790s, Britain had started imposing a 15-20 percent tariff on Indian cotton imports. This was raised to 40-80 percent by the 1810s and continued to stay at nearly 50 percent till the mid-19th century.
The exact reverse was done by the Raj in India. In the late-18th century, British textiles entering India faced a tariff of 7-10 percent. By early 19th century, it had dropped to 3.5-5 percent. And by the mid-19th century, tariff on most grades of British textiles imported into India was brought down to zero.
This is the secret history of the industrialisation of Britain and the systemic deindustrialisation of India.
Trump’s Tariff Wars: A Modern Parallel
Everything was done through raising tariff walls to protect British capitalists, and reducing tariffs to destroy India’s ‘proto-industrial’ textile trade.
This is exactly what Donald Trump is trying to do to revive American industrial capitalism: raise a wall of tariffs to ensure that Making in America becomes Great Again.
Trump believes that free-trade and globalisation has flooded the US market with cheaper goods from countries like China, Mexico, Canada, and India. This has destroyed US manufacturing and millions of hard-working Americans, who once had stable, well-paying jobs in factories, have become unemployed.
On the face of it, what Trump is saying seems to be backed by data. The US was the unquestioned leader in global manufacturing till 2009, when China took over. China’s share has jumped from less than 10 percent in 2005 to over 30 percent now. The US’ share, on the other hand, has dropped from 22 percent to less than 15 percent, in the same period.
Domestically, the share of manufacturing in the US' GDP dropped from more than 25 percent in the 1950s to just 10 percent now. The employment numbers are even worse. 70 years ago, manufacturing accounted for nearly one-third of all jobs in the US. Now, it’s share is less than one-tenth.
After World War II, the US steadily displaced all other Western capitalist powers as the home of manufacturing, by continuously adding more plant and machinery every year. This changed in the 2000s, when for the first time, real and inflation-adjusted investment in factories began to fall. This happened in 17 out of the 19 key industrial sectors. And the decline coincides with ever-increasing outsourcing to China.
However, this picture is only partly true.
While the share of manufacturing in the overall economy of the US dropped sharply when calculated in current prices, once you adjust for inflation, its share has remained steady over the past 75 years.
It has fluctuated between a narrow 11-13 percent band. In fact, manufacturing’s share in real GDP was higher in the mid-2000s than it was in any year between the 1970-2000.
This divergence, between the nominal and real shares of manufacturing, took place because the price of factory-made goods in the US rose at a much lower pace than the rate of inflation in all other sectors. While the overall price level in the US economy rose at over three percent per year since the early 1950s, prices of manufactured goods increased at just two percent annually.
The real crisis in US manufacturing, then, is not that American factories don’t produce much, but that they do not have pricing power. That also means that the real reason for the loss of factory jobs in America is automation, and not outsourcing to the developing world.
India and the Future of Global Trade
Of course, cheap imports are one big reason for the loss in pricing power. Automation could have continued independently, without American manufacturing companies reducing the prices of what they made. That would have helped them increase their profit margins without hiring more workers.
Surely, Donald Trump knows this. That is why he is using tariff as a weapon to increase the profit margins of US manufacturing companies. He cannot really believe that big American manufacturing companies – largely in chemicals, food processing, computers, and petrochemicals – will suddenly sacrifice the advantages of automation and employ more people. All they will do is raise prices to make more money.
In fact, Trump is trying to use tariffs to bully countries into opening their doors to US companies – Tesla, Amazon, Harley Davidson, Anheuser-Busch to name a few. This is reminiscent of how the colonial state used tariffs to push Manchester cotton into India at the expense of Indian cotton producers.
Trumps’s tariff threats couldn’t have come at a more critical time for us, as India is already facing its own crisis of manufacturing.
Data compiled by the Centre for Monitoring Indian Economy (CMIE) shows that between 1999-2000 to 2009-10, manufacturing in India’s corporate sector grew at a real, inflation-adjusted, rate of 8.3 percent. In the next 13 years, the annual average dropped to just 5.3 percent. Our GDP growth rate, during the same two periods, was 6.3 percent and 5.9 percent respectively.
That means, the factory sector was growing much faster than India’s economy in the first decade of this century. It is now lagging behind and dragging the economy down.
Yet, Trump’s neo-imperialist push is bound to face obstacles that the British Raj didn’t encounter.
India now has a strong capitalist class, which has benefitted from years of favourable government policies. We have many captains of industry in the global rich list. They have the financial power to fight it out with the Musks and Bezoses of America.
We are already seeing it unfold in the disputes over satellite-based internet – the bread and butter of Elon Musk’s Starlink. For now, there’s a ceasefire, where both sides are willing to collaborate.
But there will be similar conflicts in the EV space, where Tesla is trying to ram its way through. Issues will also arise if the government reverses its stance on Amazon and dilutes e-commerce norms.
The Big Business Battles are going to keep erupting between ‘metropolitan’ and ‘domestic’ capital. And no one can predict, right now, who will ultimately win.
(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)