EC120 Topic 11, Week 16: Globalization, 1815-1914: Trade and Development

The World Economy in the Long 19th Century

• The 19th century witnessed radical changes in the world economy, marking the global impact of the Industrial Revolution.
• Industrialization spread across Western Europe, with the USA and Japan emerging as significant economic powers by the late 19th century.
• Technological advancements accelerated, leading to a Second Industrial Revolution around 1860-1900.
• International trade expanded alongside domestic economies, facilitated by technology and shifts away from mercantilist policies toward Free Trade, particularly from the 1840s to the 1860s. However, a retreat occurred from the late 1870s with the rise of neo-mercantilism.
• Globalization's first phase took place from the 1870s to 1914, despite the resurgence of mercantilist ideas.

Stages in the Long 19th Century (1815-1914)

• Britain completed the first Industrial Revolution by around 1850.
• The international economy moved toward Free Trade during the 1840s-60s, marked by the symbolic abolition of the Corn Laws in 1846.
• Industrialization spread across Western Europe during the 1850s-60s.
• The Second Industrial Revolution spurred continuous technological advances in Europe and the US from the 1870s onwards.
• Germany rose to prominence in steel production and advanced in organic chemicals and electrical engineering.
• Japan industrialized rapidly after the Meiji Restoration in 1867/8, initially leveraging abundant labor and later adopting capital-intensive technologies from abroad.

Globalization: Market Integration & Income Convergence (1860s-1914)

• Commodity market integration occurred with a dramatic decline in price divergences.
• Integration between Europe and its offshoots, including the USA, increased.
• Mass migration occurred, mainly from Europe to the New World.
• Capital market integration saw growth in foreign portfolio and direct investment.
• Monetary integration was facilitated by the International Gold Standard from the 1880s to 1914.
• Convergence occurred in the “Atlantic economy,” while divergence was seen with the “third world.”
• Neo-mercantilism resurged, leading to a retreat from Free Trade from the late 1870s.
• According to Findlay & O’Rourke, the world’s economic structure was radically transformed in the century following Napoleon’s defeat, making it virtually unrecognizable to an observer from the late eighteenth century.

Global Population & Trade

• The mismatch between population and share of world trade in 1850 highlights Europe's dominance relative to Asia and the Americas.

Industrialisation, mid-19th century to 1914

• Technological advances across a broad range of industries during 1860s – c.1900 is often called the Second Industrial Revolution
• Landes’s classification:
  • “New materials and new ways of preparing old materials” including organic chemicals and mass-produced steel
  • “New sources of energy and power”, notably:
    • Steam power (turbine)
    • Electricity
    • Internal combustion engine
  • “Mechanisation and division of labour” including, among many other things, precision machine tools, and “interchangeable parts”.
  • Overall: “The ever-closer marriage of science and technology”
• Innovations of the first Industrial Revolution spread more widely, together with improvements in existing technologies (e.g., steam power) and many new innovations
• Landes’s classification (The Unbound Prometheus, pp. 249−326):
  • “New materials and new ways of preparing old materials”
    • Steel, “a superior variety of iron” – adoption of Gilchrist-Thomas process enables mass production, exploited especially in Germany and later in USA.
    • Chemical industries, esp. alkalis (soda) and organic dyestuffs: Germany developed a lead in technical education which then gained momentum as valuable applications proliferated.
  • “New sources of energy and power”
    • Steam: compound engine & development of steam turbine (Parsons, 1884). Of the steam turbine: “… greatest innovation in the use of steam power since Watt’s construction of an engine to produce rotary motion.” (Landes, The Unbound Prometheus, p. 279)
    • Internal combustion engine, fuelled with gasoline (oil derivative), initially developed in France and Germany, swiftly expanded in USA.
    • Electricity: expansion in distribution and range of applications, both in industry and domestically – an expansion that continued well into 20th century.
  • “Mechanisation and division of labour”
    • Machines with interchangeable parts (standardisation, sometimes called “the American system of manufacture”), development of a precision machine tool industry.
    • Expansion of mass production methods, production line organisation, e.g. in automobiles, applying “scientific management” of work-flows, sometimes called “Taylorism” after its promoter, Frederick Winslow Taylor (in USA).
  • The “ever-closer marriage of science and technology” (esp. in chemicals and electrical industries)

Transport & Communications in the 19th Century

• A transport and communications revolution occurred due to technological advances that reduced freight costs from the 1820s.
• Canals expanded, linking oceans and inland waterways.
• Ocean transport improved through ship design and refrigeration from the 1870s.
• Railroads expanded overland across the world after the 1840s.
• Telegraph networks became widespread from the late 1840s, with undersea cables linking continents from the 1860s.
• Linking oceans: Suez canal (1869), Panama canal (1914)
• Inland waterways: expand but their growth is eclipsed by railroads
• Ocean:
  • Steam propulsion: screw propulsion from late 1830s; compound steam engine from 1860s.
  • But larger and faster sailing vessels strive to compete
  • Iron replaced wooden hulls, 1840−70; then steel replaced iron, allowing larger, longer ships
  • Refrigeration: the steam-ship Frigorifique, 1876, carried frozen beef from Argentina to France, the first refrigerated ship to do so.
• Railroads:
  • Sequence of booms from 1840s, expanded railways throughout the world
  • By 1860, U.S. railroads extended into the mid-west prairies of North America (coast- to-coast by 1870) and the ‘black earth’ regions of southern Russia.
  • Result: major reductions in overland transport costs (though the railroads were vulnerable to monopolisation and became notorious for anti-competitive practices).
• Telegraph: networks expanded from late 1840s, greatly speeding communications
• Dramatic falls in ocean & overland freight costs from mid-19th century
• From 1870s, rail & ships open the mid-west prairies for European markets

The Transportation Revolution: Impact on Freight Rates

• The fall in freight rates (transport costs) from c.1840 indicates the impact of technological advance.

Long Distance Trade, 1815−1914

• Trade grew faster than GDP, with brief cyclical interruptions.
• Growth was dominated by Europe and the New World (mainly the “Atlantic economy”).
• There was a shift from high-value/weight to bulk commodities.
• Trade growth and its patterns reflected technological advances influencing transport costs and input demand, as well as income (GDP) growth.
• Given these changes, trade patterns reflected comparative advantage.
• Changing trade patterns affected the composition of domestic output and income distribution within and across countries.
• Trend growth of trade exceeded GDP, with brief cyclical interruptions
• Geographical pattern: dominated by Europe and the Atlantic economy
• Trading infrastructure created in 17−18th century Europe
• Economic imperialism: European nations (esp. UK, France, Russia) imposed free trade on their expanding empires (also, USA extended its borders)
• Changes in product composition:
  • Shift from high-value/weight, non-competing goods (e.g. spices, tea, coffee) to bulk commodities (grain, metals, textiles)
  • Displaced national trading monopolies: rivalries between nations’ trading elites replaced by rivalries within nations. The mercantilist nationalist trading monopolies became increasingly obsolete (such monopoly could not be imposed on other countries), e.g., VOC was dissolved in 1799 by which time it had become an impediment to Dutch trade; also monopoly power of EIC was progressively diminished (though it retained control of the British Empire in India until 1857.
  • Yet many obstacles to trade, notably tariffs, were intensified from 1815 at least until mid-19C.
• Changing trade patterns affected allocation of domestic production and distribution of income (e.g. displacement of agricultural workers in UK during a long agricultural depression from 1870s into 20C).
• Determinants of the changing patterns of trade:
  • Comparative advantage (Ricardo), determined by factor endowments (Heckscher-Ohlin) of land, labour and capital
  • Factor endowments determined by (a) trade restraints (politics), (b) migration, (c) investment, (d) technology (e.g. transport and mining technology)

Commodity Market Integration & Convergence

• International commodity markets became more integrated from 1815-1914.
• Determinants of $p<em>d – p</em>s$:
  • Transport costs
  • Imperfect competition (monopoly power)
  • Tariffs and other restrictive trade policies
• International commodity markets became more integrated, 1815-1914
• Evidence is based on price differentials between origin and destination:
  • Little or no integration until c1820, substantial integration thereafter
  • Transport cost-savings reinforced with trade liberalisation to c1880
  • Transport cost-savings outweigh increasing trade barriers from c1880
  • Commodity market integration was world-wide in its impact
• Commodity market integration and income distribution
• In 19th C. to c1890, price of primary products (raw materials, bulk agricultural goods) rose relative to manufactures, then petered out before 1914. Hence, primary production expanded in the poor periphery (the “South” – Asia, Africa, S. America, away from Europe and European offshoots). But the periphery tended to “deindustrialise” (or fail to industrialise) at the same time: specialisation in primary products.
• Hence: commodity price changes affected trade patterns, hence returns to the factors of production, hence income distribution (to labour, capital, land)
• Rough guide to 19th century trends in the Atlantic economies:
  • Europe exported labour-intensive manufactured goods in return for imports of land- intensive primary products (agricultural goods) from the New World (North & South America, and European settlements)
  • European labour benefited from increased wages, while landowners lost out, as land rents declined
    O’Rourke & Williamson find (limited) evidence of income “convergence” of incomes of different countries (as distinct from incomes within a country).

Freight Factors

• A ‘freight factor’ is the ratio of the freight (transport cost) to the commodity price at the point of Export or Import.
• $Freight factor \% = 100 \times \frac{Freight rate}{Commodity price}$
• After c.1850, it became feasible to ship bulk commodities over long distances and remain competitive with locally produced products.

Britain’s Move to Free Trade

• In 1815, Britain remained highly protectionist.
• Agricultural protection was reinforced by the Corn Law of 1815.
• The Corn Law repeal in 1846 signaled the onset of Free Trade.
• Free Trade Imperialism: enforced foreign openness
• In 1815, Britain remained highly protectionist
• Many mercantilist restrictions (e.g. Navigation acts, trading monopolies) remained, though were becoming increasingly obsolete
• High tariff rates remained on a wide range of imported goods
• Agricultural protection, long established, was reinforced with the Corn Law of 1815, a law promoted by still- powerful great landowners
• Intended to protect agriculture from imports after restoration of peace Read (highly recommended): Rebellion, Rascals and Revenue, pp.155-158 (available online).
• Protection was later moderated (e.g. sliding scale duties from 1828)
• Grain (bread) prices fluctuated, depending on the state of the harvest
• Political protests gather pace with formation of Anti-Corn Law League, 1836, voicing interests and concerns of expanding urban, industrial class (many members of which vote following the Reform Act of 1832)
• Reforms gather pace in 1840s, by which time many tariffs were irrelevant
• Irish potato famine triggered Peel’s repeal of the Corn Law in 1846 (picture shows Sir Robert Peel, prime minister responsible).
• Repeal of the Corn Law signalled the general adoption of Free Trade
• Navigation Acts repealed, 1849, by which time they were a tiresome nuisance, or irrelevant

Free Trade in Practice: British Import Duties

• By c.1870, Britain had essentially achieved free trade where remaining duties served to raise revenue without significantly hindering trade.

Liberal Interlude in Trade Policy, c1860−c1880

• In 1815, most European nations were highly protectionist, fearing foreign competition after the resumption of peace.
• Gradually, less protectionist policies were adopted from the 1820s, including Reciprocity Treaties and the expansion of the Zollverein (from 1834).
• The Cobden-Chevalier Treaty between Britain & France in 1860 included a “Most Favoured Nation” clause.
• Despite Free Trade Imperialism, countries not affected adopted policies that were (deliberately or not) highly protectionist
• In 1815, most European nations, like Britain, were highly protectionist -- response to restoration of national borders, and the demands for protection from domestic producers, who became exposed to foreign competition with the restoration of peace (e.g., British agriculture, and French textiles).
• Gradually, less protectionist policies were adopted:
  • Denmark and Netherlands reduced tariffs and abolished prohibitions
  • Prussian tariff, 1818, “immeasurably the wisest and most scientific tariff then existing” (Clapham), designed to raise revenue with modest rates, not to obstruct trade. The objectives of Prussian officials, deeply influenced by Adam Smith’s arguments regarding trade, included the desire to increase the wealth of the Prussian state.
  • Zollverein, 1834, introduced toll-free trade within three-quarters of Germany; followed by absorption of other states, and German unification
• Britain, in 1820s, adopted several Reciprocity Treaties: bilateral agreements to reduce tariffs and abolish prohibitions
• Cobden-Chevalier Treaty between Britain and France:
  • Reduced tariffs, abolished many prohibitions, established “Most-Favoured-Nation” (MFN) status between France and Britain
  • Subsequent bilateral agreements extended MFN principle in western Europe
• Apart from Europe and its colonies, much of the rest of the world remained protectionist (e.g. U.S.A., despite internal tensions between northern and southern states, protected its northern manufacturing interests)

Retreat from Free Trade: Rise of Neo-Mercantilism

• From c1880, most nations retreated from trade liberalization, possibly as a reaction to globalization.
• This retreat was driven by a variety of causes, including the preservation of existing living standards and the promotion of new industries.
• National responses varied, with some countries upholding free trade while others became more-or-less protectionist.
• From c1880, most nations retreated from trade liberalisation
• Tariffs were raised, though not to the same levels as before liberalisation – this was a moderation, not a reversal, of trade liberalisation. Other restrictions increased (e.g. justified on health & safety grounds)
• What caused the retreat?
  • Influx of cheap grain from North America (and from eastern Europe/Russia)
  • Consequence of lower transport costs & bad harvests in Europe, 1870s
  • Newly industrialising nations sought to protect their `infant industries’
  • Industrialised nations were tempted to protect from low-cost producers
  • Tariff `wars’ reflected political tensions, e.g. between France and Italy.
• Varying national responses :
  • France, Germany, Sweden move to protect agriculture
  • German “alliance of rye and iron” protects some industrial products too
  • The “Tariff of Méline”, 1892, came quite late but provides a signal end to the liberal interlude that began with the Cobden-Chevalier Treaty (1860)
  • Iberian nations: resume protection for agriculture and manufactures, neither of which were at the forefront internationally.
  • Denmark, Netherlands retain free trade, and switch to non-grain agriculture
  • Britain adheres to free trade (agriculture allowed to fare for itself). Agriculture slipped into a long period of decline, through the remainder of 19C and much of 20C.

Price of Grain and Tariff Protection

• Grain prices declined in Europe, suppressed by import tariffs.

Free Trade Imperialism

• European overseas empires expanded during the 19th century, mainly to impose trade “openness”.
• These empires allowed greater autonomy for European offshoots than colonies in Asia and Africa.
• The USA and Russia pursued continental expansion.
• A North-South divide emerged between Europe and the rest of the world.
• Enabled by technological advantages, unique to Europe in this period
• Mainly to impose “openness” (free trade), i.e. economic domination, via `unequal treaties’. Also promoted ideologies of free trade among colonial settlers (the quest for profit among colonial traders found expression in support for free trade – freedom to pursue gain)
• European offshoots (Americas, Australasia) enjoy greater autonomy
• USA and Russia pursue continental expansion (imperialism?)
• USA also pursues economic domination in Pacific & Caribbean
• A North-South divide?
• A Great Specialisation of trade: primary products from Asia, Africa and European offshoots in return for manufactures from Europe
• Exception: USA industrialises towards global importance by early 20C.
• Exception: Following the Meiji Restoration, 1868, Japan resists `unequal treaties’, with swift adoption of modern industry, and modern military technology (which became evident in its war with Russia 1905/6).
• Other countries seek to industrialise as well (with limited success), behind tariff barriers
• Were primary producers forced to de-industrialise?
  • Only in some cases (arguably, for instance, India), because abundance of primary resources meant that many countries would have exported these anyway (unlikely to have industrialised had they remained closed to external trade)

Summing Up

• Globalization was reflected in:
  • International trade expanding faster than output
  • Commodity market integration (price convergence)
• Convergence of incomes (returns to factors of production) among countries (e.g., wages in Europe compared with wages in America)
  • Partly from changes in trade flows (goods and services)
  • Partly from factor flows, esp. migration
• In the century to 1914, international trade expanded faster than world GDP probably because
  • Transport/communications revolution: technical advance
  • Reduced tariffs & other impediments (but with setbacks from late 1870s)
  • Financial innovations, esp. adoption of the Gold Standard, though this may have been as much an effect as a cause of liberalised trade
• Globalization, in the sense of price convergence, reflected reduced transport costs, liberal trade regime & reduced transaction costs. This (first?) phase of globalisation developed from mid-19C to reach its zenith in the years before 1914, despite the rise of neo-mercantilism (which had WWI not intervened may have become more pronounced in 20C).
• Convergence of incomes (returns to factors of production)
  • Observed within the “Atlantic Economy” (Europe & European offshoots)
  • But divergence between Europe and much of Asia and Africa
• Income convergence appears to have been more sensitive to flows of the factors themselves (mass migration of labour and capital) than goods & services – considered in detail next week.