Effects On Trends In Trade Policy From 1850 1914 Term paper
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Effects on Trends in Trade Policy from 1850-1914
The modernizing world of 1850-1870 belonged to an age of remarkable growth in international trade, stimulating the largest free market the world had ever seen. Yet by 1914, only 30 years later, the trend towards liberal trade policies had mostly ended, replaced by a revival of the protectionist system. A study of the variation in trade policies over time shows a remarkable growth in the power of interest groups to influence the institutional rules and regulations concerning international economic intercourse. The initial major trend can be partly attributed to international conditions, whereas later trends are more attributable to the relative strength of the interest groups within individual nations and their ability to influence institutional policies. It is, however, necessary to always consider the impact of the international economic situation on the interest groups, as changes in the international arena often played a significant role in determining which interest groups held power at any given time.
A convenient starting point for looking at trends in international commerce policy is Great Britain. Prior to the British initiative towards free trade, there were two main barriers to trade, natural and artificial1. Natural barriers were the long distances to be transversed and the high cost of shipping materials. Artificial barriers included tariffs and at times direct prohibitions on the import of certain goods. As the century progressed both barriers fell drastically due to remarkable advances in technology and through the international leadership of Great Britain. This lasted until the 1870s initiated the return to protectionism.
Britain, as the first serious pundit for free trade, led the initial trade liberalization movement for several reasons. First, the philosophical roots which planted the argument in favor of free trade came to fruition with the publication by Adam Smith of The Wealth of Nations. This work was quickly expanded upon by David Ricardo who postulated the concepts of absolute and comparative advantage, and who showed that every nation involved in trade benefited. The first group of influential people to accept and use these arguments thus arose in Britain in the form of the international merchants and industrialists.
Britain in 1832 expanded the franchise to the urban upper middle class, of whose numbers merchants and industrialists constituted a significant amount. Thus at the same time the merchants were beginning to advocate a liberalization of Britain's trade policy, they were also becoming empowered to influence the parliamentary rules. Younger politicians intent on simplifying the government architecture gained power as a result, including Robert Peel and William Huskisson.
The greatest barrier to free trade in Great Britain in the 1840s were the Corn Laws. The Corn Laws principally benefited the landed aristocracy, the strongest group traditionally represented in Parliament. Thus the landed aristocracy can and should be viewed as an institution as well as a separate interest group, given their hegemony over policy within the nation for several centuries. The rise of the merchant classes and the enfranchisement thereof provided the catalyst necessary to promote a sweeping change of the traditional policies.
In Britain this political turmoil led to a trend towards free trade and a demand for the repeal of the Corn Laws by the industrialists and merchants. Richard Cobden, an industrialist, formed the Anti-Corn Law League2 in 1839 which created one of the first large scale campaigns to influence public opinion. The Whig party saw the merchants as a way to gain more control in Parliament, but failed to win the election in 1841. Tory Sir Robert Peel was elected prime minister, already intent on making extensive changes in the fiscal system. The Anti-Corn Law League achieved triumph in 1846, not due to their extensive propaganda, but thanks to the Irish potato famine. Faced with mass starvation Peel decided to introduce a bill which would permit the duty free import of grain within a few years.
In some sense it can be argued that without the Irish famine the era of free trade would have come substantially later if at all. As an international event it propelled Great Britain down the path of free trade, and it is significant that the Whigs, which became the party of the industrialists and merchants, were unable to attain the repeal of the Corn Laws without a significant catastrophe to aid them. In the aftermath of the potato famine, the Whigs gained power and eventually replaced the vast majority of the tariffs with an income tax, making Britain essentially free trade.
The interplay of events leading Britain towards free trade is also an example of a major interest group (the merchants and industrialists) taking on the institution of parliament and the wealthy landowners and setting a new trend in the nation's economic policy. With varying interest groups this power struggle manifest itself in nations throughout Europe, with different results leading to different trends. It is important to focus not on the institutions as such, but on which interest groups are capable of influencing the institutions. In the case of Britain it is doubtful the merchants would have managed to overhaul even small parts of the fiscal policy had there not been an enlargement of the franchise in 1832.
Paul Bairoch hints that Great Britain may have chosen the free trade policy at exactly the right time for it to work, and that any other time could well have been disastrous. He cites the rapid decrease in natural barriers to trade through greater technological development and the fact that Britain was able and willing to phase out its agricultural production and come to rely on foreign foodstuffs. This argument is slightly supported by the onslaught of the Depression in 1873, discussed later.
In contrast to Britain the industrial interests in most other major industrializing nations were opposed to liberalization of trade protection. The British stood out in that they managed to have a comparative advantage in the production of most manufactured goods at the time. Any large nation which chose to engage in free trade with Great Britain would therefore see their main industrial industries annihilated, especially the textiles industry, and be forced to specialize elsewhere. Nations like France, the United States, the German Zollverein and Russia were not inclined to abandon their industrial infrastructure to the ravages of free trade without seeing the potential benefits first.
Thus the trend in Britain, which I have up until now purported to be the main driving force behind trade deregulation throughout the industrializing world, does not in and of itself manage to explain the global trend towards deregulation. There are two other main factors which ensured the success of the British system of free trade up until the 1870s.
First there is the Cobden-Chevalier treaty of 1860 which revived the concept of most favored nation, essentially a way of granting any trade concessions made to one nation to all nations simultaneously. In addition, it paved the way for the negotiation of a plethora of other trade agreements, leading to a universal reduction of tariff barriers. This had a dual-effect: due to the tangle of international treaties it became difficult for any individual nation to hike tariffs, and it set a precedent for reducing tariffs even in highly protectionist nations such as France.
A second major factor was the success of Great Britain in pursuing a free trade doctrine. The general liberal philosophy at the time equated the economic rise of Great Britain with its free trade policies, and created the belief that failure to liberalize economically would lead to an inability to compete internationally. Michel Chevalier wrote about Britain, "When such a powerful and enlightened nation not only puts such a great principle into practice but is also well known to have profited by it, how can its emulators fail to follow the same way?" Thus the governments in power were persuaded by the precedent of Britain to ignore demands for protection, in some cases detrimentally. Russia for instance saw a large deterioration of its balance of trade after the 1868 tariff was enacted.
It behooves us to look at other nations at this point to see how international events and interest groups played a role in determining economic policy. France is a major exception to the concept that interest groups largely determine a nation's trade policy, although most other nations tend to follow this idea.
France had remained highly protectionist up until 1860 for a variety of reasons, prominent among which was the textile industry as an interest group. Unable to compete with British producers of textiles, the French industry had managed to impose a prohibition on the importation of cloth to the French market. The fact that French industry opposed trade liberalization, in contrast to their British counterparts, and the continued support for protectionism in the agricultural sector guaranteed protectionist policies in France.
It took Napoleon III, a supporter of free trade, to pass the Cobden-Chevalier treaty and move France from a highly protectionist to a medium protectionist state. Done without the consent of the French Parliament, and as Paul Bairoch points out, against the will of the majority of the people3, this precedent forced France to lower its trade barriers for at least 10 years. This is exceptional in that the interest groups were united in favor of protection and yet lost out. The inability of the interest groups to exert more substantial power lies in the structure of the government and the fact that Napoleon III adroitly used a political loophole to overcome them.
Germany, loosely united in the form of the Zollverein and under the leadership of Prussia, had a much smaller industrial base compared to a formidable agricultural sector....
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