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EMPIRE and TRADE

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Title: EMPIRE and TRADE


1
EMPIRE and TRADE
  • Britain is an open economy, with a considerable
    part of the economy relying on foreign trade.
  • Two important questions
  • What was the role of foreign trade in promoting
    technological progress and economic growth in
    Britain between 1700 and 1900?
  • Britain controlled large amounts of non-British
    territory. To what extent was the British
    Empire an essential part of foreign trade and to
    what extent did it contribute to economic growth?

2
Economics suggests that Foreign Trade and
Economic Growth affect each other.
  • Growth Foreign Trade
  • Technological change affects trade simply because
    some of it takes place in the area that reduces
    trading costs (shipbuilding, navigation,
    telegraph, development of insurance and
    financing).
  • Growth for any reason leads to more imports
    because many imported goods tends to have a high
    income elasticity (tea, sugar, tobacco,
    chinaware, silks, fur hats). Still true in US
    today?

3
Growth Foreign Trade
  • (contd)
  • Possible economies of scale makes trade less
    costly (e.g. in naval force protecting trade
    routes setting up stations for provisioning or
    in information gathering). But some small
    economies did historically very well in
    international trade such as the Netherlands and
    Venice.
  • Technological progress demands certain specific
    inputs that sometimes have to be imported,
    meaning the country has to export to pay for
    this. Example cotton.
  • More than anything else as technological
    progress took place and certain tradeable goods
    fall in price, they will become more competitive
    on the world market and exports will increase
    (which will also lead to a rise in imports in the
    long run).

4
Reverse direction?
  • Growth of Foreign Markets
    Economic growth?
  • In the simplest terms, gains from trade increase
    economic welfare and income.
  • Larger markets for goods that a country
    specializes in lead to economies of scale and
    learning by doing.
  • The possibility of imports makes domestic markets
    more competitive, since producers have to worry
    about foreign competition.
  • Competition with other nations constrains
    governments from outrageous acts since it always
    has to worry about foreign competition.
  • International trade exposes countries to new
    goods, new technology, and new ideas.

5
In the British Industrial Revolution
  • The British Empire is often argued to be a
    cause (or facilitator) of the Industrial
    Revolution. The Empire provided it with broader
    markets, and this demand triggered a supply
    response. Does this make sense?
  • An subset of this view is the Williams Thesis
    (named after Eric Williams) profits from the
    Atlantic trade in slaves and sugar helped trigger
    the Industrial Revolution.

6
This causality seems to be less persuasive.
  • In part, the History does not work. Many other
    European nations had successful empires by 1800
    (France, Spain, Netherlands) yet these did not
    trigger an Industrial Revolution in those
    economies that early. Moreover, Britain lost its
    most successful colony in 1783.
  • In part the Economics does not work. We can
    easily compute the contribution of foreign
    markets as opposed to domestic demand.
  • Assume foreign demand is perfectly elastic at
    some world price small economy assumption.

7
S
S
E
E
P
Df
E
P
Dd
O
h
g
j
f
d
8
  • Explanation the domestic demand curve is Dd the
    foreign demand curve is the flat line Df. The
    effective demand curve is the kinked blue line.
    That means that if Supply is at S, the economy is
    at point E and does not export (but imports if it
    can). A technological change that moves the
    supply curve from S to S will make the country a
    net exporter. The amount it sells abroad is now
    hg.
  • Without exports, the economy would be at f and
    the price would be P lt P.

9
Is export the cause of growth?
  • The cause is obviously whatever caused the supply
    curve to shift from S to S. The role of exports
    is to prevent the price of the good subject to
    innovation from falling too much. Without the
    export market it would have fallen much more, to
    P (this is known as a worsening of the terms of
    trade).
  • In that respect export markets were important.
    But that is not the same as being a causal
    factor in the Industrial Revolution or of
    causing the shift of S.

10
  • But could the shift in the supply curve be caused
    somehow by larger (or expanding) markets?
  • Famous statement by Matthew Boulton In 1769
    Matthew Boulton wrote to his partner James Watt,
    "It is not worth my while to manufacture your
    engine for three counties only, but I find it
    very well worth my while to make it for all the
    world" --- this means that there were fixed costs
    that would only be covered in large markets. ---
    but this statement is incorrect.

11
  • Did foreign markets stimulate demand and led to
    demand-induced innovation?
  • We should keep in mind that all the manufacturers
    in Britains textiles and other goods were fairly
    small relative to the market (except machinery
    makers) so that they took demand as
    parametrically given.

12
What about Empire?
  • The point about controlling overseas territories
    is not that it allows the mother country to trade
    with these areas, but that they could trade at
    advantageous terms, and perhaps exclude others.
  • Yet the striking thing is that much of Britains
    overseas trade is with areas that are not part of
    its Empire. Above all, of course, the U.S. after
    1783, but also later Latin America, Otttoman
    Empire, China. Most important trade with other
    European countries.

13
By the mid-nineteenth century, India had become
the most important part of the British Empire
  • Yet India was poor and remote (ships had to sail
    around Africa until 1869), and became a major
    destination for British cotton goods only after
    mechanization was in full swing.
  • Some Britons made a lot of money in India in the
    eighteenth century (nabobs) but corruption
    was regarded with alarm in Britain.
  • Most other parts of the British Empire were very
    thinly populated (Canada, Australia).
  • The Caribbean Islands were an exception, sugar
    trade very profitable and textiles for slave
    workers were an important export.

14
However Foreign trade was important to
technology
  • The importation of foreign techniques (many of
    them copied or adapted from other cultures). Most
    important examples the introduction of potatoes
    to Ireland, chlorine bleaching from France.
  • The importation of foreign goods stimulated
    imitative technologies that may have been better
    in the long-run than the ones they imitated
    (chinaware, cotton goods such as calicots and
    muslins).
  • More indirect The existence of long-distance
    trade led to institutional changes that prepared
    the ground for further changes (urban merchant
    class in Atlantic Ports) (Acemoglu et al.)

15
The statistical history of British foreign trade
composition of imports (in )
Manuf Raw Materials Foodstuffs of which cereals and meats
1785 10.5 47.1 42.4 2.6
1795 7.1 44.7 48.2 6.4
1805 3.4 54.2 42.4 5.7
1815 1.1 56.3 42.6 3.2
1825 1.6 62.3 36.1 4.2
1835 2.7 67.9 29.4 2.9
1845 4.3 62.3 33.4 10.3
1855 5.1 59 35.9 15.4
16
What were the sources of imports? (in )
NNW Europe South Europe NE Africa Asia (inc. China) USA Canada, Austral. W. Indies, Latin America
1785 29.7 14.1 2.1 24.3 5.7 1.7 22.5
1795 30.3 13.5 1.7 21.4 5.7 1.6 25.8
1805 26.1 12.6 1.2 15.8 8.2 1.9 27
1815 23.3 11.8 1.7 18.2 6.1 3.5 35.3
1825 30 10.5 3.2 19.3 10.6 5.7 20.5
1835 29.1 8.3 4.7 16.4 18.8 6.5 16.1
1845 29.7 7.1 5.7 17.2 17.1 9.8 13.2
1855 29.6 6.7 7.6 17.0 20 7.0 12.1
17
What this shows is
  • Britain was trading with the entire world.
  • But Europe and US always close to 50-60 of all
    trade
  • Trade with Asia important but not overwhelming.
  • Importance of W. Indies declining, Canada and
    Austr. rising

18
British Exports, by main sectors (in
)
Manuf. Foodstuffs Raw Materials
1785 84.0 9.2 6.8
1795 87.4 8.8 3.7
1805 90.0 7.1 2.9
1815 85.5 11.2 3.3
1825 92.4 4.6 2.9
1835 91.1 3.4 5.5
1845 88 3.1 8.9
1855 81.1 5.6 13.3
19
British Exports, by destination (in )
N. and NW Europe S. Europe NE and Africa Asia USA Canada Australia W. Indies S. America
1785 22.6 19.5 4.3 14.3 22.4 5.5 11.3
1795 13.9 11.5 2.5 16.2 29.4 5.4 21.0
1805 27.2 9.4 3.5 7.2 27 3.3 22.3
1815 29.7 17.9 1.3 6.2 16.5 7.3 21.1
1825 24.8 14.6 2.9 10.4 16.1 5.3 25.9
1835 25.2 12.9 4.9 10.5 20.4 6.2 19.8
1845 29.7 10.1 7.5 17.6 12.3 7.6 16.3
1855 24.2 8 9 13.1 19.6 13.5 12.6
20
History of Textile Exports
Wool (in 1000s) Cotton (in 1000s) Cotton as of total Wool () Wool () Wool () Cotton () Cotton () Cotton ()
Wool (in 1000s) Cotton (in 1000s) Cotton as of total Europe Asia/ Africa America /Austr. Europe Asia/ Africa America/Austr.
1785 3700 766 17.1 67.8 7.4 24.7 40.5 21.4 38.1
1795 5194 3392 39.5 34.6 12.9 48.6 22.6 5.8 71.6
1805 6172 15871 72 28.2 18 53.6 45.5 4.3 50.2
1815 7866 18742 70.4 36.6 14.1 49.2 60.1 1.9 38
1825 5737 16879 74.6 31.9 17.9 50.2 51.4 10.1 38.5
1835 7037 22398 76.1 30.2 14 55.7 47.4 18.1 34.5
1845 8328 25835 75.6 42 12.5 45.4 39.2 36.3 24.5
1855 10802 34908 76.4 41.1 7.6 51.2 29.4 39.6 31
21
  • The last tables show the meteoric rise of cotton,
    but wool exports did not decline, they actually
    grew.
  • Most of the markets were in Europe and North
    America. The importance of the Indian market for
    cotton only comes late, after 1840 or so.
  • We can therefore not assign causality to Imperial
    Markets for the Industrial Revolution.

22
What about Ireland?
  • Until 1800 it was governed by Britain as an
    independent Kingdom.
  • In 1800 the Act of Union combines the two
    Kingdoms, but trade statistics are still separate
    until 1830.
  • In many ways it was treated like a colony. In the
    eighteenth century it was prohibited from
    competing with British woolen industry. What
    little manufacturing there was was located in
    Ulster (around Belfast) and specialized in linen.
    Britain decided on a policy that forced Ireland
    to specialize in linen, while they had wool.
  • Irish economy is very different from British
    agrarian, backward, poor. Little
    industrialization, and a heavy dependence on
    subsistence crops.
  • Yet it was an agricultural exporter and helped
    supply Britain with essential foodstuffs in some
    key years.

23
Percentage Ireland of British
International Trade
Exports Exports Exports Imports Imports Imports Imports Imports Imports
Total Manuf Cotton Total Grains Meat Butter Linen
1785 6.8 4.7 3.9 10.4 30.0 100 99.2 61.2
1795 9.4 7.6 10.8 9.5 16.5 98.0 87.0 69.8
1805 9.0 7.0 2.9 8.9 23.3 93.0 71.5 72.9
1815 7.2 5.3 1.3 9.8 57.0 96.7 77 94.6
1825 11.5 8.8 2.9 14.2 70.0 94.4 66.8 98.3
24
Was Ireland exploited by Britain
  • Clearly Ireland played an important role in
    feeding Britain, in part taking advantage of
    its proximity.
  • It also specialized in linen manufacturing as
    long as linen was not mechanized (that changes
    around 1830, with disastrous consequences for
    Irish linen weavers). British had prohibited its
    wool industry around 1700 so as to not compete
    with theirs.
  • Much of this was made possible by the Irish
    potato economy in which peasants grew a
    subsistence crop on very small plots and labored
    on fields that raised grains and animals that
    were mostly for export to Britain.

25
The role of Empire in British economic
development
  • There were costs and benefits.
  • The main benefits were more security of property
    and contracts, buying and selling at advantageous
    terms, keeping competitors out, and (in some
    cases) extracting resources and taxes (that is,
    robbing the colonized and their environment as
    well as innocent third parties such as Africans).
  • Other benefits strategic advantages (e.g.
    military bases), a place to send criminals and
    undesirables, prestige (Sun never sets over the
    Queens Empire).

26
At times, some individuals made great profits
  • Indian Nabobs such as Warren Hastings and
    Robert Clive and many of the representatives of
    the East India Co.
  • West Indies planters
  • Opium traders to China

27
  • But such profits did not mean that they
    stimulated or even aided the Industrial
    Revolution.
  • There is not much evidence that such profits were
    used to finance industrial entrepreneurs or RD
    efforts that resulted in technological progress.

28
Costs vs. benefits
  • Moreover, the costs of Empire were huge most of
    the wars fought by Britain were partially about
    control of overseas colonies, navy,
    administration, provisions and so on.
  • During these wars, privateers and raids destroyed
    the very trade they were supposed to protect and
    enhance.
  • Not to mention costs to indigenous populations
    and Africans.
  • Empire also diverted and distorted the flows of
    trade away from their natural and most efficient
    trajectories.
  • The problem, then as now, is that the costs were
    not paid by the same people who enjoyed the
    benefits. If the former have little influence on
    decisions and the latter call the shots,
    Imperialist policies will be resorted to even if
    it makes no sense for the economy as a whole.

29
Why did European Nations have Empires?
  • Not clearly an economically rational action from
    the point of view of the entire economy (costs gt
    benefits in most cases).
  • But some groups stood to benefit a lot and they
    were well-organized and concentrated.
  • Headrick hypothesis between 1800 and 1914
    technological change increased the power gap
    between Europeans and non-Europeans, which
    reduced the costs of Imperialism.

30
Examples
  • Better firearms
  • Quinine
  • steamboats
  • telegraph

31
Another explanation of Empire
  • Like a Prisoners dilemma game Given that
    Britains rivals (France, Spain, United
    Provinces) engaged in Imperialism, wouldnt it be
    better off to do so as well even if everyone
    would be better off without it?
  • Of course, the reason these other nations engaged
    in Imperialism was because Britain did. Good
    historical example of a Nash equilibrium.

32
  • Many of the more insightful thinkers of the time
    were anti-Empire.
  • A great empire has been established for the
    sole purpose of raising up a nation of customers
    who should be obliged to buy from the shops of
    our different producers, all the goods with which
    these could supply them. For the sake of that
    little enhancement of price which this monopoly
    might afford our producers, the home-consumers
    have been burdened with the whole expense of
    maintaining and defending that empire. For this
    purpose, and for this purpose only, in the two
    last wars, more than two hundred millions have
    been spent, and a new debt of more than a hundred
    and seventy millions has been contracted over and
    above all that had been expended for the same
    purpose in former wars.
  • Adam Smith, Wealth of Nations, Book ii, p. 180.

33
The role of commercial policy
  • In 1700, Britain, like most mercantilist
    countries, was heavily protectionist. Many high
    tariffs on goods. Also bounties on export goods,
    such as cereals. Most notorious Navigation Acts.
    Britain is aggressive in protecting its dominance
    of the oceans and its colonial possessions
    (blue-water policies).
  • High tariffs were meant to keep competing imports
    out, harm Britains main competitors and enemies,
    and provide revenues for the government.
  • Some of them were purely meant to favor one small
    but successful special-interest pressure group
    (such as brewers who wanted a tariff on wine).

34
Another example Calicot act
  • Passed in 1721 on behalf of woolen and silk
    manufacturers, banning calicots, printed cotton
    cloths imported from India.
  • Response to the so-called Calico riots.
  • Repealed in 1774 on behalf of cotton-manufacturers
    who felt this Act could be used against them.

35
Heavy tariffs on many commodities in the
eighteenth century
  • Wines
  • Sugar, tobacco, tea
  • Cereals (if prices were low)
  • Soap, glass, pottery and many other products.

36
From an economic welfare point of view, tariffs
are normally a bad thing.
  • Yet until about 1770 most mercantilist nations,
    including Britain, imposed heavy tariffs on
    imports.
  • It was believed that nations should discourage
    imports.
  • But a lot of rent-seekers took advantage of these
    bad economics and benefited from these tariffs.
  • Adam Smith and his colleagues exposed this
    rent-seeking for what it was and called for free
    trade.

37
What was the point of these tariffs?
  • To benefit certain groups who were protected at
    the expense of others
  • To create employment (beggar thy neighbor
    logic).
  • To raise government revenues
  • To affect the Balance of Payments (mercantilist
    doctrine)
  • More recent arguments for protection
  • Strategic arguments
  • Deterrent-retaliatory
  • Infant industry Economies of scale or learning
    by doing.

38
What was their effect? In a static model
Sd
Consumer Surplus
Sf
D
domestic production
Imported
39
Now what does a tariff do, contd
Sd
New Consumer Surplus
Sf T
Sf
D
Imported
domestic production
40
In the static elementary model
  • The losses in consumer surplus are the difference
    between the big red triangle and the smaller one.
  • They consist of White trapezoidDark blue
    triangle, light blue rectangle and yellow
    triangle.
  • The yellow triangle is the deadweight loss. The
    lightblue rectangle go to the government as tax
    receipts, the dark blue triangle are gains in
    producer surplus for this good, the white
    trapezoid are gains that go to the owners of the
    factors used in producing the good domestically.
  • Yet, while there are winners and losers, the
    gains of the winners are always smaller than the
    losses of the losers (because the deadweight loss
    is always positive)

41
These losses are an understatement.
  • Dynamic losses
  • Lower level of competitiveness in the economy may
    mean further distortions, lack of innovation.
  • Fewer imports mean less exposure to foreign
    technology, ideas, and ways of thinking.
  • These might be offset to some extent by domestic
    economies of scale or external economies in
    production

42
So why cant the losers buy off the winners?
  • One answer gains are concentrated, losses
    widespread, so very hard to overcome free-riding.
    This is not always the case, some tariffs are
    imposed on goods that are inputs in other
    industries.
  • Another if you start this, there is a big
    incentive for any industry to hold up consumers,
    so even if they dont want a tariff they might
    pretend as if they do.

43
  • Most famous example British Corn Laws. Classic
    example of rent-seeking.
  • First passed in 1670, these tariffs placed heavy
    duties on imported cereals, later supplemented
    with a system of export bounties ( subsidies)
    with similar effects. Reformed in 1773 so that
    the tariff only kicked in if domestic prices were
    low.
  • In 1815 they were re-instated, but by now power
    and ideology had changed and they were being
    criticized, reformed and weakened in the 1820s
    and in the end abolished in 1846 (will come back
    to this).

44
Growing sentiment in favor of free trade
  • Tariff reductions after 1770.
  • Eden Treaty 1786 between Britain and France,
    falls between the peace of Paris (1783) and the
    renewal of war between them in 1793. Reduced
    tariffs on a host of textiles and colonial goods
    between the two countries.
  • There is considerable evidence that those who
    pushed the Eden Treaty through Parliament were
    influenced by a more liberal (i.e., free trade)
    ideology promulgated by Adam Smith and his
    students.

45
In this regard, ideology played an important role
  • The eighteenth century produced the kind of
    political economy that later was known as
    classical political economy.

A. Smith, Hume
Ricardo, Malthus
J.S. Mill
46
Beneath this was a profound Enlightenment insight
  • The economic game, and especially international
    trade is NOT a zero sum game. If my partner gains
    from a deal, that does not mean ipso facto that
    I lose.
  • This is true at all levels of trade and economic
    transactions.
  • Odd thing is that this is counter-intuitive and
    hard to accept. Yet Smith and other writers in
    his tradition gradually persuaded others that
    this was so.

47
Why should we care about what people thought?
  • Because policy makers were influenced by them and
    thus had their basic ideology inculcated into
    them by these political thinkers.
  • Among the politicians influenced (by their own
    admission) were William Pitt the Younger, William
    Huskisson, Robert Peel --- all of them, in the
    end supporters of free trade.

48
Policy makers were influenced by their beliefs
  • Two years after Smiths death (i.e., in 1792),
    Pitt referred in the House of Commons to the
    writings of an author of our own times, now
    unfortunately no more, (I mean the author of a
    celebrated treatise on the Wealth of Nations,)
    whose extensive knowledge of detail, and depth of
    philosophical research, will, I believe, furnish
    the best solution to every question connected
    with the history of commerce, or with the systems
    of political economy.

49
  • Many of the leading liberal politicians who
    influenced policy in the first half of the
    nineteenth century were influenced by Smiths
    teaching, especially through his students such as
    Dugald Stewart.

50
Yet the irony of history was
  • In 1793 war broke out between Britain and France,
    which lasted for 22 years.
  • During this war, commercial connections between
    Britain and the Continent were never totally
    severed, but clearly they were disrupted. Use of
    privateers and attacks on colonies and trade.
  • Both sides tried economic warfare Napoleon
    imposed a Continental Blockade on Britain
    (prohibiting the sales of all British-made in
    countries5050 under French control). Britain
    retaliated by the orders in council stopping
    the import of all colonial goods into France.

51
To make things worse
  • Commercial Relations with the US also went bad.
  • Jeffersons embargo --- 1806-07.
  • Then the war of 1812-14.

52
During the Wars, Britain desperately sought new
export markets for its industrial products
  • Found some in Buenos Aires and Asia, but these
    never made up for the loss of the main export
    areas which was Europe.
  • After 1815 it hopes to get back to the European
    and North American markets, but by that time many
    of its European partners had imposed high tariffs
    to protect the hothouse industries that had
    grown up during the decades of war.

53
Yet the period 1790-1815 was one of rapid
technological change
  • One conclusion might be that while export markets
    are nice and good, they are not indispensable in
    the sense that losing them does not imply a
    complete halt to industrialization.

54
  • After the peace of Vienna (1815), Britain is
    subject to a fierce struggle between
    protectionists and free-traders.
  • So is the rest of Europe

55
  • In 1815 the Corn Laws were reinstated despite the
    fact that by this time protectionism had come
    under heavy criticism. Obviously landowners
    still had a lot of power.
  • It got rid of the subsidies but still imposed a
    stiff tariff and prohibiting import altogether if
    the price was below 80s a quart (later amended to
    70s). In 1828 weakened even further but still had
    some bite.
  • Abolition of the Corn Laws popular resistance
    against it became stronger and stronger.

56
  • The Anti-Corn-Law League (Richard Cobden and John
    Bright)

57
The struggle over the Corn Laws
  • For free trade
  • Manufacturing interests in industrial counties.
  • Labor
  • Free trade ideologues.
  • Some believed it would increase economic welfare
  • Some felt it would reduce rent-seeking
  • Still others free trade would enhance world
    harmony and peace.
  • Against Landed interests (both landowners and
    farmers).

58
Interesting issue in political economy
  • Why did the landlords lose? They still ran the
    government.
  • But they had de iure, not de facto power.
    Agriculture declining as source of income and
    employment.
  • Many landlords had diversified in industrial or
    commercial interests. Still, it could have gone
    the other way.
  • In fact, protectionism returns to Europe after
    1880. But not in Britain.

59
As a result
  • Britain after 1850 becomes increasingly a free
    trade country.
  • It sticks with this policy until deep into the
    twentieth century, despite growing pressures to
    move to a more protectionist position.
  • Its failure to protect its farmers meant
    specialization in non-farm products after 1875
    and growing dependence of food imports --- which
    makes sense in peace time but was costly in
    1914-18.

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