Title: EMPIRE and TRADE
1EMPIRE 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?
2Economics 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?
3Growth 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).
4Reverse 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.
5In 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.
6This 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.
7S
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.
9Is 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.
12What 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.
13By 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.
14However 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.)
15The 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
16What 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
17What 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
20History 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.
22What 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
24Was 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.
25The 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).
26At 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.
28Costs 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.
29Why 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.
30Examples
- Better firearms
- Quinine
- steamboats
- telegraph
31Another 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.
33The 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).
34Another 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.
35Heavy tariffs on many commodities in the
eighteenth century
- Wines
- Sugar, tobacco, tea
- Cereals (if prices were low)
- Soap, glass, pottery and many other products.
36From 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.
37What 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.
38What was their effect? In a static model
Sd
Consumer Surplus
Sf
D
domestic production
Imported
39Now what does a tariff do, contd
Sd
New Consumer Surplus
Sf T
Sf
D
Imported
domestic production
40In 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)
41These 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
42So 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).
44Growing 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.
45In 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
46Beneath 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.
47Why 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.
48Policy 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.
50Yet 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.
51To make things worse
- Commercial Relations with the US also went bad.
- Jeffersons embargo --- 1806-07.
- Then the war of 1812-14.
52During 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.
53Yet 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) -
57The 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).
58Interesting 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.
59As 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.
60(No Transcript)
61(No Transcript)
62(No Transcript)
63(No Transcript)
64(No Transcript)
65(No Transcript)
66(No Transcript)
67(No Transcript)
68(No Transcript)
69(No Transcript)
70(No Transcript)
71(No Transcript)
72(No Transcript)
73(No Transcript)
74(No Transcript)