Free Trade vs. Protectionism The Great Corn-Laws Debate

Mercantilism Britain, by 19th century, had established an empire with a global network of colonies as a huge market for export Traditionally, Britain, France and other European states had managed their international commerce to service their growing empire They used a range of policies such as tariffs, subsidies and trade regulations – collectively known as "mercantilism".

Laws Prior to 1815 Prior to 1660 – most of the laws focused on protecting consumer from “unjust” prices After 1660 – focus of law shifted from internal trade to external trade and the law favored the interests of producers ahead of consumers Acts of 1673 & 1689 – established a subsidy to be paid to exporters of corn whenever the domestic price fell below specified levels ** When scarcity occurred the government removed the export bounty or prohibited exports altogether ** Tension between protecting the consumers by keeping low prices and protecting the producers by keeping prices artificially high

The Napoleonic Wars 1689 to 1815 Britain fought six wars with France, spanning more than 55 of the 126 years The state of war provided natural protection from imports and foreign competition The end of war brings: serious threat of deflation fear of price collapse from flood of imports farmers were over leveraged from wartime borrowing 1815: Enactment of Corn-Laws

Import Law Government options for importation of agricultural commodities Absolute prohibition Absolute free trade Sliding scale of duties Fixed Duties Absolute prohibition below a specified price

The Corn-Laws An Import Exclusion price of 80s No imports allow if price below 80s Unrestricted duty-free import if above 80s The Corn-Laws were a series of legislative acts modified from time to time, whose intent was: Sustain Britain’s self sufficiency in food Temper dramatic fluctuations in agricultural prices

Demand for Agricultural Goods Price S0 S1 P0 P1 D0 Q0 Q1 Quantity

The Debate A heated debate led up to and continued after the 1815 enactment of the Corn Laws Two camps were established: Free Trade promoters: “The League” Supported by the Manufacturers Protectionists: “The Anti-League” Supported by : Agricultural Protection Society The formation of the “Anti League” in 1844 was a direct response to the formation of the league which was the first large political interest group formed in Britain The debate reflected the social upheaval which was taking place in Britain due to the industrial revolution and the creation of the new middle class highlighting the conflict between manufactures and agrarians.

Protectionist Arguments Corn laws stabilize prices allowing the agricultural sector to remain a viable consumer from the manufacturing sector National debts were large from wars with France. Agricultural protection would help landowners bear burden of high interest pmts Britain would become dependent on foreigners for food – a threat to the security of the empire 1a.Also hypocrisy of mfg. since they were unwilling to relinquish their own import protection

Free Trade Arguments Artificially high corn prices hurt the new laboring classes who spent much of their wages on food Agricultural protection distorted the allocation of capital in the domestic economy: mfg. would otherwise have greater share of resources encouraged use of “marginal” lands requiring excessive capital and labor Reduced production of food was appropriate given strength of other sectors and that foreigners would become equally dependent on Britain farmers were tenants of landholders and high tenant rents and food purchases went to landholders

“Comparative Advantage” David Ricardo: Economist and leading advocate of free trade Built upon Adam Smith’s philosophy “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way which we have some advantage”

“Comparative Advantage” Example Britain needs: 100 man years for production of X Cloth 120 man years for production of Y Wine Portugal needs: 90 man years for production of X Cloth 80 man years for production of Y Wine Conclusion: Portugal should produce and export wine to Britain in exchange for Cloth

Aftermath 1846: Cancellation of Corn laws Early 20th century: Grain imports began to rise dramatically Early 20th century: Britain was importing over half its food and 7/8 of raw materials Britain became very dependant on imported goods British Prime Minister: Sir Robert Peel

The Debate Continues The debate between Free-Trade supporters and Protectionists continues to date in modern capitalistic markets…

Prepared by Jeff Abraham, Jerry Bright, Craig Bromberg, and Tal Rosenberg under the guidance of Prof. George D. Smith, NYU Stern School, 2003