Globalization, 1815−1914: trade and development EC120 The World Economy in Historical Perspective Globalization, 1815−1914: trade and development Topics: World economy in the long 19th century Industrialisation, mid-19th century to 1914 Transport & communications in 19th century Long distance trade, 1815−1914 Commodity market integration and convergence Britain’s move to Free Trade Liberal interlude in commercial policy, c1860−c1880 Retreat from Free Trade: rise of Neo-Mercantilism Free Trade Imperialism Reading: get started with Findlay & O’Rourke, Power and Plenty, pp. 378–407, 425–428 Key issues: In what ways was the “economic structure” of the world economy transformed, 1815–1914? What were the driving factors in the transformation? What were the main causes and effects of commodity market integration in the 19th century? What explains the widespread move towards more liberal international trade in the mid-19th century? To what extent, and why, was there a retreat from “Free Trade” after the 1870s? What were its effects? Key concepts: the Transport Revolution; Corn Laws; neo-Mercantilism; Free Trade Imperialism; Reciprocity treaties; Most Favoured Nation agreements; the Alliance of Rye and Iron; Great Specialisation EC120, week 16

The World Economy in the long 19th century EC120 The World Economy in Historical Perspective The World Economy in the long 19th century Move towards international Free Trade, 1840s−60s Retreat from late 1870s with rise of neo-mercantilism Industrialisation: western Europe caught up, 1850s−60s Industrialisation: a “second” Industrial Revolution? Globalisation: the first(?) phase 1860s−1914 Stages in the long 19th century, 1815−1914: Britain completed the first (“classical”) Industrial Revolution, c1850 International economy moved towards Free Trade, 1840s−60s Symbolic abolition of Corn Laws, 1846 Industrialisation: western Europe caught up, 1850s−60s Industrialisation continued apace: “second” Industrial Revolution Technological progress in Europe & US from 1870s onwards Japan industrialised swiftly after Meiji restoration in 1867/8 Globalisation: market integration & income convergence, 1860s−1914 Commodity market integration: dramatic decline in price divergences Integration of Europe and it’s offshoots including US Mass migration, mainly from Europe to the “new world” Capital market integration: growth of foreign portfolio & direct investment Monetary integration: the International Gold Standard, 1880s−1914 Convergence in the “Atlantic economy”, divergence with the “third world” Rise of neo-mercantilism: retreat from Free Trade from late 1870s “… the century that followed the final defeat of Napoleon saw the world’s economic structure transformed in so radical a manner that it would have been virtually unrecognizable to a late eighteenth century observer.” (Findlay & O’Rourke, p.426) EC120, week 16

Industrialisation, mid-19th century to 1914 EC120 The World Economy in Historical Perspective Industrialisation, mid-19th century to 1914 Technological advance in broad range of industries Landes’s classification: I. “New materials and new ways of preparing old materials” II. “New sources of energy and power” III. “Mechanisation and division of labour” Technological advance in broad range of industries Innovations of the first Industrial Revolution spread more widely Geographical spread across western Europe, USA & Japan Landes’s classification (The Unbound Prometheus, pp. 249−326): I. “New materials and new ways of preparing old materials” Mass production of steel, “a superior variety of iron” Chemical industries, esp. alkalis (soda) and organic dyestuffs II. “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) Electricity: expansion in distribution and range of applications III. “Mechanisation and division of labour” Machines with replaceable parts, machine tool industry Expansion of mass production methods, production line organisation The “ever-closer marriage of science and technology” EC120, week 16

Transport & Communications in the 19th cent. EC120 The World Economy in Historical Perspective Transport & Communications in the 19th cent. Canals: linked oceans, inland waterways expanded Ocean: improved ship design and refrigeration Railroads: expanded across the world after 1840s Telegraph: networks widespread from late 1840s Canals: 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 mid-west (coast-to-coast by 1870) Telegraph: networks expanded from late 1840s Implications: Dramatic falls in ocean & overland freight costs from mid-19th century From 1870s, rail & ships open the mid-west prairies for European markets EC120, week 16

EC120 The World Economy in Historical Perspective Long distance trade, 1815−1914 Growth of trade faster than GDP; brief cyclical interruptions Growth dominated by Europe and the New World Shift from high-value/weight to bulk commodities Changing trade patterns affected composition of domestic output and distribution of income What determined of the changing patterns of trade? Trend growth of trade exceeded GDP, with brief cyclical interruptions Geographical pattern: dominated by Europe and the New World 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. Changing trade patterns affected allocation of domestic production and distribution of income (e.g. displacement of agricultural workers in UK) 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) EC120, week 16

Commodity market integration & convergence EC120 The World Economy in Historical Perspective Commodity market integration & convergence International commodity markets became more integrated, 1815-1914 Compare commodity prices at the origin (production) with those at the destination (consumption) Commodity market integration and income distribution Commodity prices -> trade patterns -> production patterns -> income distribution 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 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” EC120, week 16

Britain’s move to Free Trade EC120 The World Economy in Historical Perspective Britain’s move to Free Trade In 1815, Britain remained highly protectionist Agricultural protection reinforced: Corn Law of 1815 Corn Law repeal in 1846 signalled 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 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 when they were a tiresome nuisance Sir Robert Peel EC120, week 16

Liberal interlude in trade policy, c1860−c1880 EC120 The World Economy in Historical Perspective Liberal interlude in trade policy, c1860−c1880 In 1815 most European nations were highly protectionist Gradually less protectionist policies were adopted Cobden-Chevalier Treaty between Britain & France, 1860 Despite Free Trade Imperialism, much of the world remained protectionist In 1815, most European nations were highly protectionist (a response to restoration of national borders?) 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 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 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) EC120, week 16

Retreat from Free Trade: rise of Neo-Mercantilism EC120 The World Economy in Historical Perspective Retreat from Free Trade: rise of Neo-Mercantilism From c1880, most nations retreated from trade liberalisation Variety of causes: preservation of existing living standards and/or promotion of new industries Varying national responses: some countries upheld free trade, 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 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 Iberian nations: resume protection for agriculture and manufactures Denmark, Netherlands retain free trade, and switch to non-grain agriculture Britain adheres to free trade (agriculture allowed to decline further) EC120, week 16

Free Trade Imperialism EC120 The World Economy in Historical Perspective Free Trade Imperialism European overseas empires expanded during the 19C: Mainly to impose trade “openness” Greater autonomy for European offshoots USA and Russia pursue continental expansion A North-South divide? Europe (`north’) versus the rest (mostly `south’) European overseas empires expanded throughout the long 19C: Mainly Britain & France; Germany, Italy, Netherlands, Belgium less so Enabled by technological advantages, unique to Europe in this period Mainly to impose “openness” (free trade), i.e. economic domination. 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 Exceptions: USA industrialises too; other nations try to industrialise as well (with limited success), behind tariff barriers Were primary producers forced to de-industrialise? Only in some cases (e.g. India), because abundance of primary resources meant that many countries would have exported these anyway (unlikely to have industrialised had they remained “closed”) EC120, week 16

EC120 The World Economy in Historical Perspective Summing up In 19C, international trade expanded faster than output Globalisation: reflected in commodity price convergence Convergence of incomes (returns to factors of production) Partly from trade flows (goods and services) Partly from factor flows (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 Globalisation, 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. EC120, week 16