Fudan University Lecture 41 EMPIRE and TRADE Britain is an open economy, with a considerable part of...

Fudan University Lecture 4 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?


Economics suggests that Foreign Trade and Economic Growth affect each other.

Growth Foreign Trade

1. 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).

2. 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?


Growth Foreign Trade(cont’d)3. 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].

4. Technological progress demands certain specific inputs that sometimes have to be imported, meaning the country has to export to pay for this. Example: cotton.

5. 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).


Reverse direction?

Growth of Foreign Markets Economic growth?

1. In the simplest terms, gains from trade increase economic welfare and income.

2. Larger markets for goods that a country specializes in lead to economies of scale and learning by doing.

3. The possibility of imports makes domestic markets more competitive, since producers have to worry about foreign competition.

4. Competition with other nations constrains governments from outrageous acts since it always has to worry about foreign competition.

5. International trade exposes countries to new goods, new technology, and new ideas.


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.


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].


S

S’

Dd

Df

E

E’’

h g

P*

P

fd

E’

O j


• 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* < P.


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.


• 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.


• Did foreign markets “stimulate” demand and led to “demand-induced” innovation?

• We should keep in mind that all the manufacturers in Britain’s textiles and other goods were fairly small relative to the market (except machinery makers) so that they took demand as parametrically given.


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 Britain’s 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.


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.


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.)


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


What were the sources of imports? (in %)

N&NW 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


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


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


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


History of Textile Exports

Wool (in £ 1000s)

Cotton (in £ 1000s)

Cotton as % of total

Wool (%) Cotton (%)

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


• 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.


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.


Percentage Ireland of British International Trade

Exports 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


Was Ireland “exploited” by BritainClearly 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.


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 Queen’s Empire”).


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


• 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 R&D efforts that resulted in technological progress.


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.


Why did European Nations have Empires?

• Not clearly an economically rational action from the point of view of the entire economy (costs > 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.


Examples:

• Better firearms

• Quinine

• steamboats

• telegraph


Another explanation of Empire:

• Like a Prisoner’s dilemma game: Given that Britain’s rivals (France, Spain, United Provinces) engaged in Imperialism, wouldn’t 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.


• 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.


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 Britain’s 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).


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.


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.


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.


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.


What was their effect? In a static model:

D

Sd

Sf

domesticproduction

Imported

ConsumerSurplus


Now what does a tariff do, cont’d

D

Sd

Sf

domesticproduction

Imported

Sf + T

New Consumer Surplus


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 trapezoid+Dark 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)


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


So why can’t 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 don’t want a tariff they might pretend as if they do.


• 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).


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.


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


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.


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.


Policy makers were influenced by their beliefs

• Two years after Smith’s 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.”


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


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.


To make things worse

• Commercial Relations with the US also went bad.

• “Jefferson’s embargo” --- 1806-07.

• Then the war of 1812-14.


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.


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.


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

• [So is the rest of Europe]


• 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.


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


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).


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.


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.

Fudan University Lecture 41 EMPIRE and TRADE Britain is an open economy, with a considerable part of...

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