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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