Effects On Trends In Trade Policy From 1850-1914 Essay, Research Paper

Effects on Trends in Trade Policy from 1850-1914

The modernizing world of 1850-1870 belonged to an age of remarkable growth in international trade, stimulating the largest free market the world had ever seen. Yet by 1914, only 30 years later, the trend towards liberal trade policies had mostly ended, replaced by a revival of the protectionist system. A study of the variation in trade policies over time shows a remarkable growth in the power of interest groups to influence the institutional rules and regulations concerning international economic intercourse. The initial major trend can be partly attributed to international conditions, whereas later trends are more attributable to the relative strength of the interest groups within individual nations and their ability to influence institutional policies. It is, however, necessary to always consider the impact of the international economic situation on the interest groups, as changes in the international arena often played a significant role in determining which interest groups held power at any given time.

A convenient starting point for looking at trends in international commerce policy is Great Britain. Prior to the British initiative towards free trade, there were two main barriers to trade, natural and artificial1. Natural barriers were the long distances to be transversed and the high cost of shipping materials. Artificial barriers included tariffs and at times direct prohibitions on the import of certain goods. As the century progressed both barriers fell drastically due to remarkable advances in technology and through the international leadership of Great Britain. This lasted until the 1870s initiated the return to protectionism.

Britain, as the first serious pundit for free trade, led the initial trade liberalization movement for several reasons. First, the philosophical roots which planted the argument in favor of free trade came to fruition with the publication by Adam Smith of The Wealth of Nations. This work was quickly expanded upon by David Ricardo who postulated the concepts of absolute and comparative advantage, and who showed that every nation involved in trade benefited. The first group of influential people to accept and use these arguments thus arose in Britain in the form of the international merchants and industrialists.

Britain in 1832 expanded the franchise to the urban upper middle class, of whose numbers merchants and industrialists constituted a significant amount. Thus at the same time the merchants were beginning to advocate a liberalization of Britain’s trade policy, they were also becoming empowered to influence the parliamentary rules. Younger politicians intent on simplifying the government architecture gained power as a result, including Robert Peel and William Huskisson.

The greatest barrier to free trade in Great Britain in the 1840s were the Corn Laws. The Corn Laws principally benefited the landed aristocracy, the strongest group traditionally represented in Parliament. Thus the landed aristocracy can and should be viewed as an institution as well as a separate interest group, given their hegemony over policy within the nation for several centuries. The rise of the merchant classes and the enfranchisement thereof provided the catalyst necessary to promote a sweeping change of the traditional policies.

In Britain this political turmoil led to a trend towards free trade and a demand for the repeal of the Corn Laws by the industrialists and merchants. Richard Cobden, an industrialist, formed the Anti-Corn Law League2 in 1839 which created one of the first large scale campaigns to influence public opinion. The Whig party saw the merchants as a way to gain more control in Parliament, but failed to win the election in 1841. Tory Sir Robert Peel was elected prime minister, already intent on making extensive changes in the fiscal system. The Anti-Corn Law League achieved triumph in 1846, not due to their extensive propaganda, but thanks to the Irish potato famine. Faced with mass starvation Peel decided to introduce a bill which would permit the duty free import of grain within a few years.

In some sense it can be argued that without the Irish famine the era of free trade would have come substantially later if at all. As an international event it propelled Great Britain down the path of free trade, and it is significant that the Whigs, which became the party of the industrialists and merchants, were unable to attain the repeal of the Corn Laws without a significant catastrophe to aid them. In the aftermath of the potato famine, the Whigs gained power and eventually replaced the vast majority of the tariffs with an income tax, making Britain essentially free trade.

The interplay of events leading Britain towards free trade is also an example of a major interest group (the merchants and industrialists) taking on the institution of parliament and the wealthy landowners and setting a new trend in the nation’s economic policy. With varying interest groups this power struggle manifest itself in nations throughout Europe, with different results leading to different trends. It is important to focus not on the institutions as such, but on which interest groups are capable of influencing the institutions. In the case of Britain it is doubtful the merchants would have managed to overhaul even small parts of the fiscal policy had there not been an enlargement of the franchise in 1832.

Paul Bairoch hints that Great Britain may have chosen the free trade policy at exactly the right time for it to work, and that any other time could well have been disastrous. He cites the rapid decrease in natural barriers to trade through greater technological development and the fact that Britain was able and willing to phase out its agricultural production and come to rely on foreign foodstuffs. This argument is slightly supported by the onslaught of the Depression in 1873, discussed later.

In contrast to Britain the industrial interests in most other major industrializing nations were opposed to liberalization of trade protection. The British stood out in that they managed to have a comparative advantage in the production of most manufactured goods at the time. Any large nation which chose to engage in free trade with Great Britain would therefore see their main industrial industries annihilated, especially the textiles industry, and be forced to specialize elsewhere. Nations like France, the United States, the German Zollverein and Russia were not inclined to abandon their industrial infrastructure to the ravages of free trade without seeing the potential benefits first.

Thus the trend in Britain, which I have up until now purported to be the main driving force behind trade deregulation throughout the industrializing world, does not in and of itself manage to explain the global trend towards deregulation. There are two other main factors which ensured the success of the British system of free trade up until the 1870s.

First there is the Cobden-Chevalier treaty of 1860 which revived the concept of most favored nation, essentially a way of granting any trade concessions made to one nation to all nations simultaneously. In addition, it paved the way for the negotiation of a plethora of other trade agreements, leading to a universal reduction of tariff barriers. This had a dual-effect: due to the tangle of international treaties it became difficult for any individual nation to hike tariffs, and it set a precedent for reducing tariffs even in highly protectionist nations such as France.

A second major factor was the success of Great Britain in pursuing a free trade doctrine. The general liberal philosophy at the time equated the economic rise of Great Britain with its free trade policies, and created the belief that failure to liberalize economically would lead to an inability to compete internationally. Michel Chevalier wrote about Britain, “When such a powerful and enlightened nation not only puts such a great principle into practice but is also well known to have profited by it, how can its emulators fail to follow the same way?” Thus the governments in power were persuaded by the precedent of Britain to ignore demands for protection, in some cases detrimentally. Russia for instance saw a large deterioration of its balance of trade after the 1868 tariff was enacted.

It behooves us to look at other nations at this point to see how international events and interest groups played a role in determining economic policy. France is a major exception to the concept that interest groups largely determine a nation’s trade policy, although most other nations tend to follow this idea.

France had remained highly protectionist up until 1860 for a variety of reasons, prominent among which was the textile industry as an interest group. Unable to compete with British producers of textiles, the French industry had managed to impose a prohibition on the importation of cloth to the French market. The fact that French industry opposed trade liberalization, in contrast to their British counterparts, and the continued support for protectionism in the agricultural sector guaranteed protectionist policies in France.

It took Napoleon III, a supporter of free trade, to pass the Cobden-Chevalier treaty and move France from a highly protectionist to a medium protectionist state. Done without the consent of the French Parliament, and as Paul Bairoch points out, against the will of the majority of the people3, this precedent forced France to lower its trade barriers for at least 10 years. This is exceptional in that the interest groups were united in favor of protection and yet lost out. The inability of the interest groups to exert more substantial power lies in the structure of the government and the fact that Napoleon III adroitly used a political loophole to overcome them.

Germany, loosely united in the form of the Zollverein and under the leadership of Prussia, had a much smaller industrial base compared to a formidable agricultural sector. Thus the industrial sector was not powerful enough to make strong demands for high protection in opposition to the interests of other groups. The Zollverein was very protectionist up until the 1850s, when two factors contributed to its adoption of more liberal policies (although still protectionist by comparison to France or England). As mentioned, the agricultural sector was predominant, and hence preferred lower prices on manufactured good. Secondly, Prussia wished to retain sole control over the Zollverein and was fearful of an Austrian attempt to join. Thus by liberalizing trade policy Prussia hoped to deter a highly protectionist Austria from seeking admittance.

Spain, the Italian customs union, and Russia all relaxed their highly protectionist laws from 1850 onward as a result of the spectacular economic success of Great Britain and the ratification of trade agreements with adherence to the most favored nation clause. Since all had relatively small industrial sectors, the industrialists as an interest group demanded more protection. Yet due to the political weakness of the interest groups, and the largely despotic nature of the regimes as regards trade policy at the time, protectionism was lowered in spite of the industrial sector. The nations remained generally protectionist, though, and were in no way leaning towards true free trade.

The small continental European countries moved much more strongly to a liberal trade doctrine. By virtue of their size, the smaller countries could not count upon a large endowment factor and thus were forced to specialize earlier than their larger peers. This created politically stronger interest groups with a focus on international markets. As it was unnecessary to place tariffs upon goods for which the nation lacked centers of production, imports and consequently lower duties were accepted. Additionally, most specialized goods were intended for export rather than domestic consumption, prompting both agricultural interest groups (evidenced by the Farmer’s Association in Belgium) and liberal groups deriving their theory from England joined forces against the weaker industrial interests to lower duties with some success, notably in the Netherlands, Denmark, Portugal and Switzerland.

Following 1860, and up until 1879, most nations reduced tariffs, following the trend begun with the Cobden-Chevalier treaty, much to the detriment of pro-protectionist interest groups. Whether liberal trade policy benefited nations other than Great Britain is unclear, and still a point of contention. It must be noted that nations with more liberal trade agreements often saw a retraction in the magnitude of industrial growth. Yet the overall growth in European exports following 1860 shows tremendous gains, of nearly 5.8% per year, and belies any belief that trade liberalization was detrimental. Given that most nations, especially the large industrializers, retained substantial tariffs throughout this period, there is not a clear picture of how large a role liberal trade policies played in stimulating this growth.

By 1870 the technological advances of sea transportation, combined with the phenomenal growth of the United States railroad network had opened up the vast prairie lands in the U.S. to farming. This created a massive export of cheap wheat and other grains to Europe, which quickly plummeted the majority of European farmers into a sever crisis. Britain, having already made the transition from an agricultural nation to an industrial one, felt this depression in foodstuff prices far less than its more agricultural, continental neighbors.

The reduction in foodstuff prices immediately reversed the political stance of the powerful agricultural interest groups throughout Europe. In Germany, the farmers for the first time lent major support to the industrialist interests in advocating protection and thus paved the way for a precedent setting 1879 tariff which is historically heralded as the return to protectionism.

This new tariff marks, with the exclusion of Great Britain and the Netherlands, a universal trend to raise tariffs during the years 1880-1914. Once again international events determined which trends in trade policy were followed. In the case of the great depression, the United States plays a prominent role in redefining the trade stances of agricultural interest groups, which combined with an established push for protectionism on the part of the industrialists soon gave rise to powerful interest groups. This, in conjunction with several monarchs’ needs for more revenue, facilitated the return to protection.

Institutional fiscal needs were not the main driving force in the return to protectionism, but did play a significant role. Bismark for example needed to increase his source of revenue, and used higher tariffs (which had always been a large source of revenue in Germany anyway) to help achieve his goals. Nations without strong parliaments, and hence weak bourgeoisie middle classes, tended to return to protection first. This was facilitated by the facts that the much larger agricultural interests were suffering from imports and demanding protection within those nations, and that higher tariffs provided a larger source of revenue for the monarch (as in the cases of Russia, Austria-Hungary, Spain and Italy).

By 1892 the Great Depression was beginning to wane and trade relations between nations moved overall towards a more protectionist stance. The protectionist movement after 1892 is largely a result of internal interest group demands, and not a response to overall market depression as the preceding years had been. Thus the international economic system ceased to play as dominant a role in determining individual nations’ trade policies, and interest groups were able to gain more control over the policies adopted.

Germany became the primary leader in leading continental Europe back to protectionism, largely due to Germany’s increasing commercial power. Caprivi’s policy of concluding treaties to reduce overall tariffs met with opposition between 1892 and 1896. By weakening the protections on agriculture, Caprivi witnessed the farmers’ formation of the Agrarian League (Bund der Landwirthe), which quickly assimilated the Junkers, creating a powerful interest group. Through an agreement with the Deutscher Bauernbund and manufacturers, this group managed to oust Caprivi and catalyzed the passage of Navigation Laws, leading to an increase in protectionist policy in 1902.

France took far less time than Germany to raise its tariffs after 1892, beginning with a tariff in 1892 which remained in force until 1910. This period represents a total political victory for the agriculturalists and manufacturers as interest groups. The main opposition to higher tariffs came from the Anti-Protectionist League led by Leon Say, who was unable to stop the rise in protectionism.

Other European nations, many of which had never become as liberal in their trade policies as France or even Germany, maintained and increased their existing tariffs. Russia for example introduced a maximum and minimum tariff system under the direction of Count Witte, and it is largely due to increased protectionism that Russia industrialized rapidly following 1890. Italy saw a tremendous increase on agricultural duties in response to that sectors demands for higher protection, but simultaneously pursued a policy of keeping manufacturing duties low in order to increase agricultural exports to other nations.

Austria-Hungary faced growing demands for protection from within the nation as well. The Hungarian farmers pressured the government to adopt a more protectionist stance, but without as much success as agricultural interest in other nations. Even the small nations in Europe adopted more tariffs that they had previously had, including Denmark, Norway and the already highly protectionist Sweden and Finland.

Perhaps the most significant role of interest groups in determining foreign trade policy was played out in Switzerland. The Swiss Consumers’ Union formed a league against increases in tariffs, supported by the Socialist movement. However, the manufacturers, the Swiss Union of Craftsmen, and the Swiss Union of Farmers were able to rally enough support to pass a tariff in 1902 increasing the protectionist policy.

Britain contrastingly stands out through this entire period (1860-1914) as staunchly anti-protectionist. There were movements in Great Britain to return to a protectionist policy, beginning with the Fair Trade League which eventually became the United Empire Trade League. Joseph Chamberlain led the next interest group crusade with the formation of the Tariff Reform League. However, the liberals in power counterattacked vehemently and succeeded in blocking all attempts at levying retaliatory tariffs. It is logical that in Britain the resistance to protectionism would have remained strong even when faced with economic stagnation, given that almost all the manufacturers and economists believed that free trade was the dogma which had propelled Britain to economic prosperity.

The phenomenal growth in trade over the period 1850-1914, estimated at 25-fold, cannot be explained by any one theory, but rather must be considered at each moment in its international, national, and even regional aspect. The often bellicose attempts of the ever more powerful interest groups demanding representation led to a slow reduction of liberal trade policies in many continental nations and a return to protectionism. It is important that interest groups were often unable to achieve their goals without the aid of international events to support their arguments and force the institutionalized governments to listen.

Historically the variation in trade policies within this time period sketches many of the arguments which are still made today. There is no way to study the modern trends in economic trade policy without hearkening back to Adam Smith, David Ricardo and the Anti-Corn Law League. It is a fascinating era to study and learn from, and to hope that mistakes made in the past will not be repeated by modern political rhetoric.

Bibliography / Works Cited

1) Cameron, Rondo. A Concise Economic History of the World. Oxford University Press, 1989.

2) Schonhardt-Bailey, Cheryl, et al. Free Trade: The Repeal of the Corn Laws, pp.xi-xxviii, 132- 138, 331-344. 1996.

3)Bairoch, Paul. “European Trade Policy, 1815-1914,” The Cambridge Economic History of Europe, Volume 8. Peter Mathias and Sydney Pollard, eds., pp 1-160.