Effects On Economy:1850 To 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 ternational 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
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,