Between Free Trade and Protectionism: 1846 - 1914
|Cours||International Economic History|
- Introductory aspects of the International Economic History Course
- Introduction to the International Economic History Course
- Between Free Trade and Protectionism: 1846 - 1914
- International triumph of the gold standard: 1871 - 1914
- International Finance and Investment: 1860 - 1914
- New Challenges in International Trade: 1914 - 1929
- New monetary and financial order: 1914 - 1929
- Dark history for the world economy: 1930 - 1945
- Crises and regulations: 1930 - 1945
- Divided trade policies: 1946 - 1973
- Bretton Woods System: 1944 - 1973
- Money, Finance and the World Economy: 1974 - 2000
- Trade and the World Economy: 1974 - 2000
A battle took place in the 19th century between the supporters of free trade and their opponents who supported protectionism. When we talk about free trade, we are talking about an organization of international trade relations in which states do not put any obstacle to the entry of foreign goods. The goods produced abroad are intended to be sold or processed on the national territory. Protectionism aims to protect domestic producers from competition from foreign productions. Such protectionism can be either tariff or non-tariff, such as import quotas or red tape that creates barriers. The level of tariffs is used as an estimate of the level of protectionism. When we look at tariffs, we use an estimate to get an idea of the trends we have.
If we are talking about a transition between these two policies, such a transition applies the dismantling of protectionist measures and in particular the abolition of customs duties.
If we look at the trade policies of Europeans in the 17th and 18th centuries, we are talking about mercantilism which aims to reduce imports to a minimum and increase exports to a maximum. The aim of mercantilism is to concentrate as many precious metals as possible in a country. Towards the end of the 18th century, ideas began to change, notably with Adam Smith's 1776 publication Recherches sur la nature et les causes de la richesse des nations attaquant le mercantilisme. Changing ideas does not necessarily begin in Scotland, but also in France with the physiocrats. There is an ideological tendency that leads to an opening to freer trade relations between nations.
A first effort appeared in 1786 when England signed a trade and navigation treaty with France based on free trade. We soon see that this free trade agreement is displeasing French industrialists because French industry is in very bad shape.
« In the first year after the treaty in 1787, the English brought more than 30 million manufactured objects into France. This enormous amount far exceeded ordinary consumption. They were forced to sell at 30, 40, for 100 loss. These sales at degraded prices have been very detrimental to our factories, which have not been able to withstand such unequal competition. They then rightly demanded against a treaty which had aroused similar speculations; speculations which did not go unpunished, because in 1787 and 1788 there were in the factories of England for more than 100 million bankruptcies. »
— Mr. Boislandry in the National Assembly on November 30, 1790, Moniteur December 1, 1790.
There is a criticism of the behaviour of the English because waves of imports arrive in France. The English are not capable of producing products at these prices and being profitable at the same time. There is not a sustainable situation, but a situation that affects the chances of the French to survive.
Throughout the 19th century, there was a similar reaction from industrialists in Europe, creating a very significant obstacle to free trade in continental Europe. Until the 1850s, English industries dominated the world industrial sector mainly in the framework of buoyant industries.
This treaty of 1786 was a first failure, but it was above all the Franco-British war which lasted twenty years which led to a return to protectionism. It is a very strict protectionism that is practised in Europe. In 1848 a very liberal policy was applied by the United Kingdom which was a break considered a lasting trend towards free trade.
- 1 Major Trends in Trade Policy: 1846 - 1913
- 2 Explanations of the trade policies of the various countries
- 3 Trends in international trade
- 4 Should we have a free trade policy to promote economic development?
- 5 Annexes
- 6 References
Major Trends in Trade Policy: 1846 - 1913[edit | edit source]
Towards Free Trade in Europe: 1846 - 1875[edit | edit source]
In the United Kingdom, the political struggle between supporters of free trade and protectionism began in 1815. The powerful Gentry in parliament passed the first grain law of the 19th century to protect British agriculture from importing foreign grain. The goal of Corn Laws is to keep grain prices high.
Therefore, there are other implications. This pushes up the workers' wages because wheat continues to represent a very important part of the workers' diet. If we decide to maintain prices at a fairly high level this means that the cost of living is also maintained at a rather high level. There is a negative reaction from industrialists to farmers' policies since they want to increase their foreign market share by playing on wages in order to make their products cheaper on foreign markets.
In 1815, the agricultural owners had much influence, and the opposition of the industrialists to Corn Laws failed. We see the structure of the opposition, which will lead to another result a little later. The power of industrialists increased during the 18th century, and free traders played on the idea that rising food prices negatively influenced wages. By reducing food imports from countries with an agricultural surplus, Corn Laws reduce export opportunities for manufactured goods to other countries. These two arguments are often used to demand a reduction in customs tariffs. With the intensification of the United Kingdom's industrialisation process, we see that the industrial sector is becoming more important.
There are other reasons why there is increasing political support as there is a growing population and increasing urbanisation making Britain's food autonomy increasingly difficult. There is a concern in Britain to feed itself without imports.
The fact is that industrialists have convinced and convincing allies. Ricardo edited On the Principles of Political Economy and Taxation in 1817 where he presented the comparative advantages which is the foundation of international trade. Already during the years 1820 - 1830, the free traders manage to ban customs restrictions, but the protection is still very solid concerning the grains so they decide to increase the political pressure.
In 1838, Richard Cobden, an industrialist from Manchester participated in the anti Corn Laws League launching a campaign to convince the most of the free-trade position. In 1841, the battle broke out in parliament. The Whig Party is supported by the merchants in power creating a favourable free trade situation. Still, when the government proposes a reduction in tariffs on wheat and sugar it is a defeat. The Tories won the majority, Robert Peel was appointed Prime Minister of an extremely conservative government. Robert Peel changed his position under Cobden's influence, but his party remained opposed to the abolition of protectionist measures.
The position changed following the Irish famine in 1845. This measure is supported by the Conservatives and the whigs, but paves the way for free trade in the United Kingdom. Historians consider 1846 to mark the free trade era in the United Kingdom. Following the repeal of the Corns Laws, we see a split of the Conservative Party. The whigs eliminated other traces of protectionism and by 1860 most tariffs had almost disappeared in the United Kingdom.
In Europe, there is a sharp contrast to the British experience. Most European nations such as France and Prussia see their customs legislation amended several times in favour of free trade. Continental industrialists see protectionism as necessary for their survival in a global economy increasingly dominated by British industrialists. In Europe, farmers and industrialists tend to agree on the benefits of protectionism. Nevertheless, the supporters of liberalism on the continent are gaining more and more weight, the Tories themselves are making efforts to engage liberal politics in France and throughout Europe.
Cobden began a European tour with stays abroad until 1859 to campaign for free trade. We are beginning to see that there are some tariff reductions in most European countries. Still, these reductions are limited, because they very slightly reduce the protectionist character of continental European countries. In smaller countries, liberalism is growing; Denmark, the Netherlands and Portugal are specialists in international trade. The Netherlands has a different attitude to trade policy, which is rather free trade for quite a long time. These countries continue to maintain the liberal position, but this is not the case for all the small countries such as the Scandinavian countries, which remain protectionist. As for Switzerland, each canton has its own legislation and its own trade policy.
With the overwhelming majority adhering to the principle of free trade, protectionism remained intact until the 1850s.
Free trade in Europe really began only with a Franco-British treaty and the publication of a letter from Napoleon III. This letter makes informal negotiations with the United Kingdom public. The Cobden-Chevalier Treaty abolishes all British prohibions to French imports, France for its part reduces its customs tariffs to an average of 15% of the value of its products.
The negotiations were led by Michel Chevalier, professor of economics at the Collège de France, pressing William Gladstone, who was then Prime Minister to sign the treaty with his friend Richard Cobden. However, not only the agreement of the British but also that of the French is needed.
Napoleon III was committed to free trade ideas and wanted to create a diplomatic rapprochement with the United Kingdom, giving its support to free trade. Thanks to a legislative provision, it is possible for Napoleon III to avoid the parliament which would probably have been fatal to him. In fact, the Cobden-Chevalier treaty was described as a coup by the vast majority of the House of Commons at the time.
We see that the Cobden-Chevalier Treaty's influence is very important beyond the borders of France and the United Kingdom. A most-favoured-nation clause means that the principle of any advantage granted by one country to another country must be automatically granted to the other countries with which they sign treaties.
Other treaties follow the Cobden-Chevalier Treaty in other countries involved in customs disarmament in Europe. Already in 1861, a Franco-Belgian treaty was signed, Prussia ratified the treaty on behalf of Zollverein with France in 1862, and between 1863 and 1866, most European nations entered a free trade network. During this decade we see a transition between protectionism and a system that seems to be free trade. Even if we can speak of customs disarmament in comparison with the internal situation, it is far from being as complete as that carried out by the United Kingdom.
Outside Europe: autonomous countries, dominions and colonies[edit | edit source]
This table shows that we are not in a pure free trade system. This table also shows that in contrast to the liberal shift seen in Europe, virtually all overseas countries reinforced protectionism during the 1860s to 1880s and, more particularly, overseas countries with political autonomy. For example, for the United States, protectionist policy has played a key role since the independence of the United States.
For Paul Bairoch, the protectionist doctrine was born in the United States with Hamilton. There is an opposition between the liberal south and the protectionist north because it is industrializing behind Britain with the Civil War. There is the same fear of American industrialists as those of the French. This moment is the crystallization of the opposition between these two regions between the north, which is antislavery, but it is also a war between the free trade north and the south. The victory of the north is protectionism. Protectionist measures were reinforced in 1866.
When we look at the United States level, it is no exaggeration to say that from 1866 to 1913, the United States was perhaps the most protectionist of the advanced countries. The tariffs are in the order of 40% to 50%, we must also remember that we are talking about an isolated country, protected by the nature of competition from Europe. We must realize that this geographical aspect must be added to this policy in order to see the market, which is strictly controlled.
In the British Dominions and especially in Australia and Canada, this period was the implementation of industrialization policy through customs barriers. If we look at the discourse of industrialists in the United States, they talk about protectionism as a policy to promote industrial development. Carnegie is a fan of this policy in order to let the United States develop its industry and compete with the British. In Australia and Canada, we see much the same thing as we see in the United States, but also in Latin America. In general, in countries that retain or gain political autonomy, protectionism is maintained until the eve of the First World War.
Ferguson, an economic historian, notes that British imperialism was a driving force behind modernisation in the 19th century. According to his position, this was a good thing. However, everyone agrees that the British Empire is not alone in forcing its colonies to adopt a free trade policy.
Return of protectionism in Europe: 1879 - 1913[edit | edit source]
Despite the important step European countries took on free trade in the 1860s, this new international regime did not last long. A great depression began in 1873 until 1896. This depression supports the relatively low level of customs duties in Europe.
The transport revolution led to the globalisation of trade and especially agricultural trade in the 1870s, with large quantities of wheat and agricultural products exported to Europe.
It appears that towards the end of the 19th century, competition became really important. The situation is widespread. Increased competition is contributing to a structural decline in agricultural products throughout the world, particularly for European farmers. European farmers facing exports from lowland countries like Australia, the United States and Canada are demanding tariff increases.
This causes a general deflation is deep in European economies for twenty years. Industrialists are also affected by deflation, which is why industrialists are calling for a return to protectionism. These requests led to a great success. The most visible response to the 1873 crisis was a return of continental Europe to protectionism in the last quarter of the 19th century. One speaks of 1879 because it is at this time that Germany behind closed doors are liberal interlude with a new tariff in 1879 changing its mind with regard to trade policy. 1879 is remembered as the end of the free trade period and the beginning of a new protectionist period.
The situation in Germany is interesting, because the crisis plays a decisive role in convincing the Junkers in eastern Germany to support the industrialists. Until then, the Junkers were more in favour of free trade, as they exported their grain via the Baltic Sea. However, with the invasion of wheat in Europe, the Junkers are suffering from falling prices. Bismarck takes the opportunity to operate a new political alliance called the "Rye and Steel Alliance" pushing for a protectionist policy. It should be noted that Bismarck himself is a Junker marking a drastic transition in foreign policy by denouncing the Zollverein treaties. Until now, the ports largely open to imports have made us a dumping ground for the overproduction of foreign products. The idea of dumping is leading the nation into a deflationary spiral.
This is true in all European countries, but there are a few exceptions. The United Kingdom remained a free trader until the outbreak of the First World War. We see that protectionist pressure is increasing in Britain with opposition to Cobden's policy, but proponents of protectionism fail to enforce protectionist policies until the First World War.
Economic thought was oriented towards free trade in the 19th century, the industrial world was similar to that of 1815. Liberal countries remain islands. On the other hand, for autonomous countries, there are protectionist tendencies and colonized countries are subject to treaties that force them to reduce customs barriers.
Explanations of the trade policies of the various countries[edit | edit source]
Why Britain follows the path of free trade?
Domestic elements[edit | edit source]
We have suggested the importance of economic interest in a battle between industrialists and farmers. Great Britain is not as efficient in wheat production as the lowland countries making the price of wheat higher than in Chicago or Ticino. British industrialists prefer lower wheat prices in order to make prices cheaper and justify lower wages. This is an economic argument where we see an opposition between farmers and industrialists in Great Britain.
The industrialization process intensified as the 19th century unfolded. In the end, industrialists were successful against agriculture simply because of their growing importance in the British economy, partly explaining the forces that led Britain to free trade. However, this thesis is too simplistic.
The change in the balance of power between industrialists and farmers in the British economy was not immediately reflected in British policy. Even in the early 1840s, industrialists did not control the country's politics. The whigs tried to dominate the country in 1841, but lost power. In fact, we are focusing on the political situation in Great Britain, which is a headache, because the Conservative Party came to power in 1841 with a commitment to protect farmers. The gentry continued to dominate the House of Commons in 1846 and it was their leader Robert Peel who repealed the Corn Laws. There is a situation where the gentry is acting irrationally in terms of its economic interests.
However, if more time is taken to understand the true economic interests of large farm owners, this paradox can be resolved. When we look at farmers, with the spread of industrialization, some owners are diversifying their portfolios to diversify their investments, particularly in railways, mining and industry. For this reason, some owners become rather neutral and even slightly positive in relation to free trade.
It is possible to qualify the analysis of economic interests, but there is something that can be explained on the basis of an analysis of economic interests. We see that we need other ideas and we must mix arguments to explain the turn of 1846.
We are still looking for a convincing and complete argument. It is possible to look at another element often highlighted by historians and specialists which is the rise of a free-trade ideology in the United Kingdom in the 19th century. It is true that we are seeing an increase in this ideology, but despite the rise of this ideology, if we look at the votes between 1841 and 1845 and the opposition taken by the Tories and the Conservative Party, there has been no change in their vote for increased protectionism. We do not see a change in their attitude. Ideas change in relation to an external shock which is the Irish famine in 1845.
We need a mix of arguments to explain this change. First we focused on structural aspects. Without the Irish famine, given that there are structural changes leading to a free trade movement, would there have been another shock leading Britain in the same direction?
As far as the domestic element is concerned, we see the importance of political interests and how they are organised. The role of institutions allows emphasis to be placed on state and political structures and the individuals responsible for them. The role of ideas is that trade policy is about belief systems or ideas.
International elements[edit | edit source]
A country's trade policy also emanates from each nation's place on the international political, military, diplomatic, economic and financial scene.
Interactions between States[edit | edit source]
In the case of the British example, it is an important country that is the most economically powerful country in the world at the time. Industrialists have confidence to campaign for free trade because they know they will dominate international markets. Moreover, as England has a powerful navy that allows it to dominate the seas, it allows it to secure its sources of supply from elsewhere.
If we look at the same hierarchy of a country at the bottom, we can talk about coercive relations, countries are forced either directly as a colony or indirectly as a dependency to follow the policy of a country.
Policy dissemination[edit | edit source]
Moreover, there is no obligation to represent relations between States in a hierarchical way; there is an opportunity for learning and merging policies. There are also processes of infatuation. For certain policies, notably with regard to free trade and monetary policies, Bismarck looks at Britain and considers that its monetary policy explains its wealth.
Trends in international trade[edit | edit source]
We can see possibilities of a gap between free trade policy and imports and exports. With the Corn Laws, farmers fear the worst with the invasion of foreign wheat and the collapse of prices.
In this table we see the term effects. It took some time to have this invasion because even though wheat was cheaper there in 1846, transportation costs were still high in 1846. That is, free trade alone is not capable of promoting the growth of international trade. The fall in transport costs can compensate for very strong protectionism.
Despite the fact that the 19th century ended with a strong protectionism, the trade between the countries of the whole world knows a historical growth. The annual growth is 3.5% during the 19th century against 1% from 1500 to 1800. As a result, the importance of countries' foreign trade in relation to their economies is clearly increasing, and these economies are becoming increasingly open.
Exports represented 2% of GNP in 1830, in 1860 it was 9% and in 1913 it was 14%. There is an increase in the openness of the European economy. The expansion of trade affects different countries unevenly. These differences reflect several factors, but especially the different size of economies. We see this clearly with the United States, because if we look at the level of exports, they arrive at almost the same level in absolute value as those of Great Britain, but account for only 6% of GDP whereas in the United Kingdom we speak of 18%.
The importance of third world trade is also increasing. If we look at the estimates, the share of exports between 1830 and 1913 increases from about 2% to 19%.
European countries dominate international trade in manufactured goods. More generally, the country's participation in international trade is closely linked to the structure of its economy. At the end of the period, the surplus of exports is impressive for Great Britain while for Latin America it is the opposite. This is typical because it is a region that has difficulty industrializing.
We must recognize that despite the fact that we are seeing an intensification of industrialization, when we look at a distribution of the world's international trade, even though this trade is becoming more and more important, we see that even so international trade in terms of gross product is becoming more and more important. Great Britain depends on other countries for its gross products, the size of the deficit increases during this period. For Latin America, the situation is different.
Some cases appear where there are both things at the same time with manufactured product capacities and natural resources to exploit.
Should we have a free trade policy to promote economic development?[edit | edit source]
The answer is more than 90%"yes" for the specialists of the question. However, this argument creates a big problem for proponents of free trade. To promote the advantages of free trade, Great Britain is the model to take because it followed a free trade policy from 1846 to 1913.
This country was already strongly industrialized before making the transition to free trade with an economic advance acquired behind customs tariffs. It is the fact that they are aware of Britain's advantage and their origins that British competitors are not ashamed to put in place protectionist policies, it is the idea of educational protectionism to defend its industry behind trade barriers found in Germany and the United States.
The experience of developed countries is a challenge to free trade. Protectionism and not free trade according to the data would be a growth factor. But such a finding does not account for the other examples of countries that do not have the same boom despite a protectionist policy. They avoided the same trap in others with a strong relationship between protectionism and economic growth.
Annexes[edit | edit source]
- Sen, A. (2010). Adam Smith and the contemporary world. Erasmus Journal for Philosophy and Economics, 3(1), 50. https://doi.org/10.23941/ejpe.v3i1.39