Effects on Trends in Trade Policy from 1850-1914The modernizing world of 1850-1870 belonged to an age of remarkable growthin international trade, stimulating the largest free market the world had everseen. Yet by 1914, only 30 years later, the trend towards liberal trade policieshad mostly ended, replaced by a revival of the protectionist system. A study ofthe variation in trade policies over time shows a remarkable growth in thepower 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 moreattributable to the relative strength of the interest groups within individualnations and their ability to influence institutional policies. It is, however,necessary to always consider the impact of the international economic situationon the interest groups, as changes in the international arena often played asignificant role in determining which interest groups held power at any giventime. A convenient starting point for looking at trends in international commercepolicy is Great Britain.
Prior to the British initiative towards free trade, therewere two main barriers to trade, natural and artificial1. Natural barriers werethe long distances to be transversed and the high cost of shipping materials.Artificial barriers included tariffs and at times direct prohibitions on the importof certain goods.
As the century progressed both barriers fell drastically due toremarkable advances in technology and through the international leadership ofGreat Britain. This lasted until the 1870s initiated the return to protectionism. Britain, as the first serious pundit for free trade, led the initial trade liberalizationmovement for several reasons. First, the philosophical roots which planted theargument in favor of free trade came to fruition with the publication by AdamSmith of The Wealth of Nations. This work was quickly expanded upon byDavid Ricardo who postulated the concepts of absolute and comparativeadvantage, and who showed that every nation involved in trade benefited. Thefirst group of influential people to accept and use these arguments thus arose inBritain in the form of the international merchants and industrialists.
Britain in 1832 expanded the franchise to the urban upper middle class, ofwhose numbers merchants and industrialists constituted a significant amount.Thus at the same time the merchants were beginning to advocate aliberalization of Britain’s trade policy, they were also becoming empowered toinfluence the parliamentary rules. Younger politicians intent on simplifying thegovernment architecture gained power as a result, including Robert Peel andWilliam Huskisson.
The greatest barrier to free trade in Great Britain in the 1840s were the CornLaws. The Corn Laws principally benefited the landed aristocracy, thestrongest group traditionally represented in Parliament. Thus the landedaristocracy can and should be viewed as an institution as well as a separateinterest group, given their hegemony over policy within the nation for severalcenturies. The rise of the merchant classes and the enfranchisement thereofprovided the catalyst necessary to promote a sweeping change of the traditionalpolicies. In Britain this political turmoil led to a trend towards free trade and a demandfor the repeal of the Corn Laws by the industrialists and merchants. RichardCobden, an industrialist, formed the Anti-Corn Law League2 in 1839 whichcreated one of the first large scale campaigns to influence public opinion.
TheWhig party saw the merchants as a way to gain more control in Parliament, butfailed to win the election in 1841. Tory Sir Robert Peel was elected primeminister, already intent on making extensive changes in the fiscal system. TheAnti-Corn Law League achieved triumph in 1846, not due to their extensivepropaganda, but thanks to the Irish potato famine.
Faced with mass starvationPeel decided to introduce a bill which would permit the duty free import of grainwithin a few years. In some sense it can be argued that without the Irish famine the era of freetrade would have come substantially later if at all. As an international event itpropelled Great Britain down the path of free trade, and it is significant that theWhigs, which became the party of the industrialists and merchants, were unableto attain the repeal of the Corn Laws without a significant catastrophe to aidthem. In the aftermath of the potato famine, the Whigs gained power andeventually replaced the vast majority of the tariffs with an income tax, makingBritain essentially free trade.
The interplay of events leading Britain towards free trade is also an example ofa major interest group (the merchants and industrialists) taking on the institutionof parliament and the wealthy landowners and setting a new trend in thenation’s economic policy. With varying interest groups this power strugglemanifest itself in nations throughout Europe, with different results leading todifferent trends. It is important to focus not on the institutions as such, but onwhich interest groups are capable of influencing the institutions. In the case ofBritain it is doubtful the merchants would have managed to overhaul even smallparts of the fiscal policy had there not been an enlargement of the franchise in1832. Paul Bairoch hints that Great Britain may have chosen the free trade policy atexactly the right time for it to work, and that any other time could well havebeen disastrous. He cites the rapid decrease in natural barriers to trade throughgreater technological development and the fact that Britain was able and willingto 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 industrializingnations were opposed to liberalization of trade protection. The British stood outin that they managed to have a comparative advantage in the production ofmost manufactured goods at the time. Any large nation which chose to engagein free trade with Great Britain would therefore see their main industrialindustries annihilated, especially the textiles industry, and be forced to specializeelsewhere. Nations like France, the United States, the German Zollverein andRussia were not inclined to abandon their industrial infrastructure to the ravagesof free trade without seeing the potential benefits first. Thus the trend in Britain, which I have up until now purported to be the maindriving force behind trade deregulation throughout the industrializing world, doesnot in and of itself manage to explain the global trend towards deregulation.There are two other main factors which ensured the success of the Britishsystem of free trade up until the 1870s. First there is the Cobden-Chevalier treaty of 1860 which revived the concept ofmost favored nation, essentially a way of granting any trade concessions madeto one nation to all nations simultaneously. In addition, it paved the way for thenegotiation of a plethora of other trade agreements, leading to a universalreduction of tariff barriers.
This had a dual-effect: due to the tangle ofinternational treaties it became difficult for any individual nation to hike tariffs,and it set a precedent for reducing tariffs even in highly protectionist nationssuch as France. A second major factor was the success of Great Britain in pursuing a free tradedoctrine. The general liberal philosophy at the time equated the economic rise ofGreat Britain with its free trade policies, and created the belief that failure toliberalize economically would lead to an inability to compete internationally.Michel Chevalier wrote about Britain, When such a powerful and enlightenednation not only puts such a great principle into practice but is also well known tohave profited by it, how can its emulators fail to follow the same way? Thusthe governments in power were persuaded by the precedent of Britain to ignoredemands for protection, in some cases detrimentally. Russia for instance saw alarge 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 internationalevents and interest groups played a role in determining economic policy.
Franceis a major exception to the concept that interest groups largely determine anation’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 tocompete with British producers of textiles, the French industry had managed toimpose a prohibition on the importation of cloth to the French market. The factthat French industry opposed trade liberalization, in contrast to their Britishcounterparts, and the continued support for protectionism in the agriculturalsector guaranteed protectionist policies in France. It took Napoleon III, a supporter of free trade, to pass the Cobden-Chevaliertreaty and move France from a highly protectionist to a medium protectioniststate. Done without the consent of the French Parliament, and as Paul Bairochpoints out, against the will of the majority of the people3, this precedent forcedFrance to lower its trade barriers for at least 10 years. This is exceptional inthat the interest groups were united in favor of protection and yet lost out. Theinability of the interest groups to exert more substantial power lies in thestructure of the government and the fact that Napoleon III adroitly used apolitical loophole to overcome them.
Germany, loosely united in the form of the Zollverein and under the leadershipof Prussia, had a much smaller industrial base compared to a formidableagricultural sector. Thus the industrial sector was not powerful enough to makestrong demands for high protection in opposition to the interests of other groups.The Zollverein was very protectionist up until the 1850s, when two factorscontributed to its adoption of more liberal policies (although still protectionist bycomparison to France or England). As mentioned, the agricultural sector waspredominant, and hence preferred lower prices on manufactured good.Secondly, Prussia wished to retain sole control over the Zollverein and wasfearful of an Austrian attempt to join. Thus by liberalizing trade policy Prussiahoped to deter a highly protectionist Austria from seeking admittance. Spain, the Italian customs union, and Russia all relaxed their highly protectionistlaws from 1850 onward as a result of the spectacular economic success ofGreat Britain and the ratification of trade agreements with adherence to themost favored nation clause. Since all had relatively small industrial sectors, theindustrialists as an interest group demanded more protection.
Yet due to thepolitical weakness of the interest groups, and the largely despotic nature of theregimes as regards trade policy at the time, protectionism was lowered in spiteof 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 aliberal trade doctrine. By virtue of their size, the smaller countries could notcount upon a large endowment factor and thus were forced to specialize earlierthan their larger peers. This created politically stronger interest groups with afocus on international markets. As it was unnecessary to place tariffs upongoods for which the nation lacked centers of production, imports andconsequently lower duties were accepted.
Additionally, most specialized goodswere intended for export rather than domestic consumption, prompting bothagricultural interest groups (evidenced by the Farmer’s Association in Belgium)and liberal groups deriving their theory from England joined forces against theweaker industrial interests to lower duties with some success, notably in theNetherlands, Denmark, Portugal and Switzerland. Following 1860, and up until 1879, most nations reduced tariffs, following thetrend begun with the Cobden-Chevalier treaty, much to the detriment ofpro-protectionist interest groups. Whether liberal trade policy benefited nationsother than Great Britain is unclear, and still a point of contention. It must benoted that nations with more liberal trade agreements often saw a retraction inthe magnitude of industrial growth. Yet the overall growth in European exportsfollowing 1860 shows tremendous gains, of nearly 5.8% per year, and beliesany belief that trade liberalization was detrimental.
Given that most nations,especially the large industrializers, retained substantial tariffs throughout thisperiod, there is not a clear picture of how large a role liberal trade policiesplayed in stimulating this growth. By 1870 the technological advances of sea transportation, combined with thephenomenal growth of the United States railroad network had opened up thevast prairie lands in the U.S. to farming. This created a massive export ofcheap wheat and other grains to Europe, which quickly plummeted the majorityof European farmers into a sever crisis. Britain, having already made thetransition from an agricultural nation to an industrial one, felt this depression infoodstuff prices far less than its more agricultural, continental neighbors. The reduction in foodstuff prices immediately reversed the political stance ofthe powerful agricultural interest groups throughout Europe.
In Germany, thefarmers for the first time lent major support to the industrialist interests inadvocating protection and thus paved the way for a precedent setting 1879tariff 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 againinternational events determined which trends in trade policy were followed.
Inthe case of the great depression, the United States plays a prominent role inredefining the trade stances of agricultural interest groups, which combined withan established push for protectionism on the part of the industrialists soon gaverise 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 toprotectionism, but did play a significant role. Bismark for example needed toincrease his source of revenue, and used higher tariffs (which had always beena 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 themuch larger agricultural interests were suffering from imports and demandingprotection within those nations, and that higher tariffs provided a larger sourceof revenue for the monarch (as in the cases of Russia, Austria-Hungary, Spainand Italy). By 1892 the Great Depression was beginning to wane and trade relationsbetween nations moved overall towards a more protectionist stance.
Theprotectionist movement after 1892 is largely a result of internal interest groupdemands, and not a response to overall market depression as the precedingyears had been. Thus the international economic system ceased to play asdominant a role in determining individual nations’ trade policies, and interestgroups were able to gain more control over the policies adopted. Germany became the primary leader in leading continental Europe back toprotectionism, largely due to Germany’s increasing commercial power. Caprivi’spolicy of concluding treaties to reduce overall tariffs met with oppositionbetween 1892 and 1896. By weakening the protections on agriculture, Capriviwitnessed the farmers’ formation of the Agrarian League (Bund derLandwirthe), which quickly assimilated the Junkers, creating a powerful interestgroup.
Through an agreement with the Deutscher Bauernbund andmanufacturers, this group managed to oust Caprivi and catalyzed the passage ofNavigation Laws, leading to an increase in protectionist policy in 1902. France took far less time than Germany to raise its tariffs after 1892, beginningwith a tariff in 1892 which remained in force until 1910. This period representsa total political victory for the agriculturalists and manufacturers as interestgroups.
The main opposition to higher tariffs came from the Anti-ProtectionistLeague 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 theirtrade policies as France or even Germany, maintained and increased theirexisting tariffs. Russia for example introduced a maximum and minimum tariffsystem under the direction of Count Witte, and it is largely due to increasedprotectionism that Russia industrialized rapidly following 1890.
Italy saw atremendous increase on agricultural duties in response to that sectors demandsfor higher protection, but simultaneously pursued a policy of keepingmanufacturing duties low in order to increase agricultural exports to othernations. Austria-Hungary faced growing demands for protection from within the nationas well. The Hungarian farmers pressured the government to adopt a moreprotectionist stance, but without as much success as agricultural interest inother nations.
Even the small nations in Europe adopted more tariffs that theyhad previously had, including Denmark, Norway and the already highlyprotectionist Sweden and Finland. Perhaps the most significant role of interest groups in determining foreign tradepolicy was played out in Switzerland. The Swiss Consumers’ Union formed aleague against increases in tariffs, supported by the Socialist movement.However, the manufacturers, the Swiss Union of Craftsmen, and the SwissUnion of Farmers were able to rally enough support to pass a tariff in 1902increasing the protectionist policy. Britain contrastingly stands out through this entire period (1860-1914) asstaunchly anti-protectionist. There were movements in Great Britain to return toa protectionist policy, beginning with the Fair Trade League which eventuallybecame the United Empire Trade League. Joseph Chamberlain led the nextinterest group crusade with the formation of the Tariff Reform League.
However, the liberals in power counterattacked vehemently and succeeded inblocking all attempts at levying retaliatory tariffs. It is logical that in Britain theresistance to protectionism would have remained strong even when faced witheconomic stagnation, given that almost all the manufacturers and economistsbelieved that free trade was the dogma which had propelled Britain to economicprosperity. The phenomenal growth in trade over the period 1850-1914, estimated at25-fold, cannot be explained by any one theory, but rather must be consideredat each moment in its international, national, and even regional aspect.
Theoften bellicose attempts of the ever more powerful interest groups demandingrepresentation led to a slow reduction of liberal trade policies in manycontinental nations and a return to protectionism. It is important that interestgroups were often unable to achieve their goals without the aid of internationalevents to support their arguments and force the institutionalized governments tolisten. Historically the variation in trade policies within this time period sketches manyof the arguments which are still made today.
There is no way to study themodern trends in economic trade policy without hearkening back to AdamSmith, David Ricardo and the Anti-Corn Law League. It is a fascinating era tostudy and learn from, and to hope that mistakes made in the past will not berepeated by modern political rhetoric. Bibliography1) Cameron, Rondo. A Concise Economic History of the World.
OxfordUniversity 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 CambridgeEconomic History of Europe, Volume 8. Peter Mathias and Sydney Pollard,Business