Many economists have attributed the increase in world trade as an effect of globalization. Globalization is the integration of international markets (O’Rourke et al, 2002 p.25), that is, gravitating to a single world market. This first happened in the 19th century as the world was never globalized to this extent before and this was evidenced by the factor price convergence of goods (O’Rourke et al, 2002 p.46). Factor price convergence is the price equalization of similar factors of production across countries as a result of international trade (Samuelson, 1948). I will now explain how the fall of certain barriers to trade and colonization may have affected world trade in the 19th century.
The revolution in transport on land and sea during the industrial revolution made large contributions to globalization in the 19th century. A fall in transport costs would lead to import and export prices converging which subsequently increased international trade volume (O’Rourke et al, 2002 p.25). The adoption of steamships at sea drastically reduced the international shipping times as steamships did not rely on wind patterns like sailing ships did (Pascali, 2017 p.2823). Increasing use of the constantly improving steamships that were faster and the opening of the Suez Canal in 1869 reduced international freight costs (Daudin et al, 2010 p.7). As evidenced by the fall in freight rate indexes for coal between 1714 and 1913 by Harley and North (Harley, 1988 North, 1958 cited by O’Rourke et al, 2002 p.36). A similar trend was observed with the American freight rates for exports between 1840 and 1913, as it fell by more than 40 percent after being adjusted for inflation (O’Rourke et al 1994). This meant that the transport revolution was an international occurrence.
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Pascali found that steamships had reduced average shipping times by more than half and the Suez Canal added an additional 10 percent of time reduction. Pascali used the reduced shipping times to find a correlation with world trade patterns and had positive results (Pascali, 2017 p.2844). He found that steamships alone were responsible for approximately half of the increase in international trade during the 19th century (Pascali, 2017 p.2823). The expansion of the railroad network helped reduce expensive domestic costs of transport which further promoted economic integration (Daudin et al, 2010 p.8). The effect of railroads reducing interior-to-seaboard costs was greater than or equivalent to steamships reducing the international freight rates (Bordo et al, 1999) which was beneficial for peasant producers in rural areas (Findlay et al, 2009 p.405). The fall in transport costs would lead to converging terms of trade which subsequently increased international trade volume (O’Rourke et al, 2002 p.25).
After the Napoleonic wars, there was relative and stability in Europe during the 19th century and after the post-war settlement at the Congress in Vienna in 1815 (O’Rourke et al, 2010 p.100). This peace promoted trade (Jacks, 2006 cited by Daudin et al, 2010 p.8) and allowed global integration of markets the capacity to flourish. Most European trade policies were generally protectionist right after the Napoleonic war (Findlay et al, 2009 p.395). Britain became the first major economy to liberalize trade by abolishing the Corn Laws in 1846 and promoting free trade policies (O’Rourke et al, 2010). After 1846, major European countries adopted more liberal trade policies with average tariffs falling throughout 1850 until the 1870s and reinforcing the reduced transport costs (Findlay et al, 2009 p396). Most of Asia and Africa had low tariffs as well due to European imperialism and American pressure on Japan (Findlay et al, 2009 p401).
However, the agricultural tariffs in Europe started to increase after the 1870s due to cheap grain from the New World and Russia starting to impact domestic producers negatively (Findlay et al, 2009 p.397) and most European tariffs began rising past this point. After the Civil War, the United States became pro-tariff as they wanted to protect their domestic producers from European competition (Findlay et al, p.398). In general, tariffs remained high in most major economies apart from the United Kingdom, Asia, and Africa by the late 19th century (Findlay et al, 2009 p.402). Therefore, it is hard to conclude whether trade policies affected world trade.
International trade in the 19th century was a multilateral system and relied on convertible currencies which required monetary stability (Findlay, 2009 p.406). The gold standard was able to provide this monetary stability with reduced exchange rate fluctuations between countries which led to reduced trade uncertainties (Daudin, 2010 p.8). The gold standard also allowed countries with large circulation to escape from adjusting for domestic deflation as inflation was relatively stable (Flandreau, 2010 p.97). Calculations on trade between pairs of countries after they adopted the gold standard were found to have increased by about 30% (López-Córdova and Meissner, 2003 cited by Findlay, 2009 p.407).
The laying of the transatlantic telegraph cable 1860s linked financial hubs together and drastically reduced the time taken to communicate with overseas agents (Bordo et all, 1999 p.32). Information asymmetries were greatly reduced which led to more long-term capital flows as credit risks could be better assessed (Bordo et al, 1999 p.33). This implies that foreign direct investment would increase in other countries. The telegraph caused a price convergence in the capital markets too, as the cost of financial assets decreased, which also indirectly increased international commodity trade (Findlay et al, 2009 p.408). The telegraph effectively decreased the cost of communication between countries which facilitated an increase in world trade (Daudin et al, 2010 p.17).
Advancements in technology during the industrial revolution allowed the increased power of Europe and the United States (O’Rourke et al, 2010 p.100). This allowed for international markets such as Asia and Africa to be forcibly opened up through colonization and expansion of the empires (O’Rourke et al, 2010 p.100). European advances were made in India, Africa, and Asia and were forced to adopt looser foreign trade policies (O’Rourke et al, 2010 p.100). This meant that countries that would otherwise not trade with Europe would be forced to with lower tariffs. A famous example of Europe opening a market would be the ‘Opium Wars’ in China around the mid 19th century which ended in treaties that would support foreign trade in favor of Europe (Bleeching, 1975).
Colonization also forced countries to adopt similar institutions which led to similar economic policies across countries as well (Bordo et al, 1999 p.21). Colonization brought together different markets under one institutional system by having one official language, one currency, uniform channels for the transaction of knowledge, and much more (Roy, 2012 p.208). This meant that colonies had a part in reducing information asymmetries and also helped lessen the language barriers between countries as well. Colonization also allowed for enterprising Europeans to take advantage of the low costs of production in other countries (Daudin et al, 2010 p.17). The effect of colonization on international trade was so profound that to this day countries with colonial ties still continue to trade with each other in large volumes (Rauch, 1999 cited by Bordo et al, 1999).
In conclusion, the invention of steamships and the decrease in transport costs and times allowed for comparative advantage to occur at an international scale, this was because the countries no longer had the natural protection of distance (Findlay et al, 2009 p.426). Colonization also forced different regions to trade with each other and created powerful monopolies. While most economists generally agrees that the gold standard did promote trade, there is disagreement about the magnitude of effect (Findlay et al, 2009 p.407). Hence, the increase in world trade can be mainly attributed to the many technological innovations that occurred during the industrial revolution, but many other factors
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