The era spanning from 1870 until the start of World War I is often called the “first age” of globalization. Trade volumes rose rapidly. Large swaths of the global population moved from poor to rich countries. Capital circulated quite freely. Today, in the wake of the COVID pandemic and the rise of protectionism advanced by populist candidates, it is worth revisiting the debates regarding the origins of this first age. In those historical debates, we might find lessons about what could roll back globalization today.
The origins of the first age of globalization can be broken into two broad categories. The first is comprised of those who emphasized the role of liberal trade policies between nations from the 1840s onwards. The second is comprised of those who emphasized the role of technological breakthroughs such as better maritime safety technologies, faster and larger ships, faster turnaround times in port, better insurance markets, and so on, all of which led to major reductions in transportation costs. Combined with a reduction in overland transportation costs thanks to canals and railways – which made it cheaper to bring goods to port – the wave of transportation-related innovations brought forth the great age of globalization. Some scholars are content to mix the two categories together and argue that they were complementary.
There is one argument, however, that has emerged recently that argues that the first age of globalization could have started much earlier had it not been for trade policies. How much earlier? At least a century, which means somewhere in the mid-18th century.
These early seeds of globalization can best be seen in the transatlantic grain trade between the United States and the United Kingdom. More precisely, it can be seen in what economists call the “law of one price.” The law posits grain prices should have converged between the two countries (assuming there were no transportation costs, tariffs, or other trade barriers). This is because if prices differ for the same product in different countries, it creates an opportunity for arbitrage. Traders buy the product in the country where it’s cheaper and sell it in the country where it’s more expensive, making a profit in the process. This arbitrage creates convergence in prices across countries. Generally, seeing price convergence means that markets are becoming integrated. This is something that was observed in the first age of globalization.
Yet, one hundred years before the great transportation innovations of the 19th century, prices between the United Kingdom and its American colonies appeared to follow the predictions of the law of one price. As one study summarized, “prices adjusted to the law-of-one-price equilibrium.” Yet, the process was “continuously being interrupted by ‘exogenous’ events, such as trade policy, war, and politics,” all of which raised trade barriers, making it harder to exploit arbitrage opportunities.
In this telling, even without the great technological innovations of the 19th century, globalization could have started much earlier had it not been for trade policies and wars (which have an effect on shipping costs that mimic tariffs). Given that the first era of globalization is tied in the imagination of many to rising and converging living standards, this argument amounts to saying that living standards could have surged earlier had free trade been more popular.
In a recently published article in Social Science History, Maja Pedersen, Paul Sharp and I provided further evidence in favor of this argument. We did so by adding Canadian prices from 1760 to 1858 to the earlier studies that considered the United Kingdom and the United States. Canada was a small open economy with preferential access to British markets (because it was a British colony), but which also shared the same natural trade barriers (i.e., distance) as the United States. This allowed us to triangulate the role of government policies and natural barriers.
First, during the period from 1760 to 1775, Canada, Britain, and what would become the United States were part of the same Empire, so there were few policy-related barriers to trade. We found that the period was marked by signs of the law of one price operating well – something that holds up with both monthly and annual data. Second, we found that the North American colonies gradually connected themselves to the British market due to the mild preferences that Britain gave to its colonies.
Third, and quite tellingly, trade policies divorcing Canada from the United States caused trade between the two countries to disintegrate between the 1780s and 1820s. However, the British adopted the Colonial Trade Act in 1831 which abolished all duties on agricultural products entering Canada. There was a “grain invasion” and American wheat rapidly replaced Canadian wheat (especially in the Atlantic colonies such as Nova Scotia, New Brunswick, and Quebec). Prices rapidly started to show the same workings as they did from 1760 to 1775 when the law of one price worked quite well. Essentially, once trade barriers were removed, the law of one price began to work again despite natural hurdles to trade.
Pedersen, Sharp, and I conclude that historians should be “forced to consider that the first era of globalization could have occurred earlier had it not been for institutional trade barriers.” This is where I see a lesson for today. If trade policies could have had such a large impact when natural barriers were far more daunting than today, how much damage could new protectionist policies today generate? The possibilities invoked by this question should reinforce concerns about the rise of protectionism today.
Made available by the American Institute for Economic Research.