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HISTORY OF INTERNATIONAL TRADE
Traditional Societies. Until the late 19th century, most people virtually everywhere were peasants who produced food and also knew how to fashion many tools and other necessities. What they could not make for themselves, they bought in neighboring towns in exchange for their (usually small) agricultural surplus and a few handicrafts. Long¬distance trading was rare, because output of all products was low and because transportation was expensive, slow, and dangerous. Whatever international trade did occur was usually monopolized by government-licensed private orga¬nizations like the British East India Company. Only goods with a high value in relation to their weight, like precious stones, metals, spices, special fabrics (particularly wool and silk cloth), furs, and wine, could be taken to faraway places and sold profitably. Grain, too, was sometimes traded abroad but, it would seem, in small quantities.
For centuries, trade was concentrated along the shores of the Mediterranean and Baltic seas and around the Asian caravan routes to which they were linked. The focal points of international exchange were the Italian cities of Venice, Genoa, and Florence, the German cities of Augsburg and Niirnberg, the towns of Flanders (in present-day Belgium), and the Hanseatic ports along the southern and eastern shores of the Baltic. Trade hardly touched the lives of ordinary people, however. Neither were their lives much altered by the discovery of the Americas and the circumnavi¬gation of Africa and South America. But those feats of courage and skill did divert trade from the inland seas of Europe to the Atlantic and Indian oceans.
The Industrial Revolution. In the 17th and 18th cen¬turies, technological innovations in Britain opened the way to higher productivity, first in agriculture, then in manufac¬turing. New machinery enabled larger units to manufacture cheap textiles and, a bit later, iron. These first steps toward mass-production led to the mass movement of goods from country to country, for they were accompanied by improve¬ments in transportation and communications. British in¬dustry was soon imitated in France and Belgium.
Despite the remarkable progress of the previous hundred years, international exchanges of goods and services at the beginning of the 19th century represented only about 3 percent of the value of world output. But then the indus¬trial revolution spread to such countries as Germany, the United States, and (a bit later) Japan. In the second half of the 19th century, new industries emerged to produce machine tools, electricity, and chemicals. These industries soon accounted for a substantial proportion of world trade. Railroads and steamships transported bulk loads over long distances; the telegraph facilitated the worldwide circulation of information. As a result of these developments, foreign trade so increased that by 1913 about one-third of everything produced in the world was exchanged over national borders.
The spread of industrialization boosted the demand for raw materials, initially cotton and timber, later metals and fuels. About half of these primary products originated in European countries; the other half came in part from plantations, mines, and similar enterprises established in the colonies to supply goods to Europe. Enclaves emerged in many colonial economies more closely connected with cus¬tomers abroad than with the societies in which they were physically located, societies where peasants continued to farm in the traditional manner. Some countries (not all former colonies) have yet to overcome this division.
Despite the importance of primary products in the inter¬national exchanges of the 19th century, trade was dominated by Europe. Before World War I, less than 25 percent of world trade was transacted among non-European countries, about 40 percent represented the trade of European coun¬tries with each other, and 35 percent, European trade with the rest of the world. Britain remained the chief trading nation, but its share in international exchange diminished, inevitably in view of the rapid development of continental Western Europe, North America, and Japan.
The Era of Free Trade. The foundations of free trade— the removal of restrictions on the movement of goods and services from country to country—were laid by the (mostly British) classical economists. In Britain, protection was very gradually discarded, starting in the 18th century, and by the early 1840′$ was mainly (though not exclusively) confined to tariffs on imported grains. In 1846 even agricultural protection was in principle abandoned. Contrary to expectations, grain prices did not immediately fall because no countries were capable of exporting sub¬stantial amounts of grain to Britain. The 1850′s and 1860′s, in fact, were a period of sustained prosperity, and, rightly or wrongly, free trade was credited with the responsibility for it. Other liberalizing measures taken in Britain and elsewhere made the years between 1850 and 1880 the era of minimal barriers to trade.
By 1870, however, the development of ocean-going steam¬ships had exposed British agriculture to real competition. Europe (though not, at first, Britain) began turning away from free trade in the late 1870′s, after a prolonged eco¬nomic crisis. Simultaneously, a new and more volatile kind of nationalism forced governments to collect more revenue to pay for armaments. Nationalism also promoted fears in such powers as the United States and Germany that it would be difficult to industrialize if competition from Britain, the leader in this field, were not checked. This increased the popularity of the infant-industry argument for protection.
The 20 th Century. The movement toward protection continued to grow stronger after the beginning of the 20th century. Nonetheless, when World War I broke out, in 1914, protectionism had made relatively few advances, though the world economy was no longer so free from trade controls as it had been 50 years earlier. International trade was, however, still regulated by the gold standard, under which currencies had a fixed gold value and payments imbalances among nations were settled through the transfer of a limited supply of gold reserves. A country could not keep its goods competitive by simply devaluing its currency, nor could it indefinitely sustain a payments deficit. Instead, each trading country had to keep its goods competitive by keeping an edge in production costs.
The Depression. The gold standard was undermined during World War I and replaced during the 1920′s by the gold-exchange standard, under which international settle¬ments were made mainly in British pounds and U.S. dollars. This system, however, allowed the United States and Britain and any countries able to borrow recurrently from them to sustain recurrent payments deficits. Eventually this system collapsed, helping to bring about the Great Depression of the 1930′s. Many governments reacted to the Depression by subjecting foreign trade to new controls. One after another, they formally went off the gold standard, abolishing fixed exchange rates, and sought, by devaluing their currencies and by imposing tariffs and quotas, to improve the com¬petitiveness of their products while protecting them against international competition. This was to be achieved at the expense of other countries—the so-called “beggar-my-neighbor” policy. Since many countries could and did play the same game, the result was international disintegration and stagnating, even decreasing, world trade. Manufacturing output in most countries languished and so, consequently, did trade in primary products needed for industry.
The policy of national self-sufficiency was carried to an extreme in the Soviet Union and in Nazi Germany and Fascist Italy, which sought to achieve autarchy, or national economic independence. Foreign trade in the Soviet Union was taken over by the government and centrally planned. Fascist Italy and Nazi Germany projected a similar program of autarchy, but in those countries government control was less complete and curtailment of external trade less thorough.
The Postwar Years. The disruption of international ex¬change in the 1930′s, combined with the dislocation of World War II, was so great that the absolute volume of trade in the 1940′s may have been lower than it had been in 1913. Undoubtedly, it was not much higher. Mindful of the harm caused by stagnating trade, the Allied countries began planning to improve conditions during the hostilities. They agreed to establish the International Monetary Fund (IMF) to watch over the exchange of currencies. The plans for the liberalization of trade itself were implemented less smoothly. But in the 1940′s a General Agreement on Tariffs and Trade (GATT) standardized the policies of almost all non-Communist countries. GATT was negotiated in the hope of eliminating as many obstacles to trade as possible, espe¬cially quotas and subsidies, by means of the so-called “most favored nation clause,” which ensures that any trade conces¬sion between countries is automatically extended to all members. Under the aegis of GATT, various cycles of trade negotiations have taken place: several in the 1950′s, the Dillon round in 1961, the Kennedy round in the 1960′s, and, in the late 1970′s, the Tokyo round. By the end of the Kennedy round, the industrial countries’ average tariff on manufactures was down to about 10 percent. The Tokyo round set itself the aim of reducing tariffs on manufactures by a further 40 percent
Traditional Societies. Until the late 19th century, most people virtually everywhere were peasants who produced food and also knew how to fashion many tools and other necessities. What they could not make for themselves, they bought in neighboring towns in exchange for their (usually small) agricultural surplus and a few handicrafts. Long¬distance trading was rare, because output of all products was low and because transportation was expensive, slow, and dangerous. Whatever international trade did occur was usually monopolized by government-licensed private orga¬nizations like the British East India Company. Only goods with a high value in relation to their weight, like precious stones, metals, spices, special fabrics (particularly wool and silk cloth), furs, and wine, could be taken to faraway places and sold profitably. Grain, too, was sometimes traded abroad but, it would seem, in small quantities.
For centuries, trade was concentrated along the shores of the Mediterranean and Baltic seas and around the Asian caravan routes to which they were linked. The focal points of international exchange were the Italian cities of Venice, Genoa, and Florence, the German cities of Augsburg and Niirnberg, the towns of Flanders (in present-day Belgium), and the Hanseatic ports along the southern and eastern shores of the Baltic. Trade hardly touched the lives of ordinary people, however. Neither were their lives much altered by the discovery of the Americas and the circumnavi¬gation of Africa and South America. But those feats of courage and skill did divert trade from the inland seas of Europe to the Atlantic and Indian oceans.
The Industrial Revolution. In the 17th and 18th cen¬turies, technological innovations in Britain opened the way to higher productivity, first in agriculture, then in manufac¬turing. New machinery enabled larger units to manufacture cheap textiles and, a bit later, iron. These first steps toward mass-production led to the mass movement of goods from country to country, for they were accompanied by improve¬ments in transportation and communications. British in¬dustry was soon imitated in France and Belgium.
Despite the remarkable progress of the previous hundred years, international exchanges of goods and services at the beginning of the 19th century represented only about 3 percent of the value of world output. But then the indus¬trial revolution spread to such countries as Germany, the United States, and (a bit later) Japan. In the second half of the 19th century, new industries emerged to produce machine tools, electricity, and chemicals. These industries soon accounted for a substantial proportion of world trade. Railroads and steamships transported bulk loads over long distances; the telegraph facilitated the worldwide circulation of information. As a result of these developments, foreign trade so increased that by 1913 about one-third of everything produced in the world was exchanged over national borders.
The spread of industrialization boosted the demand for raw materials, initially cotton and timber, later metals and fuels. About half of these primary products originated in European countries; the other half came in part from plantations, mines, and similar enterprises established in the colonies to supply goods to Europe. Enclaves emerged in many colonial economies more closely connected with cus¬tomers abroad than with the societies in which they were physically located, societies where peasants continued to farm in the traditional manner. Some countries (not all former colonies) have yet to overcome this division.
Despite the importance of primary products in the inter¬national exchanges of the 19th century, trade was dominated by Europe. Before World War I, less than 25 percent of world trade was transacted among non-European countries, about 40 percent represented the trade of European coun¬tries with each other, and 35 percent, European trade with the rest of the world. Britain remained the chief trading nation, but its share in international exchange diminished, inevitably in view of the rapid development of continental Western Europe, North America, and Japan.
The Era of Free Trade. The foundations of free trade— the removal of restrictions on the movement of goods and services from country to country—were laid by the (mostly British) classical economists. In Britain, protection was very gradually discarded, starting in the 18th century, and by the early 1840′$ was mainly (though not exclusively) confined to tariffs on imported grains. In 1846 even agricultural protection was in principle abandoned. Contrary to expectations, grain prices did not immediately fall because no countries were capable of exporting sub¬stantial amounts of grain to Britain. The 1850′s and 1860′s, in fact, were a period of sustained prosperity, and, rightly or wrongly, free trade was credited with the responsibility for it. Other liberalizing measures taken in Britain and elsewhere made the years between 1850 and 1880 the era of minimal barriers to trade.
By 1870, however, the development of ocean-going steam¬ships had exposed British agriculture to real competition. Europe (though not, at first, Britain) began turning away from free trade in the late 1870′s, after a prolonged eco¬nomic crisis. Simultaneously, a new and more volatile kind of nationalism forced governments to collect more revenue to pay for armaments. Nationalism also promoted fears in such powers as the United States and Germany that it would be difficult to industrialize if competition from Britain, the leader in this field, were not checked. This increased the popularity of the infant-industry argument for protection.
The 20 th Century. The movement toward protection continued to grow stronger after the beginning of the 20th century. Nonetheless, when World War I broke out, in 1914, protectionism had made relatively few advances, though the world economy was no longer so free from trade controls as it had been 50 years earlier. International trade was, however, still regulated by the gold standard, under which currencies had a fixed gold value and payments imbalances among nations were settled through the transfer of a limited supply of gold reserves. A country could not keep its goods competitive by simply devaluing its currency, nor could it indefinitely sustain a payments deficit. Instead, each trading country had to keep its goods competitive by keeping an edge in production costs.
The Depression. The gold standard was undermined during World War I and replaced during the 1920′s by the gold-exchange standard, under which international settle¬ments were made mainly in British pounds and U.S. dollars. This system, however, allowed the United States and Britain and any countries able to borrow recurrently from them to sustain recurrent payments deficits. Eventually this system collapsed, helping to bring about the Great Depression of the 1930′s. Many governments reacted to the Depression by subjecting foreign trade to new controls. One after another, they formally went off the gold standard, abolishing fixed exchange rates, and sought, by devaluing their currencies and by imposing tariffs and quotas, to improve the com¬petitiveness of their products while protecting them against international competition. This was to be achieved at the expense of other countries—the so-called “beggar-my-neighbor” policy. Since many countries could and did play the same game, the result was international disintegration and stagnating, even decreasing, world trade. Manufacturing output in most countries languished and so, consequently, did trade in primary products needed for industry.
The policy of national self-sufficiency was carried to an extreme in the Soviet Union and in Nazi Germany and Fascist Italy, which sought to achieve autarchy, or national economic independence. Foreign trade in the Soviet Union was taken over by the government and centrally planned. Fascist Italy and Nazi Germany projected a similar program of autarchy, but in those countries government control was less complete and curtailment of external trade less thorough.
The Postwar Years. The disruption of international ex¬change in the 1930′s, combined with the dislocation of World War II, was so great that the absolute volume of trade in the 1940′s may have been lower than it had been in 1913. Undoubtedly, it was not much higher. Mindful of the harm caused by stagnating trade, the Allied countries began planning to improve conditions during the hostilities. They agreed to establish the International Monetary Fund (IMF) to watch over the exchange of currencies. The plans for the liberalization of trade itself were implemented less smoothly. But in the 1940′s a General Agreement on Tariffs and Trade (GATT) standardized the policies of almost all non-Communist countries. GATT was negotiated in the hope of eliminating as many obstacles to trade as possible, espe¬cially quotas and subsidies, by means of the so-called “most favored nation clause,” which ensures that any trade conces¬sion between countries is automatically extended to all members. Under the aegis of GATT, various cycles of trade negotiations have taken place: several in the 1950′s, the Dillon round in 1961, the Kennedy round in the 1960′s, and, in the late 1970′s, the Tokyo round. By the end of the Kennedy round, the industrial countries’ average tariff on manufactures was down to about 10 percent. The Tokyo round set itself the aim of reducing tariffs on manufactures by a further 40 percent
