Lecture 4: The first wave of globalization,
1800 to 1914 AD
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Emerging from shambles, European nations
renew contacts with one another and the rest of
the world from 1820.
Thus, begins the “first wave of globalization”.
What we will explore in this lecture is its course,
causes, and consequences.
But first, need to chart two developments which
straddle the turn of the 19th century.
Introduction
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1.) The “French Wars” from 1793 to 1815:
First truly global conflict.
Powerful effects on the volume of trade,
especially outside of Britain and after 1806.
French exports & imports decline 45 & 60%;
US exports & imports decline 90 & 95%;
Background developments
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Apart from these immediate effects, also need to
think of long-run effects.
Wars caused with collapse of the New World
empires and, thus, colonial preferences.
Second, wars proved the undoing of many of the
chartered trading companies (VOC in 1806,
likewise EIC in 1813).
Background developments
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Third, Napoleon made a number of internal
reforms to the economies of his empire.
Most importantly, prohibitions on the craft guilds
and the dismantling of internal customs barriers.
Thus, trade within Europe was promoted.
Cumulatively, centuries-long restrictions on
Background developments
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Finally, the defeat of the French forces at
Waterloo in 1815 ushered in a new era.
The struggle for supremacy in Europe which had
been waged for 500 years was over.
British naval power gave rise to the Pax
Britannica from 1815 to 1914.
Background developments
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2.) Also need to make note of simultaneous
developments within Britain itself.
Period from 1770 to 1820 gave rise to the British
Industrial Revolution.
Causes still debated, but a clear role for the
“global economy” (slaves, cotton, and textiles).
Background developments
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First, there is the application of IR technology to
other fields: above all, RRs (1820), telegraph
(1834), and steamships (1838).
Diffusion only from 1850, but final results clear.
Maritime freight rates reduced by 50% (steam
and Suez), overland rates reduced by 90%.
Background developments
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Circa 1900
Background developments
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Second, perhaps even more important were the
effects of the IR on prices and incomes.
Technological improvement and implications for
product prices…even without improvements in
transport, this will affect relative prices of goods.
Turning to demand, an (at least) unitary elasticity
between income and imports.
Background developments
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Background developments
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Background developments
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So what else explains the rise in trade volumes
from 1820?
For most nations in 1820, commercial policy still
set in mercantilist terms.
Slowly changed with the substitution of (ad
valorem) tariffs for import prohibitions.
Causes of the global trade boom
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Britain as an exception: after the French Wars,
Britain reintroduced its Corn Laws.
These were a set of sliding-scale, specific tariffs
on wheat, rye, barley, and oats (i.e. Corn).
But with the rise of industry in Britain, the Corn
Laws came under attack.
Causes of the global trade boom
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1849, a radical change in commercial policy—
unilateral and unreciprocated.
Britain unilaterally liberalizes throughout the
1850s and encourages others to do so.
Most significant development: signing of the
Cobden Chevalier trade treaty of 1860.
Causes of the global trade boom
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Basic elements of modern day trade policy:
reciprocity and most-favored-nation status.
Reciprocity: concessions granted to countries are
roughly equivalent in terms of trade flows or
market access; but then, what’s the use?
Most-favored-nation status: binds countries to
automatically extend trading concessions
Causes of the global trade boom
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Institutionally, we see the rise of the Classical
Gold Standard.
In this system, countries fixed the gold content of
their currencies→fixed exchange rates among
countries on the gold standard.
E.g. 0.14 Great British pounds/gram and 1.65
Dutch guilders/gram→11.79 NGL/GBP.
Causes of the global trade boom
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We also see the introduction of new commercial
organizations and techniques: formal commodity
& forex markets.
Standardization of commodities/contracts
dramatically reduced transaction costs.
Finally, period saw the spread of European
empires (formal and informal); China in 1839,
Japan in 1853, India in 1858, Africa in 1890s.
Causes of the global trade boom
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Causes of the global trade boom
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This expansion was accomplished with:
1.) application of IR technology to other spheres;
2.) improvements in medical “technology”;
3.) a European demographic surge.
Bottomline: Europeans used new-found power to
Causes of the global trade boom
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What about other flows?
From 1800 to 1850, negligible amounts of
financial capital crossing national borders, but
British take the lead starting in 1850.
1865−1913: British invest as much in Africa,
Asia, and Latin America as in the UK itself.
Trends in other flows
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But what sets this period really apart from the
present day is immigration.
1800−1913: >50 million people left Europe for
the “European offshoots”
In the same time, a vast number of people—
perhaps 50 million—leave China and India.
Trends in other flows
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The end result was what some have called
“The Great Specialization”.
First truly global division of labor: periphery
specializes in raw materials in exchange for
manufactured products of the core.
Trade increases not only in volume, but also in
variety; implies big increase in welfare.
Trends in other flows
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What explains the form that the Great
Specialization took?
HO: differences in factor abundance across
countries and differences in factor intensity
across industries determine trade patterns.
Also strong predictions for income distribution in
presence of trade (but absence of other flows).
The Heckscher-Ohlin model of trade
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Key assumptions:
1.) Two countries (i=H,F), two homogenous
tradeable consumption goods (j=1,2), and
two homogenous non-tradeable factors of
production (R,L) in fixed supply; (2x2x2).
2.) Endowments of factors of production are
different in the two countries.
The Heckscher-Ohlin model of trade
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4.) CRS with diminishing marginal returns;
Fj(2Rij,2Lij)=2Yij and d2F/dR2<0.
5.) Perfect competition.
6.) Factor intensity assumed to be different in
two sectors.
7.) Identical tastes and preferences.
The Heckscher-Ohlin model of trade
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HO theorem states that each economy will export
the good that uses relatively intensively its
relatively abundant factor of production.
Consider an example where agriculture is
relatively land-intensive and the foreign country
is relatively land-abundant.
Thus, we expect the foreign country to export
The Heckscher-Ohlin model of trade
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Graphically…
The Heckscher-Ohlin model of trade
Graphically…
The Heckscher-Ohlin model of trade
Graphically…
Agriculture
With trade
Manufactures
The Heckscher-Ohlin model of trade
1.) Stolper-Samuelson Theorem:
Increases in the relative price of a good will
increase the real return to the factor used
intensively in its production.
At the same time, it will decrease the real return
to the other factor of production.
Implications of the Heckscher-Ohlin model
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2.) Factor Price Equalization:
Free trade will tend to equalize not only
commodity prices but also the factor prices of L
and R in both H and F.
In the limit, all laborers will earn the same wage
and all land-owners will earn the same rental
Implications of the Heckscher-Ohlin model
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Note that all these taken together imply very
strong distributional effects for trade.
Suppose Home from above opens up to trade;
what are the predictions of the HO model?
1.) Home exports labor-intensive manufactures.
2.) Relative price of manufactures at Home will
increase
The Heckscher-Ohlin model of trade
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A historical example: North America (NA) and
the United Kingdom (UK) in 1870.
Population in the UK: 31 million
Population in NA: 44 million
Land area of UK: 240,000 square km.
Land area of NA: 18,200,000 square km.
The Heckscher-Ohlin model of trade
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HO: relative abundance matters instead.
R/LUK=0.008 sq km per person
R/LNA=0.414 sq km per person
NA is relatively land abundant (by a factor of
about 50!).
The Heckscher-Ohlin model of trade
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What about output? A very crude approximation:
agriculture (relatively land-intensive) and
(relatively labor-intensive) manufacturing.
From 1870, radical improvements in institutions,
policy, and technology …
HO predicts the UK will export manufactured
goods and NA will export agricultural goods.
The Heckscher-Ohlin model of trade
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And what about relative factor returns?
In the UK, the formerly scarce factor (land)
suffers while the formerly abundant factor
(labor) benefits
In NA, the formerly scarce factor (labor) suffers
while the formerly abundant factor (land)
benefits
The Heckscher-Ohlin model of trade
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Finally, what about inequality?
In the UK, land holdings highly concentrated,
implying inequality should have declined.
In NA, the decline in w/r would seemingly
increase inequality.
The Heckscher-Ohlin model of trade
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Period from 1820 to 1913 witnessed the birth of
an uncontestable wave of globalization;
culminated in the Great Specialization.
But as much as these linkages deepened, the
global economy was still susceptible to shocks.
Anything which threatened domestic (political)
or international (diplomatic) support could bring
the whole thing to a grinding halt.
Conclusions
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