Without Protectionism and Wars, Could the First Age of Globalization Have Occurred a Century Earlier?

Technology broke those barriers. In fact, some would even point out that the first age of globalization occurred in an era during which multiple countries (including the United States) engaged in heavy-handed protectionism. Technological progress was thus so strong that it swamped bad policies. The role left for institutions—trade policies, maritime security, property rights—automatically appears modest.

Looking back even farther in history to all prior periods, we might surmise that the first age of globalization could not have happened earlier because the natural barriers could not yet be conquered. However, this is not correct. There is now a rising body of evidence suggesting that government-created barriers to trade were a far bigger hindrance than is commonly appreciated. They were sufficiently large to prevent previous innovations in transportation technologies from ushering in the first age of globalization far earlier. Had it not been for these barriers, there are strong reasons to believe that the first age could have happened a full century earlier.

This point is not just a historical curiosity. First, it underscores that a trend toward greater globalization, connectedness, and integration represents the natural progression of human affairs rather than isolation or autarky. Second, it highlights how technology has historically reinforced the inherent human desire to connect, thereby contributing to the substantial economic and social advancements known as the “great enrichment.” Third, it shows that governmental interference has consistently obstructed these natural tendencies, a pattern that has persisted from the past, ultimately postponing the great enrichment and the first age of globalization by a century.

It is hard to overstate the productivity gains in international shipping from 1870 to 1914. The range of available rates suggests that it was somewhere between 0.76 percent and 1.94 percent per year. This is probably understating the gains because we need to account for the role of better information flows—through technologies such as the telegraph—that complemented the gains in shipping productivity. The result was rapidly falling freight rates (generally by close to 2 percent every year after adjusting for inflation) that allowed goods to move more easily around the world. By historical standards, the pace of improvement was exceptionally fast. It also connected far-flung markets. John Maynard Keynes described that connectedness when he wrote that, by 1914, “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.”

Nowhere was this greater connectedness more visible than in the movement of prices for goods traded between countries. In an ideal scenario devoid of transportation expenses, tariffs, or other hindrances to trade, prices for traded goods should align across all countries. The rationale behind this is simple: If a product such as grain is priced differently in any two countries, it presents an arbitrage opportunity. Savvy traders move grain from where it is cheap to where it is dear. Prices equalize as a result. This is what economists dub “the law of one price.” Obviously, there are always some frictions to exchange. Bringing goods from one place to another is not costless. However, the abstraction is potent because it says that if transportation costs or tariffs fall, prices should grow closer together. Observing a trend of price alignment thus indicates growing market integration—either from falling tariffs or falling transportation costs. And this is exactly what we observed during the first age of globalization: increasing integration of far-flung markets.

This story—which is a common one in history books—has been challenged on multiple grounds. Some have pointed out that even during the first age of globalization, the reduction in government barriers to trade mattered more than the technology-driven reductions of natural barriers in driving the integration of markets. Personally, I tend to agree with that claim.

However, I am going to handicap the case for liberal trade policies by rhetorically refusing to accept this argument. Rather, I am going to shift to a less commonly emphasized argument. The typical story of the first age of globalization argues not only for rapid technological progress in transportation technologies post-1870 but also for trivial improvements pre-1870. At best, the conventional wisdom is that whatever improvements occurred before 1870 were too modest to matter.

This is false. There was sizable productivity growth in the shipping industry. According to Nobel laureate Douglass North, productivity increased by 0.45 percent per annum from 1600 to 1784. Knick Harley found lower growth during that period (closer to 0.1 percent per annum); he also found that it stood on average at 0.63 percent per annum from 1811 to 1858. Studying shipping productivity in the American colonies, James Shepherd and Gary Walton found that it increased by somewhere between 0.4 percent to 1 percent per annum from 1650 to 1789. These findings of rising shipping productivity are echoed in studies of more localized waterway transportation. Shipping speeds also increased noticeably during the period. There were other important productivity enhancements in shipping as well: the expansion of lighthouse networks, the rise of well-organized insurers, and the improvements of port installations that sped up turnaround times.

These productivity gains in transportation technologies were modest in comparison to later ones. Yet they were not negligible. They could have allowed for an earlier start to the first age of globalization by allowing for markets to integrate better. Why didn’t they? The answer is that they were able to until significant tariffs and wars delayed everything. In other words, I am stating that those modest gains in shipping productivity were probably sufficient to trigger the first age of globalization. Government policies just canceled out their effects. If this is correct, the perspective of critics who assert that commercial policies were more significant than technological advancements during the first age of globalization only reinforces the argument in favor of liberal trade policies.

To understand the market-integrating potential of these apparently modest gains in shipping productivity, it is useful to look at Canada and the integration of its internal markets between 1760 (after it became entirely a British possession) and 1850. By virtue of Great Britain being a single polity, there were no tariff barriers of relevance between the different colonies of British North America. Yet Canada is geographically immense. The waterway distance between Halifax, Nova Scotia, and Toronto, Ontario, is 4,071 nautical miles—roughly the same as the distance from Bremen, Germany, to Alexandria, Egypt. Ships carrying goods between the different colonies thus had to travel long distances (along riverways rather than the open seas), suggesting the presence of important natural barriers to trade.

However, if we look at trends of market integration from the late 18th century to the mid-19th century, we observe that markets were becoming increasingly integrated. The most common measure of market integration is the coefficient of variation, calculated by taking the standard deviation of the prices across all the different markets and dividing it by the average price across all the different markets. The lower the coefficient, the more integrated markets are. In the 1760s, that coefficient stood north of 0.2. By the 1850s, it had fallen to less than 0.1. This is a strong trend in favor of market integration. If you use the 1831 census data, which cover a cross section of more than 300 areas in the British colony of Quebec (which was larger than half of Europe), you can also get a coefficient of variation that can be compared with those of European nations. The level reported in the 1831 census is between 0.097 and 0.099—a figure that matched the level of market integration observed within Britain at the same time. Because of the absence of trade barriers within the colony, the vast majority of those levels and trends would have been explained by the modest technological advances of the late 18th and early 19th centuries. But remember that we are describing a colony the size of half a continent. This amounts to saying the small gains in shipping productivity were sufficient to drive market integration on a gigantic geographical expanse where no relevant legal barriers to trade existed.

The above example suggests that market integration could have happened easily without government-created trade barriers. We have a further example—again from Canada—that should help reiterate this point. As a colony, Canada had no control over its trade policy. The British Parliament and the Colonial Office in London would decide which tariffs (and to what level) to place in Canada. They could also decide to repeal those tariffs—which is what they unexpectedly did in 1831 with the Colonial Trade Act. In one fell swoop, all tariffs on American agricultural produce were abolished. American foodstuffs could enter Canada freely, an extreme case of unilateral trade liberalization. (The United States did not reciprocate.) Overnight, American wheat and flour flooded Canadian markets. In the colony of Quebec, wheat went from being more than three-quarters of grain production in 1831 (a proportion that had been stable since the 17th century) to less than a tenth in 1844. A colony that had been a net exporter of wheat became a net importer overnight—close to 2.2 million bushels for a population of less than one million. American wheat was so much cheaper that the colonists simply shifted to producing other crops or to other sectors of activity while the consumption of wheat per capita increased 22 percent. Prices of agricultural goods in Canada rapidly began moving in greater synchronicity with American prices. This was an extremely rapid pace of adjustment to trade liberalization. Again, bear in mind that we are now talking about not only Canada but also the American areas along the Great Lakes (Ohio, Michigan, New York, Illinois, Indiana, Wisconsin, and Pennsylvania). This is a huge geographical expanse—as large as Europe—that rapidly integrated once the government barriers to trade were removed.

These instances indicate that the relatively modest shipping productivity growth of the late 18th and early 19th centuries had the potential to surmount considerable natural trade barriers. However, in the latter case, this potential was hindered by governmental trade barriers, specifically the tariffs in place before the enactment of the Colonial Trade Act of 1831. This highlights how government-made regulatory obstacles, in contrast to physical or geographical (i.e., natural) obstacles, played a pivotal role in shaping trade dynamics during the period.

The logic of these examples can be extended further to a far greater geographic area—the entire North Atlantic—because of the pioneering work of Paul Sharp and Jacob Weisdorf. In 2013, they published an article in Explorations in Economic History in which they studied market integration for wheat between the United Kingdom and the United States from 1700 to 1900. Trade volumes for wheat were small between the two nations (and were generally one-way from the colonies to the home country). However, prices for wheat shared important co-movements and there was a clear trend in favor of market integration. If prices in Britain rose beyond a certain threshold, American imports would surge, which would affect prices in both markets. This is essentially stating that the law of one price was operating. What impeded the operation of the law of one price was what Sharp and Weisdorf called “exogenous shocks”—a broad categorization that blends wars, political disintegration, and tariffs. But in practice, these are all policy shocks. Once the United States became independent, the British initially retaliated by blocking access to their markets (and those of the colonies), and they later tightened the Corn Laws (a set of protectionist measures that restricted the entry of grain). The United States also retaliated in multiple ways. These retaliatory measures are in addition to the disturbances caused by wars themselves. As such, between 1800 and 1847 (the period after the tightening of trade barriers between America and Britain), Sharp and Weisdorf find no signs of the law of one price operating. In other words, markets were integrating until the American Revolution and postrevolutionary trade barriers ended the trend.

In their conclusion, Sharp and Weisdorf clearly evoke the possibility that the first age of globalization could have started earlier. They point out that imports of wheat to Britain as a share of total consumption rose significantly after the repeal of the Corn Laws in the late 1840s; an American “grain invasion” then occurred. Sharp and Weisdorf then discuss the multiple merchant petitions during the 1791 debates regarding the tightening of the Corn Laws. All the petitions highlighted the importance of the American wheat trade to Britain’s food supply. Absent wars and tighter policy-related barriers to trade, Sharp and Weisdorf state that “we would now date the grain invasion—and possibly even the origins of globalization—to the late 1700s, rather than a century later.”

This was merely informed speculation at the time of Sharp and Weisdorf’s study. In subsequent work, Sharp, Maja Pedersen, and I decided to tighten that case by—yet again—looking to Canada. There are three reasons for this. First, Canada had a small population. Its influence on world prices was minimal. Thus, if there was strong market integration, we should expect that prices there would have responded strongly to price changes abroad. Second, Canada became entirely British in 1760. Until 1783, it was part of a large “free trade zone” in wheat with Britain and the United States. However, after 1783, Canada remained a British possession. Each time Britain tightened trade policy, preferential treatments were carved out for Canadian producers by virtue of being members of the British Empire. Third, Canada shares highly similar geographical constraints (i.e., the span of the Atlantic Ocean) with the United States when the time comes to access British markets. The preferential treatment extended to Canadian producers, who shared similar natural barriers with the Americans, thus allows us to triangulate the relative importance of trade barriers.

We ended up confirming much of the story initially told by Sharp and Weisdorf. Canadian prices responded strongly to American prices before 1783 and strongly to changes to British prices after 1783. In a way, Canada provides a sort of counterfactual. Had the United States still enjoyed the same access to British markets as before the American Revolution, it could have been as well connected as Canada was. The difference is that Canada was so small (less than 300,000 persons by 1800, compared to 5.3 million in the US), it could hardly provide the quantities sufficient to speak of a wheat invasion. Yet on a per capita basis, Canada ended up supplying extremely large quantities. Before the American Revolution, when the Canadian population was less than 100,000, between two and six bushels per person were exported annually. Until the 1830s, generally more than one bushel per person was exported (with the exception of years with export bans due to crop failures or wars blocking ports). Had Americans supplied a similar effort on a per capita basis as the Canadians, that would have been the grain invasion of the 1840s. Bear in mind that this is not free trade. This enormous Canadian effort was achieved only with a lesser degree of discrimination against Canadian imports into Britain—a strong case for saying that policy barriers delayed globalization.

Unsatisfied by this evidence, I decided to address one last limitation of the work of Sharp and Weisdorf and the work I did with Pedersen and Sharp. Both studies used annual wheat prices. This is low frequency and makes it hard to assess price adjustments in the shorter run. As such, I teamed up with Antoine Noël to circumvent this limitation by collecting monthly wheat prices for three American cities, London, and Quebec City. We compared the coefficients of variation (i.e., the measure of market integration described earlier) from the 1760–1775 period to those of the post-1783 period, when governments erected more barriers to trade. In Figure 1 below, we show the results of this comparison. The dashed red line shows the coefficient of variation between Canada and the United States over the entire post-1783 period. The black line shows the monthly coefficients of variation during the pre-1775 period. With the exception of the first months after the Conquest of 1760, markets were always better integrated before 1775. In the 1760s and 1770s, despite less advanced transportation technologies and the absence of significant trade policy barriers, Canada and the United States enjoyed a stronger connectedness than they would in the 1840s, when more advanced transportation existed but was hampered by major trade policy obstacles. In fact, levels like those observed in the 1760s and 1770s would not be seen again until Canada and the United States signed the Treaty of Reciprocity in 1854.

In Figure 2, we replicate this exercise for the integration between all of North America and London from 1770 (the first point in time for which continuous monthly prices are available). And the same pattern holds true—markets were integrated better in the 1760s and 1770s than after. In fact, the level of integration from 1760 to 1775 is not only lower, it is the same as that observed in the 1840s just before the Corn Laws were removed in Britain. Over the span of eight decades, significant advancements were made in shipping productivity. This implies that with fewer trade policy barriers, the less advanced technologies of the 1760s and 1770s achieved a level of market integration comparable to that of the more advanced shipping technologies of the 1840s, when trade policy barriers were higher. This stark contrast underscores the profound impact that government-imposed trade barriers had in canceling the potential benefits of technological advancements. Such barriers effectively delayed the onset of the first age of globalization by a century, illustrating how government decisions can significantly influence the course of economic and technological progress.

Together, these examples all demonstrate that even modest improvements in trade technologies were sufficient to create a strong integrating force. These improvements do not include the steamship, reinforced steel, or the telegraph; rather, they are improvements in the age of wooden ships with sails. For brief periods of time when trade technologies were allowed to work, we saw vast areas (North America, the North Atlantic) grow rapidly integrated. That integration, unfortunately, disappeared once governments stepped in.

A few years ago, there was a panel on the legacy of the abolition of Britain’s Corn Laws following the publication of an ambitious article on the (positive) effects of the repeal on the living standards of Britons. One of the panelists, the historian Steve Davies, said that the suddenness and exhaustiveness of the repeal had a huge effect on popular opinion. The repeal “fixed in the minds of the British working class in particular, right up to the present day, the profound belief that free trade is good for the poor and the working man and woman and that protectionism is basically a conspiracy by the rich and special interests to screw over the working class.” To this day, he continued, “the lower middle class and the working class in Britain is and always has been solidly in favor of free trade.”

The lessons from the first age of globalization can serve the same purpose. The urge to trade and barter drives efforts to improve technologies, which, in turn, leads to greater economic connectedness and greater enrichment. During the first age of globalization, this advancement was impeded by governmental interventions, delaying significant gains in living standards by a century. Knowledge of this history underscores the importance of eliminating such obstructions to promote a future, even greater enrichment.