Effect Of Free Trade And Tariffs example essay topic

Historians of the 19th century have traditionally linked economic growth with a move to free trade. The mid-Victorian boom in Britain for example has been attributed to the significant moves to free trade in the period 1840 1860. Typically this British characteristic has been compared to the free trading stance of France. The supposedly higher levels of protection in France have been linked, often in a post hoc ergo proper fashion, to its economic retardation. The debate on the relative economic merits of free trade is by no means original. The political environment in Britain during the 19th century was dominated by free trade arguments.

The free traders of the Anti-Corn Law League saw free trade in a much broader context. It was Cobden who rather dramatically said that: In the Free Trade principle which shall act on the moral world as the principle of gravitation in the universe -drawing men together, thrusting aside the antagonism of race and creed, and language, and uniting us in bonds of eternal peace. Clearly it is not in the remit of this essay to analyse and discuss these potential effects of free trade, but Cobden quotes highlights the importance and passion that contemporaries, and historians, have placed on the question of free trade. Initially I shall attempt to compare the level of free trade in Britain and France in the 19th century. I will then begin to assess the effects of tariffs and free trade during this period. Historians have often seen Britain as leading the world in implementation of free trading policies.

It is argued that Britains move to free trade accentuated its already pronounced economic lead over her continental competitors. France and the other hand is viewed as highly protectionist and adopt in free trade polices only in the later stages of the 19th century. Nye, however, has empirically criticized the assumption that Britain had more open economy than France. In his study Nye calculates tariff revenue as a percentage of total imports. His figures show us that Frances average rate of tariff was 50% lower than Britains during the 1820's, and that Britains tariffs were only comparable to those of France after the great free trade reforms of the 1840's. Nye admits that British tariffs were based primarily on consumption goods such as tea, wine and tobacco, but he argues against discounting these products as indicators of protection.

He suggests that, whilst not protecting domestic industries, these tariffs still distorted the efficient allocation of resources. In short Nyes empirical study finds a paradoxical gap between the historical perception and commercial reality. Nye bemoans the seemingly obligatory over-emphasis on leading sectors, such as textiles where Britain was clearly less protectionist, and points out that economic development should not be confused with industrialization. Irwin reasserts the view that the French economy was more protectionist than Britain. Irwin states that Nyes rate of tariff revenue indicator is a poor indicator of levels of protectionism. Crucially Irwin is quick to differentiate between protectionist tariffs and consumption tariffs.

Yes, tariffs on the consumption of a few luxury items were high, but, unlike Nye, Irwin finds little evidence for the availability of substitutes. Contemporary opinion is used to reinforce Irwins argument. It was Cobden himself who stated that: We have many duties such as that, for example on tea which are too heavy, but they are not maintained in the interest of any British producer. The structure of the British tariff is examined in detail and we see that Gladstones budget of 1860 removed all protectionist tariffs, whilst half of the remaining items were solely for the purpose of countervailing duties of excise on the like articles produced in the UK. In this way we see the British government normalizing domestic excise duties on imported goods. This can hardly be seen as a protectionist policy.

Indeed by 1897 95% of tariff revenue is generated by tobacco, tea, spirits and wine. If one takes Irwins position it is safe to say that there was virtually no protection in Britain after 1860. This contrasts markedly with that of France. Even after the Cobden-Chevalier treaty of 1860 there was a 10-15% tariff on most goods. Tariffs in the latter half of the 19th century were successively ratcheted up and culminated in the highly protectionist Me line tariff of 1892. To Irwin the real test of the relative protectionism of a tariff system lies in the principles that underlie that system.

In Britain we see an extension of the excise system and in France we see a system designed to keep goods out. It is difficult to accommodate both Irwins and Nyes arguments. However Irwins more detailed examination of tariff content is compelling and it would seem harsh to penalize Britain for taxing mainly consumption items. Nyes evidence does suggest that France, especially in the early half of the 19th century, was less protectionist, in relative terms, than once thought. By analysing both views we can safely say that Britain still held the lead in free trade during the 19th century. However the free trading gap was not as significant as once thought.

More recent historians have begun to suggest that the economic effects of free trade have been exaggerated. McCloskey was one of the first historians to propose that free trade may have retarded Britains economic growth. He sees the reduction of tariffs in the 1840's as the equivalent of a 21% narrowing of the differential between domestic and world prices. McCloskey appeals to the logic of free trade, and like the more contemporary Robert Torrens, emphasises negative terms of trade effects. If British demand for imports was a nonnegligble fraction of the world demand then the elimination of duties, by means of a rise in import demand, will have caused a nonnegligble rise in import prices. If the price of imports has increased then Britains terms of trade have worsened.

McCloskey resorts to theory and proposes an optimal tariff for Britain given its monopsonistic position in the world market. McCloskey, using anti-Ricardian assumptions, believes Britain to have been an influential player in the world market. Thus he estimates low elasticties of export demand and import supply necessitating the need for a high tariff. The 1881 average tariff of just under 6% is viewed to be optimal only if consistent with elasticities of 35! McCloskey calculates that a 21% fall in the tariff, combined with a 20% share of foreign trade in national income, could account for a 4% loss in national income.

Mccloskey application of pure trade theory to mid-Victorian Britain highlights a crucial point. A move to free trade is not, even theoretically, a move to higher income. Gains from increased efficiency and resource allocation can be more than offset by deteriorating terms of trade. In this was we see McCloskey agreeing with Torrens who cited the terms of trade deterioration as reason for the cautious adoption of free trading policies. The terms of trade deterioration is likely to be lessened if moves to free trade are reciprocal.

Irwin argues that a unilateral tariff reduction in Britain may well have had detrimental effects. Irwin agrees with Base vi and Walker that the effect of the change in relative prices from a tariff removal (terms of trade) depends on the underlying elasticities. Like McCloskey Irwin finds a range of plausible elasticties that show a unilateral trade reduction as making Britain worse off in GDP terms. However Irwins data diverges from that of McCloskey and he estimates a fall smaller reduction in total income from a 21% cut in tariffs.

The emphasis on the terms of trade deterioration is balanced by the suggestion that bi-lateral or multi-lateral trace reductions can improve terms of trade. Many countries followed Britains lead and cut tariffs in the 19th century and these tariff cuts will have improved Britains terms of trade. Irwin agrees with Torrens: reciprocity should be the rule. Again we see the importance of underlying elasticties as affecting the effects of a move to free trade, a point which is reinforced by McCloskey, but Irwin develops the argument by placing extra emphasis on the effects of other countries tariff behaviour. The emphasis on the variability of the effects of free trade is furthered using the case study of the Corn Laws.

The welfare effects of repeal are thought to be significant when Ricardian small country assumptions are used. The living cost for labourers is reduced by a massive 25% and output rises by 23.6%. However if Ricardian assumption are discarded and pro-Torrens (Britain influencing world market prices) views are taken into consideration we see much smaller welfare effects. The export boom is tempered by rising import costs resulting from an inelastic import supply. In this case the detrimental effects of the terms of trade deterioration offset efficiency gains, although labourers still benefit from repeal. Macro effects are lessened, but we must be careful not overlook intra-industry changes and the effect on the average Briton.

Williamson reiterates the importance of elasticties in determining the true effects of repeal. The lower the elasticties in foreign markets the more the Corn Laws served to improve the terms of trade. Williamson suggests, like Irwin, that plausible estimates of elasticties can be used to state that the Corn Laws were no burden on manufacturing at all. The effects of tariffs and free trade in the 19th century are ambiguous.

Some argue free trade aided the mid-Victorian boom, whilst others argue it retarded growth. Key factors in this debate seem to be elasticties of demand and supply, tariff structure and the level of multi-lateral tariff participation. Were tariffs protective or purely fiscal in nature Were lurches to free trade mirrored in other countries Were tariffs at their optimal level Whilst in Britain elasticties are thought to have been low, there is insufficient data, especially from abroad, to come to a definitive conclusion on the relative effects of free trade. Even if one could come to a satisfactory estimate of elasticities it must be remembered that these factors are far from static.

Most of the factors mentioned above are dynamic and thus change over time. The arguments for the positive and negative effects of free trade have been argued explicitly in recent historical studies. The polarity of the arguments reflects economic theory. Free trade can have positive and negative effects. It is therefore impossible to come to a simple conclusion to this question.

The effects of tariffs and free trade in the 19th century were variable. The effect of free trade and tariffs depends on a variety of economic and political factors. These factors are too varied and too changeable to allow for a more authoritative answer to this question..