Lessons of 1000 years of trade history

To many seasoned observers of the world economy, today’s globalization is a largely technological phenomenon. Once learned, new technologies are typically not forgotten, which is why globalization can seem an irresistible force, destined to bind us ever more tightly together for the foreseeable future. History, however, suggests that globalization is as much a political as a technological phenomenon, which can thus be easily reversed, and has been so in the past.

Economists are well used to considering one way in which globalization can be undermined politically. The standard theory of international trade tells us that while trade may raise incomes generally, it produces both winners and losers. If the losers are sufficiently politically powerful, they may convince governments to impose protection. More importantly, history tells us that this is not just a theoretical curiosum, since this is exactly what happened in late 19th century Europe.  For the first time in history, steamships and railroads made it possible to transport bulky commodities across oceans and continents, linking together regions of the world with very different endowments of land, labour and capital.  Faced with an invasion of cheap grain from Russia and the New World, governments in France, Germany and other Continental countries caved in to the protectionist demands of their agrarian constituencies, raising agricultural tariffs significantly.

However, history also tells us that politics matters for globalization in a far more fundamental way.  The new steam technologies of the Industrial Revolution would never have had the effect that they did, had they not operated within the context of a stable geopolitical system within which the Royal Navy guaranteed the freedom of the seas for all; within which wars between the major European powers were relatively rare; and within which those same European powers used their military superiority to impose more or less open trade on most of Africa and Asia.  With the outbreak of World War I, that geopolitical system was destroyed, and 19th century globalization with it, despite the fact that technological progress continued unabated during the interwar period.  And while in the rich countries of Western Europe and North America the post-1945 period saw a gradual reconstruction of open trading conditions, deglobalization characterised much of the rest of the world until the 1980s thanks to the spread of communism and decolonisation, which themselves had their roots in the century’s two world wars, and the intervening economic debacle.

Economists have typically shied away from considering such matters, regarding wars as ‘exogenous’ shocks to the system, or as departures from normality.  The importance of war and peace for the international economic system is so evident, however, that it is now reflected in the title of a book which Ronald Findlay and I have recently published on the history of international trade over the very long run (Power and Plenty: Trade, War, and the World Economy in the Second Millennium, Princeton University Press). The ‘Power and Plenty’ of the book’s title refers of course to the mutual dependence of trade and warfare during the Mercantilist era, when the links between commerce and violence were particularly explicit and clear.  But great expansions of world trade were linked to conquest even earlier.  The pax Britannica and pax Americana which provided the geopolitical stability underlying the globalisations of the 19th and late 20th centuries have their counterpart in the pax Mongolica of the 13th and 14th centuries, which produced an impressive integration of the Eurasian economy.  The Muslim conquests which unified a vast region stretching from India to the Atlantic provide an earlier example, while the Iberian conquests of the 16th century would provide an even more spectacular later one.

In the light of history, it would be foolish to assume that present day trends will automatically persist into the future.  What sorts of challenges might arise to threaten 21st century globalisation?  One striking feature of today’s international economy is that, as in the 19th century, regions with very different factor endowments are being drawn into closer contact with each other, as what used to be known as the Third World opens up to the rich countries of the North.  Will the modern day equivalents of the farmers of 19th  century Europe, namely unskilled workers in the OECD, eventually press for and obtain a rolling back of trade liberalisation?  The 2005 French referendum on the so-called European Constitution, and the 2008 Irish referendum on its successor, the Lisbon Treaty, when unskilled workers voted against what they saw as pro-market, pro-globalisation accords, may serve as straws in the wind in this regard.

Even more fundamentally, the continuation of a broadly liberal international trading environment will require that the geopolitical system adapt to the rise of China, India and other ‘Third World’ giants.  In a historical context, this represents of course the restoration of the status quo ante, the end of a “Great Asymmetry” in international economic and political affairs caused by the Industrial Revolution, which was itself in large part a product of the interactions between early modern Europe and the rest of the world.  But that is not to say that such an adjustment will be easy.  The international system has historically done a pretty poor job of accommodating newcomers to the Great Power club.  German unification and industrialisation during the late 19th century led to tensions with Britain and France over colonial and armament policy, while Japan’s rise to regional prominence during the interwar period, and its search for secure sources of raw materials, ended in war against United States and its allies.  Both precedents are worrying, in that similar questions are posed today, both in terms of the rights of emerging nations to rival the established powers’ military capabilities (notably with regard to nuclear weapons), and in terms of the strategic importance to countries like China of ready access to oil supplies and other natural resources.

The last point should cause us to reflect that, Cobden and Montesquieu notwithstanding, interdependence and trade do not necessarily guarantee peace.  The world economy of the late 19th  century was extremely interdependent, to the point where Norman Angell famously felt able to pronounce, on the eve of World War I, that major conflict was now unthinkable.  Interdependence implies vulnerability, and vulnerability can lead to fear, with unpredictable consequences, as Anglo-German rivalry in the run-up to the Great War, and Japanese reactions to the Great Depression and Smoot-Hawley, both indicate.

Impermanence appears to be the most enduring feature of the human condition, and if there is one lesson which we can safely learn from history, it is that history has not ended.  Hopefully it will not repeat itself.

This article was originally  posted on www.voxeu.org and the History News Network.