COMMODITY MARKET INTEGRATION (pagg.

65 76)
WORLD TRADE (1815 1914)
Transport costs: canals have been important for commodity market integration,
but steamships were the most important XIX century innovation in shipping
technology.
Until 1860 steamers mainly carried high-value goods like passengers and mail
(nowadays airplane transport), but in subsequent decades a series of
innovations made steamships more efficient.
Another news was the opening of the Suez Canal in 1969; far eastern trade was
still dominated by sail and, wanting to use a steamer, it required carrying too
much coal. The innovations in steamships and the opening of the Suez Canal
made it possible to halve the distance from London to Bombay.
The other major XIX century development in transportation was, of course, the
railroad.
The Liverpool-Manchester line opened in 1830; early Continental countries have
been Belgium, France and Germany. Lets consider that during the late XIX
century the growth in railway was huge and, in particular, in the United States,
where trains would play a major role in creating a national market. An important
effect is that railways did the most of the work in reducing price gaps and
create convergence within the US regional prices.
Lets consider that the impact of these transport innovations on the cost of
moving goods between countries has been important because, especially from
1840 onwards freight rates dropped of about 40% in Great Britain, America,
Black Sea, Egypt, etc
Trade policy: free-trade policies also provided a relevant push toward
integration; after Waterloo (1815) European trade has been described as an
ocean of protectionism surrounding a few liberal islands. Gradually, however,
the demand for trade liberalization in Great Britain grew, partly under the
influence of economists like Ricardo, partly as a result of the growing power of
urban interests.
The pro-globalization movement applied to both commodity and factor markets,
so skilled workers were allowed to emigrate in 1825 (not allowed since 1719),
prohibitions on import of grains was abandoned in 1828 replaced with a slidingscale tariff about the domestic price of grain.
Tariffs were reduced again and again. Export of machinery was allowed in 1842
(banned since 1774). The final move toward free trade in 1846 with the
suspension of the Corn Laws.
Before 1860 only a small part of Continental countries (corresponding to 4% of
Europes population) has adopted a truly liberal trade policy: Netherlands,
Denmark, Portugal and Switzerland, Sweden and Belgium (from 1856) but
maintaining some degree of protection.
1860 is an important year toward liberalization; the Cobden Chevalier treaty has
been a decisive shift toward European free trade. The treaty abolished all French
import prohibitions, replacing them with ad valorem duties not greater than
30%. But most importantly the treaty introduced the most-favored-nation (MFN)

clause establishing the principle of non-discrimination as a corner-stone of

European commercial practice.
A lot of bilateral treaties followed: France and Belgium in 1861, a FrancoPrussian treaty in 1862, Italy entered the Cobden Chevalier treaty in 1863,
Switzerland in 1864, Sweden, Norway, Spain, the Netherlands, the Hanseatic
towns and Austria in 1866.
But from 1870s everything changes again because of the impact of cheap New
World and Russian grain in European markets. International trade was having a
profound impact on income distribution, lowering the income of landowners
relative to those of workers throughout Europe.
Countries started to protect economy once again: Germany in 1879 when
Bismark protected both agriculture and industry; France in the 1880s; Sweden
in 1888; Italy in 1878.
***There was a common pattern across western Europe of liberalization followed
by a reversion to protection, prompted by the distributional effects of the grain
invasion and consequent pressure from landowners attempting to isolate
themselves from the international economy.***
There were exceptions: Denmark adhered to agricultural free trade throughout,
switching from being a net grain exporter to a net grain importer; the
Netherlands followed a similar path; Belgium and Switzerland; and most
importantly the United Kingdom (despite some domestic dissension).
New World landowners benefited from free trade, but that doesnt mean that
New World trade policy was liberal. In the USA the new-born industries had
formed the basis for a long-standing Northern pro-tariff lobby that lasted
because of the Republican domination of Congress.
Canada also protected manufacturing after 1878, Australia from 1893,
Argentina increased tariffs from the 1870s onward, Uruguay by 1913, Brazil;
Venezuela.
*** It appears that the highest tariff barriers were in the New World, not Europe.
***
The opposite was the case in Asia where Japan switched from virtual autarky to
free trade in 1858.
Other Asian nations (China, Siam, Korea, India and Indonesia) also followed the
liberal path mostly forced by colonial dominance or gunboat diplomacy.
The XIX century is the real break with the past in market integration. Trade
growth is astonishing compared to production (GDP) increase see trade ratios
like merchandise exports to GDP that increased 8 times between 1820 and
1913.
Price convergence is visible across the planet (nothing before 1800); lets
consider wheat spread Liverpool-Chicago from 58% to 16% and cotton spread
Liverpool-Bombay from 57% to 20%.
When world commerce combines with industrialization we see a clear division of
labor on global scale (Western Europe exports manufactured goods, North

America still exports primary products, but rapid industrialization leads to a

more balanced trade in manufactures over time, the rest of the world (Oceania,
Latin America, Africa, Asia and India) exports primary goods.
*** The contrast with the situation 150 years earlier is striking because of the
clear distinction between industrial producers and agricultural/natural resources
producers in both the core and periphery.***
Commodity market integration does not determine economic convergence.
High added value exports are in core economies hands.
Peripheral economies export raw materials and agricultural.
It explains why industrialization did not move to low-wage countries, a failure
that will have a long lasting heritage.
WORLD TRADE (1914 2000)
- WWI: impact on liberal economic order of late XIX century end because each
side attempted to destroy the others trade through blockades and u-boat
campaigns and even traditionally liberal governments (UK first of all) imposed
restrictions on trade and shipping introducing a system of quotas and the al
location of shipping capacity.
During the war, in countries involved in the war, import shares fell only
marginally while it was exports that collapsed because resources were diverted
to the war effort and raw materials for the export were rationed.
Correspondingly, in neutral economies exports rose (e.g. Sweden, Japan and
North America) to meet Allied demand.
This reorientation of trade led to bad consequences that lasted as chronic
problem contributing to trade tensions after WWI: agricultural oversupply. Lets
consider also the absence of European manufactured exports on world markets
that stimulated the expansion of industrial capacity in the US, Japan, India,
Australia and Latin America.
After the war, excess of food supply brought to pressures for agricultural
protection. Restrictions on trade remained prevalent and when quantitative
restrictions were abolished, these were replaced with high tariffs.
The international community remained ineffective, even the League of Nations
invoked and recommended the returning to free and more equal trade, but the
same single Governments raised barriers and practiced discrimination widely.
Soviet Union made the situation worse by exporting more as price fell in order
to earn sufficient revenues to pay for capital equipment imports.
The symbol of interwar protection has been the Smoot-Hawley tariff raised in
1930 by US as a consequence of the resumption of European supplies,
consequent overproduction and agricultural prices fall. The tariff protected US
agriculture as well as industry and represented a substantial increase in overall
protection. Lets consider that in 1929 the Great Depression exploded in US and
it has been another major reason for the adoption of severe protection
everywhere. US didnt want to become the unilateral guarantor of open markets
that the UK had been before the war (think about the fact that US now is
sufficiently important to become a sort of benchmark).
In 1931-1932 even the traditionally free-trading Netherlands and Britain
established protection on imports.
But in 1932, there were also several signals that at least some countries were
trying to moderate and reverse the increase in protectionism of the previous

two years. In 1932 the Benelux countries (Belgium, the Netherlands and
Luxembourg) agreed at Ouchy to start cutting on tariffs in order to rapidly
liberalize regional trade, but the obstacle was the MFN clause that had a crucial
role after 1860 in speeding up free trade, but that had a chilling effect during
the 1920s and 1930s (the clause tended to obstruct the reduction of tariffs by
means of bilateral or multilateral agreements because a free-rider problem
might arise, with other parties, bound in a web by the MFN treaty, waiting for
others to reduce tariffs in order to reap the benefits.
In 1932 US appointment of a pro-free trade secretary of state brought US to sign
a lot of treaties, the most important with UK.
Obviously MFN status has been a cornerstone of the postwar GATT (1947) which
has seen a huge decline in tariff barriers, initially only among richer countries
involved and from 1960s onward also the less developed ones.
-

Transport costs: they continued to fall during the XX century, but at a slower
rate than previously.
Obviously the rates increased a lot during the war and remained abnormal until
1920.
Its important to highlight that air freight rates declined dramatically from 1950s
(they raised in the 1970 decade) especially on North American routes. The
result has been the tenfold increase in the ratio of air to ocean shipments since
1962.

Trade policies: declining transport costs are no longer the main driver of
integration, so its probable that trade liberalization played a much greater role
in commodity market integration in the late XX century than it did during the
former period.
Lets think about tariffs: in late XX century they are much higher in developing
countries than in rich ones, while the opposite was more true of the late XIX
century.
But agriculture remains a protected niche in many wealthy countries, higher
than in 1913; NTBs such as countervailing and antidumping duties, quotas,
voluntary export restraints, production subsidies and technical barriers to trade,
are much more important today than they were in 1913. Above all the use of
antidumping measures has become more common and on increase in the EU
and outside the Organization for Economic Cooperation and Development
(OECD) we cannot assume that average worldwide protection is less severe
today than it was in 1913.
The consensus is that the world is becoming more open, but what can explain
the different timing of liberalization across regions?
The US liberalized almost immediately, Western Europe waited about 15 years
and when it did it, it did it in a rush at the end of 1950s.
Latin America became progressively more closed from the 1950s onward, only
opening in the 1980s along with New Zealand.
The former Communist economies only opened during 1990s and much of Africa
still remains closed.

Commodity market integration in the XX century: what has been the combined
impact of the transport cost and trade policy development?
The 1913 levels of openness had not been recouped as late as 1973.

Price gaps for identical commodities in different markets remain the best
measure of commodity market integration.
Speaking about the composition of trade over the course of the XX century, in
1913 primary products had accounted for about 60% of total merchandise
exports while in 1999 it declined to 18%.
Manufactures now account for more than 50% of merchandise exports
everywhere, even in the case of Africa they are vastly more important than on
the eve of WWI.
-

Conclusions: the range of goods that have been traded between continents
since the XVI century has steadily expanded over time and there has been
substantial commodity market integration over the period driven by technology
in the XIX century and politics in the late XX one.
However the process is not straight because it was periodically interrupted by
shocks such as wars and world depressions. The main drivers (transport and
policy) at times combine together whereas at times clashed.
Lets consider that we know little about international commodity market
integration during the XX century, so we can state that the second wave of
globalization is at work.