Trade, Power and Innovation

Trade and its globalisation are at the top of the political agenda now. After decades in which national economies have become more and more entwined, populist politicians are questioning the benefits of globalisation. Meanwhile in the UK, we are embarked on a process of turning our backs on our biggest trading partner in the quest for a new set of global relationships, which, to listen to some politicians’ rhetoric, will bring back the days of Britain as a global trading giant. There’s no better time, then, to get some historical perspective on all this, so I’ve just finished reading Ronald Findlay & Kevin H. O’Rourke’s book Power and Plenty: Trade, War, and the World Economy in the Second Millennium – a world history of a millennium of trade globalisation.

The history of world trade is one part of a history of world economic growth. Basic economics tells us that trade in itself leads to economic growth – communities that trade with each other on an equal basis mutually benefit, because they can each specialise in what they’re best at doing.

But trade also drives innovation, the other mainspring of economic growth. The development of larger markets makes innovation worthwhile – the British industrial revolution would probably have fizzled out early if the new manufactured goods were restricted to home markets. Ideas and the technologies that are based on them diffuse along with traded goods. And the availability of attractive new imported goods creates demand and drives innovation to provide domestically produced substitutes. This was certainly the case in England in the 18th century, when the popularity of textiles from India and porcelain from China was so important in stimulating the domestic cotton and ceramics industries.

This view of trade is fundamentally benign, but one of the key points of the book is to insist that in history, the opening up of trade has often been a very violent process – the plenty that trade brings has come from military power.

The direct, organised,large-scale involvement of Western European powers in trade in the Far East was pioneered by the Dutch East India Company (VOC), formed in 1602. Their mode of operation involved the maintenance of spice monopolies by lethal force, including massacres and ethnic cleansing; the English East India Company’s corporate takeover of India followed. In mid-19th century China, Britain asserted its right to trade in opium with naval power, and the outcome of those “Opium Wars” was a series of “unequal treaties” regarded with bitterness in China to this day.

Meanwhile, the development of an Atlantic economy involved the forcible transfer and subsequent bondage of around 11 million Africans between the 16th and 19th centuries (with about 30% of these numbers being traded by the British). It was this slave trade that permitted the exploitation of the new lands of the Americas; these discoveries (and the expropriation by force of their indigenous owners) made land abundant, but the exploitation of this land needed an elastic supply of low-cost labour, which slavery provided. As the industrial revolution gathered momentum, it was this combination of abundant land and labour that kept the prices of raw materials like cotton subdued, even as the demand for them increased. By the late 18th century around 80% of all exports from North America derived from slave labour.

This ability of the European powers to project power globally across oceans – through naval power – was itself the result of innovation. An 18th century warship was the most technologically sophisticated object of its time – and had a cost to match. A single 74 gun ship (a third rate ship of the line) in 1780 cost around £50,000; in terms of its share of the national economy, this corresponds to about £500 million now (about 2/3 of the cost of a current Type 26 Frigate). More than 80 of these were built in Britain in the second half of the 18th century, which goes some way to explaining why British military expenditure accounted for an astonishing 14% of national income in 1760. These military demands for innovation undoubtedly spilled over to the civilian world; the demands of global navigation stimulated precision instrument making, while the Portsmouth Block Mills have a good claim to be one of the earliest implementations of mass production.

“Power and Plenty” is, in my opinion, a great book. It’s a long read, full of graphs and statistics, but it’s written with verve and wit. It refers frequently to economic theory, explicitly testing it against the historical evidence. I found it to be full of surprises and new perspectives.

As an example, I’d never before appreciated the importance of the Mongol conquests of Genghis Khan and his successors in creating a “Pax Mongolica” for a century or so after 1250, making possible safe and regular (though not fast) land travel from China’s eastern shoreline and Korea to the Mediterranean and Baltic coasts. Along with the trade goods carried across this long overland route, Chinese technological innovations diffused into Europe, perhaps most significantly gunpowder. And, just as we worry about the current round of globalisation facilitating the spread of new pandemic diseases like SARS and avian flu, it was the Eurasian empire of the “Pax Mongolica” that brought the Black Death to Western Europe.

On the other hand, shifting trade patterns themselves can drive bigger geopolitical shifts. As sea-power and the Atlantic economy grew in importance, there was a movement of Western Europe from being a peripheral part of the world system to a more central role; conversely, the resulting diminishing role of the Middle East and the Eastern Mediterranean as intermediaries in the trade from the far east to Europe set in train the long-term relative decline of those regions.

To bring the story closer to the present day, one thing I found very surprising is that the cost of shipping hasn’t fallen by anything as large a factor as I would have supposed, despite containerisation. Roughly speaking, shipping costs have dropped by a factor of about 4 over the past century. What has changed isn’t so much the cost of transport, but its speed (helped, of course, by a dramatic increase in the volume of freight carried by air). The world shows no sign yet of becoming flat, and distance still imposes a significant barrier on trade.

The really big change that has influenced the character of the current wave of globalisation isn’t falling freight costs, but what Findlay and O’Rourke call the “Unraveling of the Great Specialisation”. The industrial revolution led to a situation in which an industrialised North made manufactured goods, and a non-industrialised South supplied raw materials. As manufacturing becomes more important in the formerly undeveloped South, trade in manufactured goods now flows both ways. Even more striking is the growth of “vertical specialisation”, as supply chains are globalised and manufacturing processes divided up into stages, with different stages carried out in different countries, and intermediate products repeatedly crossing national and indeed continental borders before the ultimate product is finally assembled.

What general conclusions can one draw from a millennium scale study of world trade? Trade brings losers as well as winners, and whenever countries with very different balances of resources have come into contact this has caused big political strains. The way these strains are relieved can be unpredictable. And while there are times when increasing trade integration across the world seems to be a natural and inevitable process, Findlay and O’Rourke remind us that “history suggests that globalisation is a fragile and easily reversible process”.