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1

Factors that stimulated trade growth in 1870‐1913 

  1. decline in international freight rates
  2. international gold standard – which eliminated exchange rate fluctuations and uncertainty 
    • it has been calculated that adherence to the g.s. may increase trade btw two countries by up to 30% 
  3. peaceful international relations formation of empires 
  4. formation of empires 

2

Figures of performance of European trade growth 

  • 1830‐1870: +16.1% per year(current values)
  • 1870‐1913: +4.1% per year(current values)
  • 1870‐1913: +6,8% per year(volume of trade) 

3

Patterns of international trade

  • Europe as whole was a net exporter of manufactured goods and services to less developed countries in exchange for commodities
  • Within Europe, less developed areas in the south and east traded agricultural products for industrial goods produced by more developed countries 

4

Figures of fall in freight rates and reasons 

  • • In general, freight rates (= transport costs) began to decline after mid‐ century and fell after 1870
    • British trans‐oceanic freights remained stable in 1740‐1840, then dropped by 70% in 1840‐1910
    • declines of 50% or more in freight rates were common in 1870‐1913
  • The decrease in international freight rates was caused by
    • falling domestic transport costs (resulting from railway construction)
    • lower trans‐oceanic tariffs (to a lesser extent) 

5

Commodity markets and its contribution in int' trade growth

  • The growth of international trade brought about substantial integration in commodity markets
  • Indeed, commodity prices converged
    • grain: gap between London and Chicago fell from 57.6% to 15.6%
    • bacon: gap between London and Cincinnati fell from 92.5% to 17.9%
    • rice: gap between London and Rangoon fell from 93% to 26%
  • US‐British price convergence also occurred in some manufactured goods such as cottons, iron bars, pig iron, copper, etc 
  • Note: this applies only to free trade countries; elsewhere trade tariffs prevented price convergence 

6

Factors fostering greater financial integration 

  • peaceful international relations
  • the gold standard, which eliminated exchange risk and assured foreign lenders of the financial rectitude of borrowing governments
  • natural resources in receiving countries, whose profitable exploitation awaited capital and managerial & technical expertise from developed countries 
    • Indeed, foreign capital took the form of both portfolio investment (purchase of bonds and shares) and foreign direct investment (FDI, i.e., multinationals) 

7

Indicators attest to growing financial integration in 1870‐1914 

  1. share of foreign assets in world GDP was 7% in 1870; 20% in 1914 (that figure was not to be seen again before the 1970s or 1980s)
  2. the ratio of the balance of payments’ current account to GDP
  3. reduction in bond spreads btw developing and developed economies was 5% in 1870, came down to 1% in 1914 (far lower a figure than in the 1990s!)

8

Sources of capital exports

  • Funds invested abroad came from greater wealth and income created by industrialisation
  • In particular, they came from current account surpluses, that is the balance of
    • trade in goods and services
    • foreign payments: remittances, interests and dividends earned on previous foreign loans and investments
  • Britain usually ran trade deficits but drew resources to invest abroad from the revenues of its merchant fleet and banking and insurance services + dividends and yields on its foreign investments
  • France and Germany instead relied on conspicuous trade surpluses 
  • 1870‐1914: the largest capital exporting countries were Great Britain, France, and Germany {until 1914 the US was a net debtor} 

9

GB and its investments

  • GB invested mainly in Europe until 1850, then shifted to the western offshoots 
    • US, CA, AU, NZ : 41%

    • Latin America: 17.7%

      • total: up from £25m (1825) to £1,2b (1913) 

      • regional distribution: 40% to AR, 22% to BR, 11% MX 

      • type:

        • portfolio: 38% government bonds; 16% railway securities

        • FDIs: multinationals in railways, utilities, services, mining and agriculture, etc. 

    • Asia: 11.5%

    • Europe: 9.7%

    • Africa: 9.1%

  • Overall, the bulk of British capital exports went to countries that were rich in natural resources rather than cheap labour 
  • Countries in the region benefited from British investment, but emerged as little diversified economies based on production of a few staple commodities, which rendered them vulnerable to fluctuations in international demand and prices 

10

French and German investments

  • invested mainly in Europe: 61.1% and 53.3% respectively
    • 25% of French foreign investments went to Russia, another 13% to Latin America
    • German capital flowed to Latin America (16.2%) and to the western offshoots (15.7%) 

11

Int' trade on price convergence

  • nternational trade caused substantial convergence in factor prices
  • in 1870‐1910, the real price of land fell in GB, DE, FR and soared in North America 
  • as a result, the wage‐rental ratio grew (export

    of manufactures increases wages,import of commodities lowers rents)

  • The finding lends support to Heckscher‐Ohlin model 
    • model essentially says that countries export products that use their abundant and cheap factors of production, and import products that use the countries' scarce factors
    • because of trade there’s convergence in factor prices