Download Free Trade vs. Protectionism The Great corn

Free Trade vs. Protectionism
The Great Corn-Laws Debate
Mercantilism
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Britain, by 19th century, had established an
empire with a global network of colonies as a
huge market for export
Traditionally, Britain, France and other European
states had managed their international
commerce to service their growing empire
They used a range of policies such as tariffs,
subsidies and trade regulations – collectively
known as "mercantilism".
Laws Prior to 1815
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Prior to 1660 – most of the laws focused on
protecting consumer from “unjust” prices
After 1660 – focus of law shifted from internal
trade to external trade and the law favored the
interests of producers ahead of consumers
Acts of 1673 & 1689 – established a subsidy to
be paid to exporters of corn whenever the
domestic price fell below specified levels
The Napoleonic Wars
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1689 to 1815 Britain fought six wars with
France, spanning more than 55 of the 126 years
The state of war provided natural protection
from imports and foreign competition
The end of war brings:
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serious threat of deflation
fear of price collapse from flood of imports
farmers were over leveraged from wartime borrowing
1815: Enactment of Corn-Laws
Import Law
Government options for importation of agricultural
commodities
1.
Absolute prohibition
2.
Absolute free trade
3.
Sliding scale of duties
4.
Fixed Duties
5.
Absolute prohibition below a specified price
The Corn-Laws
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An Import Exclusion price of 80s
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No imports allow if price below 80s
Unrestricted duty-free import if above 80s
The Corn-Laws were a series of
legislative acts modified from time to
time, whose intent was:
1.
2.
Sustain Britain’s self sufficiency in food
Temper dramatic fluctuations in agricultural
prices
Demand for Agricultural Goods
Price
S0
S1
P0
P1
D0
Q0 Q1
Quantity
The Debate
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A heated debate led up to and continued
after the 1815 enactment of the Corn
Laws
Two camps were established:
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Free Trade promoters: “The League”
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Supported by the Manufacturers
Protectionists: “The Anti-League”
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Supported by : Agricultural Protection Society
Protectionist Arguments
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Corn laws stabilize prices allowing the
agricultural sector to remain a viable consumer
from the manufacturing sector
National debts were large from wars with
France. Agricultural protection would help
landowners bear burden of high interest pmts
Britain would become dependent on foreigners
for food – a threat to the security of the empire
Free Trade Arguments
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Artificially high corn prices hurt the new laboring
classes who spent much of their wages on food
Agricultural protection distorted the allocation of
capital in the domestic economy:
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mfg. would otherwise have greater share of resources
encouraged use of “marginal” lands requiring
excessive capital and labor
Reduced production of food was appropriate
given strength of other sectors and that
foreigners would become equally dependent on
Britain
“Comparative Advantage”
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David Ricardo: Economist and leading
advocate of free trade
Built upon Adam Smith’s philosophy
“If a foreign country can supply us with a
commodity cheaper than we ourselves can
make it, better buy it of them with some part
of the produce of our own industry, employed
in a way which we have some advantage”
“Comparative Advantage”
Example
Britain needs:
100 man years for production of X Cloth
120 man years for production of Y Wine
Portugal needs:
90 man years for production of X Cloth
80 man years for production of Y Wine
Conclusion: Portugal should produce and
export wine to Britain in exchange for Cloth
Aftermath
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1846: Cancellation of Corn laws
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Grain imports began to rise dramatically
Early 20th century:
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Britain was importing over half its food and
7/8 of raw materials
Britain became very dependant on imported
goods
The Debate Continues
The debate between Free-Trade supporters
and Protectionists continues to date in
modern capitalistic markets…
Prepared by Jeff Abraham, Jerry Bright,
Craig Bromberg, and Tal Rosenberg under
the guidance of Prof. George D. Smith,
NYU Stern School, 2003