19th Century Commercial Policies and the Spanish Economy
Main Phases of Commercial Policy in the 19th Century
1) Protectionism (in Great Britain until 1846 & Rest of Europe until 1860)
Abolition of tariffs imposed on the trade of cereals by the British in 1846 (Corn Laws). Before the Corn Laws, there was more employment in agriculture than in industry. The market followed a 2×2 model based on two commodities and two sectors. As a consequence of the Corn Laws repeal, there was a fall in food prices, which led to a fall in the demand for labor in agriculture since workers started moving to the industrial sector. Therefore, there was a fall in wages in both sectors. The reason why there was a decrease in food prices is because, as Corn Laws were repealed, tariffs on agricultural goods were lower and, because of this, there was a decrease in benefits for landowners (they are going to be in worse condition). If we compare both sectors after the abolition of the Corn Laws –> loser=agriculture, winner=industry.
2) Free Trade (Low Tariffs for Fiscal Purposes)
In the 1850s, the British were the only ones with a free trade commerce and started campaigns to convince the rest of Europe (they had tariffs). The first country adopting free trade was France by signing the Cobden-Chevalier Treaty with Great Britain (1860), and they agreed to lower tariffs between the two countries. The treaty contained the Most Favored Nation (MFN) clause, which required each country to provide any concessions, privileges, or immunity to all other member countries. The Golden Age of free trade took place between 1860-1889, and Spain signed the Figuerola Tariff in 1869 (for trade liberalization).
3) Return to Protectionism (General Rise in Tariffs)
The free trade period was short-lived because of the Transport Revolution caused by the fall in transport costs due to the development of technology and the establishment of trade barriers (increased tariffs) and the grain invasion as a consequence of the Transport Revolution.
Analysis of the First Globalization: Free Trade and Competitive Advantage (1870-1914)
The basic variable of market behavior is price. Therefore, it is the key evidence of globalization. During globalization, we find integration; this means the lower the price gap, the more integrated the market is. In other words, there is convergence. This first globalization was promoted due to the fall in transport costs. Convergence is the tendency in factor price equalization. In trade, we find a commodity price convergence in agricultural goods like cereals and wheat. Mass migration caused wage convergence, capital inflows caused convergence in the interest rate between countries importing and exporting capital, and finally, there was land convergence in the price of land and rent.
Reactions to Globalization: Tariffs and Protectionism
The first reactions to globalization were the increase in tariffs to compensate for the decrease in transport costs and, in this way, protecting the economy of their own country. Countries were forced to do so as some goods like wheat were cheaper in western countries (importer) than in the exporter country where they were produced. This was because of the fall in transport costs, and by increasing import tariffs, the price would rise, protecting the country’s industry from foreign goods.
Spanish Case Within European Growth Models of the 19th Century (WW2-CW)
In the 19th century, Spain’s demographic pressure was lower than in the rest of Europe, with the exception of France. There was a low level of domestic investment and school enrollment (low investment in physical and human capital). The Spanish economy was less open to international trade than those more advanced countries of similar population size. There was a higher share of employment in agriculture: a wider productivity gap between agriculture and the rest of the economy. The government imposed high tariff protection (particularly since 1890). There was relative backwardness: a gap in per capita income that grows wider as income per person increases and a divergent economy structure.
Phases of the Spanish Economic Growth
We start with a major change like the loss of the colonial empire. This caused trade in goods and services to fall sharply, and investment levels declined. Domestic industries lost a protected market, but in the long term, the more flexible and competitive sectors were able to adapt. Additionally, we find the libreo from 1833-1868. In this period, we have to highlight the land disentitlement in agriculture of land property of the church and civil institutions, which caused an increase in production. In this period, industry did not develop because, instead of trying to make it competitive in the international market, they protected it through tariffs. Also, we find the fiscal reform of Mon-Santillan in 1845 on direct taxes over territorial contributions and industrial/trade contributions and indirect taxes on consumption, which caused equity, flexibility, sufficiency, and deficit. However, the tax system was more equitable than in the old regime. During the 19th century, the government was not efficient in promoting economic modernization. Furthermore, we find the Restoration era, where there was gradual economic growth. From 1850-1914, we find a sustained increase in per capita GDP, parallel to a widening gap with the leading countries since Spain was increasingly isolated from the international market. There was incomplete integration into the Gold Standard, Spain was protectionist: 1891 tariff, and Spain’s participation in the international labor market was also modest. Also, abandoning the gold standard granted a plus at the international capital market level as it enabled access to foreign investment. The market penalized countries that, up to 1914, were out of the system. Related to banks, we find the Law of Banking and Credit Companies in 1856 to facilitate the construction of railways, and in 1874, the Bank of Spain had the monopoly to issue notes. We also find protectionism towards industry.