{ Note: This post describes and summarises a literature on 19th century growth & trade. I do not necessarily endorse its findings. This post is intended as largely descriptive. }
There is a vast cross-country literature which finds a positive correlation between economic growth and various measures of openness to international trade in the post-1945 period. Despite intense methodological bickering amongst researchers, nonetheless maybe 50 studies (maybe more?), using a variety of methods and approaches, come to the same conclusion: trade openness was associated with growth after 1945. (This amazing critical survey lists most of those studies.)
This huge body of research does have some quite compelling critics, the most prominent being Rodríguez & Rodrik (2000). This widely cited paper argues — amongst many other things — that there is no necessary relationship between trade and growth, either way. It depends on the global context as well as domestic economic conditions. I think that view is correct.
There is also a smaller literature on the “19th century growth-tariff paradox” associated with the historian Paul Bairoch. He argued informally that European countries with higher tariffs grew faster in the half century before the Great War.
Bairoch’s rough eyeball correlation was confirmed econometrically by O’Rourke (2000) for a sample of 10 rich countries (Australia, Canada, Denmark, France, Germany, Italy, Norway, Sweden, the UK, and the USA) in the period 1875-1913. This finding was supported by several other studies, including Clemens & Williamson (2001, 2004), but was disputed by Irwin (2002) on the grounds that the correlation was driven by rapidly growing settler economies with high land-labour ratios which relied on tariffs for revenue.
Lehmann & O’Rourke (2008, 2011) then countered by disaggregating tariffs of those 10 rich countries into revenue, agricultural, and industrial components, reporting that duties specifically protecting the manufacturing sector were indeed correlated with growth.
But these 19th century studies take the 20th century findings as a valid point of departure — there is a contrast between the positive tariff-growth correlation for 1870-1914 and the negative correlation after 1945. The ‘paradox’ is therefore in keeping with the criticisms of Rodriguez & Rodrik (2000), one of whose major points is that there is not, even in principle, any necessary relationship between openness and growth. It depends on the global environment, domestic conditions, complementary domestic non-trade policies, what actually gets protected, etc.
Yet even the small 19th century literature is mixed — more mixed than the 20th century literature. Clemens & Williamson (2001, 2004) confirms the overall positive correlation between tariffs and growth found by O’Rourke (2000). But C&W also tests the proposition with a larger sample of 35 countries in 1870-1914 that includes many from the poor periphery. The positive growth-tariff relationship for the rich countries is large; much smaller for the non-European periphery, and negative for the European periphery (e.g., Spain, Russia, etc.) So obviously even with the same global conditions there’s a lot of heterogeneity.
According to Clemens & Williamson (2001, 2004) the reason there was an overall positive correlation in the 19th century, may be that countries with higher tariffs tended to export to countries with lower tariffs:
“[E]very non-core region faced lower tariff rates in their main export markets than they themselves erected against competitors in their own markets. The explanation, of course, is that the main export markets were located in the Core, where tariffs were much lower.”
This is how I personally interpret it: Great Britain and others acted as free-trade sinks (my phrase, not C&W’s) for exporting countries such as the United States (and Wilhelmine Germany) which protected their steel and other industries. (Echoes of East Asia which benefited from US policy during the Cold War? It’s nice if there are countries willing to indulge your export-led development strategy without reciprocal openness.)
( Edit: Yes, yes, yes, as many have pointed out on Twitter, Britain in the 19th century famously settled its trade deficits with America, Canada, Europe, etc. through its surpluses with India, etc.
But as you can see in the graphic above, it’s a little bit more complicated: India also had surpluses with the USA, Japan, and Europe. )
(Clemens & Williamson appeal to a prisoner’s dilemma model in which trade coordination between two countries is the best outcome, but if one country does defect, i.e., imposes tariffs, then the other is better off retaliating. So in the 19th century, the non-retaliating party might have been worse off in terms of growth.)
The correlation reverses after 1945 because “tariff barriers faced by the average exporting country have fallen to their lowest levels in a century-and-a-half”, and rich countries in particular were much more open. So the international environment does matter for the relationship between trade and growth.
Jacks (2006) — using the Frankel-Romer gravity model approach — both replicates the positive correlation between growth & tariffs, and supports the free-trade-sink view. The reason higher-tariff countries grew faster was that “an increase of 1 percentage point in the level of tariffs led to an increase of roughly 0.7 percentage points in the balance-of-trade to GDP ratio”. In other words, the more protectionist countries could generate trade surpluses (which add to GDP), apparently because the more free-trading countries did not retaliate against them. Again, the global environment matters.
Tena-Junguito (2010) focuses on industrial tariffs and supports the other aspect of the Clemens & Williamson finding: the tariff-growth correlation applies only to the “rich country club”. For Latin America and the European periphery, the correlation was negative. Unfortunately this is a semi-cross-sectional view, relating tariffs in 1875 with cumulative growth in GDP per capita between 1875-1913, which obviously misses the change over time in tariff schedules after 1875. Most other studies use panel data, relating 5-year chunks of growth rates and average tariffs.
On the other hand, Schularick & Solomou (2011) find no evidence for the tariff-growth correlation for a sample of 30 countries, rich and poor. It turns out to be spurious once you control for the business cycle (which was transmitted internationally via the gold standard). The time trend which drives the tariff-growth relationship is apparently the 1875-79 depression. Countries became more protectionist during the recession, but the higher tariffs remained in place after the global economy recovered, driving the spurious result.
However, Schularick & Solomou do not look specifically at manufacturing tariffs, so their findings do not overturn Lehmann & O’Rourke (2008, 2011), which did find a correlation between manufacturing tariffs and overall growth for the rich countries. It’s possible Lehmann & O’Rourke’s results might be duplicated for a larger sample which includes poor countries.
Personally I find that unlikely because, if anything, the duties levied by primary commodities-exporting countries such as those in Latin America would surely have been on manufactured goods.
In the final analysis, we shouldn’t make too much out of this literature, either way. Cross-country regressions — especially in a sample ranging from 10 to 30 countries — are a pretty crude and blunt tool for assessing infant-industry arguments.
Edit: I prefer single-country examinations of tariffs and development. For the USA in 1870-1913, some great examples are Yoon; DeLong; and Irwin, all of which argue that tariff protection likely did not play an important role in US economic development in the post-civil war period. Also see my post on the Napoleonic blockade & the infant industry argument.
Addendum: One major reason (amongst many many!) that cross-country regressions are a poor tool for assessing the infant industry argument is that many industries are often protected for the ‘bad’ reasons. (But Nunn & Trefler address this issue successfully in my opinion.)
Another major reason is this: it’s actually quite easy for poor countries to temporarily increase growth rates “through protectionism” as long as you can do technological upgrading by importing it from more advanced countries. If tariff policy or state subsidies distort investment away from agriculture and toward industry by increasing the rates of return in manufacturing, you will get structural transformation (movement of labour from lower-productivity to higher productivity sectors).
Traditional agriculture is so unproductive and so full of underemployed labour that any diversion of resources toward any ‘modern’ sector can raise growth rates, all else equal. If a government decided to import some machines, close off the country to global trade, round up peasants at gun point, and force them to work in factories, you will get growth. If this were not true, Stalinist industrialisation would have been impossible ! (I ignore the welfare considerations, of course.)
In fact, even if productivity growth were zero in both the traditional and modern sectors, you can still get positive economy-wide productivity growth just by moving resources out of the traditional sector and into the ‘modern’ sector. All it takes is movement out of one stagnant sector to another stagnant (but ‘better’) sector. You can continue with this process until you run out of peasants — or run out of idle labour in agriculture (because, at some point, agriculture itself will need productivity growth to release more labour — unless you start importing food, in which case you will need to start export something).
Postscript: By the way, the spectacular historical vulgarian Ha Joon Chang has a habit of cherry-picking from this literature. HJC gleefully cites any study, especially O’Rourke (2000), which confirms his priors, but fails to report nuanced or inconsistent results.
Of course, I do not fault Chang for failing to reference research which did not exist at the time of writing his popular Kicking Away the Ladder (2002), but he doesn’t cite any of the follow-ups in Bad Samaritans (2007), either. And every time he writes an article, he always appeals to the same references and fails to cite stuff inconsistent with his priors (e.g., HJC 2010 and 2013, as well as Chang’s reply to Easterly’s review of Bad Samaritans.)
To the best of my knowledge the only time he has come close to nuance is in the 2010 proceedings of the Annual World Bank Conference on Development Economics, but the modicum of subtlety is relegated to the footnotes:
At least for the 1870–1913 period, there is even evidence of a positive correlation between tariff rate and rate of growth (O’Rourke 2000; Vamvakidis 2002; Clemens and Williamson 2004)”
“5. Irwin (2002) argues that this correlation was driven by high tariffs imposed for revenue reasons in the New World countries (the United States, Canada, and Argentina in his sample) that were growing quickly for other reasons (such as rich natural resource endowments). However, the United States was the home of infant industry protection at the time, and many of its tariffs were not for revenue reasons. Moreover, O’Rourke (2000) and Lehmann and O’Rourke (2008) show that the positive tariff-growth statistical correlation is not driven primarily by the New World countries.”
“6. Clemens and Williamson (2001) argue, on the basis of an econometric analysis, that around a third of this growth differential between Asia and Latin America during 1870–1913 can be explained by the differences in tariff autonomy.”
Notice that even when HJC does mention Clemens & Williamson (2001), he omits details which do not suit his priors !
Chang (2005, 2010, 2013) loves to cite Rodríguez-Rodrik (2000) and argues against the feasibility of econometrically validating any trade-growth relationship. But then he cites those selective bits of the econometric literature on the Bairoch conjecture anyway, and all the time! Apparently the Rodríguez-Rodrik warnings about the non-universality, historical contingency, and context-specificity of the trade-growth relationship apply only to the 20th century findings!
Edit 26 December 2016: See Vincent Geloso’s remarks on some of the papers mentioned in this post. He’s also posted below in the comments section.
pseudoerasmus 
Fantastic post. Thanks.
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Great post. Merry Christmas.
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-I think the exporting countries would have done just as well had there been no “free-trade sinks”, but the same openness to productivity-enhancing innovation they actually had. More production would have just been domestically consumed.
-Same here. For example, NAFTA greatly increased Mexico’s exports and export complexity, but did not help its economic growth rate all that much. That’s because most of Mexico’s economic problems did not relate to trade openness or lack thereof. The same must apply for numerous other countries.
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Excellent post, again stressing how little we still understand about Tariffs, even though we’ve had some the best brains in the business have a crack at it.
Part of the problem is that because of the issues of our own time we have obsessed over infant industry arguments. Have missed that there are at least three others reasons that led to polities engaging in Protection; revenue, protection of declining industries and 3rd best anti-deflation tactic in face of Gold Standard (Lehmann/O’rourke and Schularick & Solomou show how powerful understanding that is). I suspect all three were more important that infant industry plans in explaining tariff structure.
The Bairouch debate misses that Tariffs are usually highly contested policy in many countries, Free Trade is a standard of not only the Liberals and but rising Socialist parties of the age. This is true even in the White Colonies including the USA! The reasons being tariffs to fund pre-welfare states are regressive taxes for regressive spending. The most important development in buyers of last resort is when they develop an Income tax. Peels repeal of the corn laws is directly preceded by his reintroduction of the Income tax in 1841. And the modern Free Trading USA needed the 16th Amendment and the Roosevelt expansion of that Income tax. Indeed pre-1929 USA is the standout example for anyone (Milankovic) who thinks globalization can explain the return of inequality.
Then there’s Japan; our great tariff autonomy lacking industrial success of the pre-1914 world. The Meiji state’s fiscal triumph of keeping the huge Tokugawa land taxation system while expanding income, corporate and consumption (sake, tea, tobacco etc) taxes, allowed them to maintain solvency, military power, and expand public goods; infrastructure, education (including lots of tech transfer schemes).
I also think more micro-analysis of protected sectors is needed. We really need to get the hell out of obsessing over Cotton textiles. Is a protected* domestic cotton industry a la USA/Germany/Russia a good thing in industrializing, or just a somewhat better labour sink than traditional agriculture? Metal fabrication is probably a better common denominator industrial sector for industrializing countries. What appropriate mix of factor prices, economies of scale (internal and external), market size and competition is necessary to get a sector that helps to advance an economy to the technical frontier? There are things the USA can do with Tariffs which Portugal cannot.
*i.e. not at all competitive with the British in third markets, which is an achievement only the Japanese achieve pre-1914.
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Yes, all good points.
(1) I totally agree cotton was a technologically dead-end industry which generated little demand for skill, and with so many other exceptional aspects that we shouldn’t make generalisations about the possibilities of industrialisation from cotton. Counterfactually, it’s not clear that the cotton industry was really truly necessary for later development.
(2) But for historical path-dependence reasons, cotton is inescapable. That’s how many countries embarked on acutally existed industrialisation.
(3) Yes, tariffs had domestic opponents in many countries, not just England at the time of the repeal of the corn laws. That reminds me that recently the “historians of capitalism” have been wondering why the North and the South fought a civil war at all !!! since the North benefited from slavery. At the junto blog I had to remind them:
sectionalist conflict between north and south was at least partly about the clash of economic interests. The high tariffs protecting Northern manufacturers were perceived by Southerners at the time as harming the South, economically. The South largely absorbed the costs of those tariffs because Southern cash crops bought fewer manufactured goods. James 1981 estimated the distributional impact of antebellum manufacturing tariffs and confirmed that tariffs redistributed income from southerners to northerners. So if the new scholarship only mentions the economic linkages between north and south due to slavery, and ignores the economic aspects of sectional conflict which contributed to the civil war, then that’s a pretty serious lacuna. Also, the economics of sectionalism at least has a bearing on the claims to efface the “unclear line of demarcation between a capitalist North and a slave South, with consequences for how we understand North and South as discrete economies—and whether we should do so in the first place.” Revisionism should address prior and existing claims, especially something as major as sectionalism !!
(4) Re: Japan. Yes. see
https://twitter.com/pseudoerasmus/status/756165026692665344
(5) There are MANY micro-studies of the infant industry argument, especially for the USA. The latest of course is Juhasz’s Napoleonic blockade paper, about which see today’s post.
(6)
Definitely. A smallish South Korea could have so many scale- and capital-intensive industries precisely because it had somewhere to export to — meaning, SK could use its domestic market to finance the high fixed capital cost of those industries and then start exporting at the right half of the cost curve. This is almost certainly what the USA did also, and Wilhelmine Germany with steel. In the case of China, however, domestic market size allows them to have more (internal) competition behind protectionist walls, something South Korea could not do nearly as much (and therefore even more export dependence). The 19th century USA also had that market size but also like Germany the USA was full of cartels (‘trusts’) in the late 19th century.
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“sectionalist conflict between north and south was at least partly about the clash of economic interests.”
-Indeed. Downstate New York (especially NYC), northern New Jersey, and many areas of southern Illinois, Ohio, and Indiana and eastern Pennsylvania -all areas benefiting from a low-tariff policy- were highly antagonistic to Lincoln.
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Okay, here is my comment.
A: Protection is incredibly hard to measure, especially when its protection versus revenue generation. C&W used customs revenues over import volumes. However, if purely restrictive, there is no importation and no import-based revenues for the government. Thus, the C&W measure is zero which means no protection. This is an improper measure. To calculate something more accurate like Anderson-Neary (see Beaulieu et al. 2011), you need more data and it will show more restrictiveness.
B: Growth data is bad. First of all, the recent Lindert paper shows that using the GDP data as presented by Maddison is misleading because of the different purchasing powers. One of the outliers in the 19th century regression is Canada (high growth/high tariffs) and there are serious reasons to doubt the quality of the estimation of the GDP data. Not that the data is bad overall, it is bad for the purposes of such sensitive empirical analysis.
C: Mistaken relation: tariffs may be a result of high growth environment. This may sound very weird, but tariffs imply a very limited tax base (generally on elastic goods) which limits the ability of the government to grow. High-tariff countries were also countries with very small governments. This is an institutional arrangement where smaller government and lower overall taxes are the benefits and higher tariffs are the costs. You trade-off Small Gov against Higher Tariffs and vice-versa. If Canada, US and other high-tariffs countries had high-growth, it may be because they had smaller governments but higher tariffs. This “public choice” view would probably eliminate the entire argument from the Bairoch-friendly crowd. Basically, if you were to run a regression with “tariffs” and “other taxes” or “tariffs” and “size of governments”, you would get a non-effect from tariffs – I am 100% sure.
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Good comments. B is the most relevant because the GDP data are old and need updating. The criticisms A and C are already part of the “growth-tariff paradox” literature, it’s part of Irwin’s critique and the reply by Lehmann & O’Rourke. More on this will follow with better trade restrictions measurement.
BTW, O’Rourke has done some Anderson-Neary calculations to adjudicate between Nye and Irwin on England v France, but those calculations are sensitive to assumptions about the elasticity of substitution.
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point C is rarely underlined, even in LOR. Structure and size of government are important as well.
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well it’s in Irwin.
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Well, unless its in the gated version. There are no tests of competing forces of this in the ungated version.
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no, no one has done tests AFAIK but the theoretical critique is there.
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Interesting. To me the facts of which countries benefit from tariffs look like they fit pretty well with the proportion of the national economy devoted to manufacturing.
Non-European periphery countries: small manufacturing industry, tariffs on foreign manufacturers help boost that industry by drawing in resources from less productive sectors, boosting growth overall.
European periphery countries: medium sized manufacturing industry, tariffs on foreign manufacturers are good for that industry, but the fallow resources in non-manufacturing sectors have mostly been utilized, so shifting more resources from those sectors to manufacturing starts to hurt the non-manufacturing sectors, reducing or even outweighing the positive growth from manufacturing.
Core countries: large manufacturing industries, tariffs on foreign manufacturers are good for that industry, and thus produce growth. Non-manufacturing portion of the economy now small enough compared to manufacturing that any damage done to it is outweighed by manufacturing growth.
Basically comes down to manufacturing being a higher productivity sector to have around in the long run, but the process of a country deliberately shifting away from its initial comparative advantage and towards a manufacturing based economy has some stages that are bad for growth.
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