Why did international trade rise rapidly between 1870 and 1914?

Here is a short article (that misses many points that could have been made, such as mass migration and transmission of knowledge) that I wrote before christmas on the series of events that lead to the rapid increase in international trade between 1870 and 1914.

Between 1870 and 1914 global trade was growing at a rate that was noticeably rapid in comparison to the time period before, and included vast amounts of international trade in capital, goods and ideas. The rapid rise in trade between countries grew for many reasons but is greatly connected to what the World Bank sets out as the first ‘wave’ of globalisation that began in 1870 and finished in 1914. This period of globalisation introduced a reduction in transport costs, which increased the value of involvement with international trade and it also introduced fixed exchange rates and other benefits via the gold standard.

As Daudin, Morys and O’Rourke point out, as a result of developing and improving technologies the cost of transport decreased continuously between 1870 and 1914. ‘Freight rates declined steadily, as a result of technical improvements’, they also go further in their paper and mention that the development of the internal railways ‘linked inland producers and consumers to ports, and hence to other countries and continents.’ Crafts also mirrors their argument mentioning that globalisation can be a result of ‘technological developments that reduce transport costs’. The declining freight rates and decreasing cost of transport within and across countries meant that international trade became cheaper and more profitable, hence this main aspect of globalisation contributed to the rapid rise in international trade. Steamships became extremely valuable in increasing the speed of international trade from 1870 to 1914, there was ‘growth in the usage of faster and more regular steamships, especially after the opening of the Suez Canal in 1869’, the opening of the Suez Canal meant that steamships were able to transport commodities between Europe and Asia without having to traverse around Africa which allowed faster, cheaper trade and a greater connection between Asia and Europe, thus increasing the amount of international trade.

The gold standard was adopted by many countries in the 1800s, the vast majority having adopted it after 1870. ‘separate currencies were barriers to trade which stifled international commerce’ Having multiple currencies when trading internationally meant that there was uncertainty in international trade due to fluctuations in the exchange rates, this meant that when the gold standard was implemented in many countries the uncertainty was removed allowing a rapid rise in trade between these countries. Results found by Lopez-Cordova and Meissner show that gold standard countries traded ‘up to 30% more with each other than the nations not on gold’ and that global trade may have been about 20% lower if no countries had decided to standardise currencies using gold.

To conclude, the first wave of globalisation that brought a reduced cost in transport through technological improvements was one of the main contributors to the rapid rise in international trade between 1870 and 1914 by making it cheaper, faster and more profitable, but the gold standard and trade policies adopted by the main trading countries created a greater certainty in international markets really driving the rise in international trade.

Hayekleon 2014.

Bibliography

Daudin, Morys, O’Rourke, Globalisation, 1870-1914 (University of Oxford, Department of Economics, 2008)

Crafts, Globalisation and Economic Growth: A Historical Perspective (Wiley, 2004)

Lopez-Cordova and M. Meissner, Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era (American Economic Association, 2003)