Nineteenth-century trade policy

Paul Krugman

The big story: trans-Atlantic divergence

Britain moves to free trade with repeal of the Corn Laws

US moves to high protection with tariff

Both countries move to favor manufacturing overagriculture …

English-speaking bias: I won’t try to discuss France, otherEurope

Largely illusory decline due to rising imports of raw cotton

Cloth Wine

Britain 100 120

Portugal 90 80

Comparative advantage: Ricardo’s example

Unit labor requirements

Suppose prices such that 1 unit of cloth trades for one unitof wine. Then Britain can use 100 men to acquire wine throughtrade – cheaper than producing itself; and Portugal can use80 men to acquire cloth – cheaper than producing itself. Mutualgains from trade

But not at all a realistic picture for Britain …

Specific factors model (aka Ricardo-Viner)

Labor

Capital Manufactures Food Land

Labor in manufacturing

Output of manufactures

Marginal product oflabor

Similarly for food

Production function for a given capital stock

Labor in manufactures Labor in food

Wage rate

PM*MPLMPF*MPLF

Equilibrium given prices of manufactures, food

Wheat prices

Labor in manufactures Labor in food

Wage rate

PM*MPLMPF*MPLF

Effect of rise in the price of food, e.g. due to Corn Laws

Nominal wage rises, butby less than price of food

Effects: Landowners clearly better off

Capital owners clearly worse off

Workers: ambiguous, since real wage falls in terms of foodbut rises in terms of manufactures

But negative if food a large part of consumption basket

Why repeal of the Corn Laws?

Formation of anti-Corn Law League, centered in Manchester

Role of ideas?

Refutation of “iron law of wages”?

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Real wage in Britain

Henry Clay's "American System," devised in the burst of nationalism that followed the War of 1812, remains one of the most historically significant examples of a government-sponsored program to harmonize and balance the nation's agriculture, commerce, and industry. This "System" consisted of three mutually reenforcing parts: a tariff to protect and promote American industry; a national bank to foster commerce; and federal subsidies for roads, canals, and other "internal improvements" to develop profitable markets for agriculture

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Customs share of revenue

Henry Clay, 1832