Britain’s post-Brexit trade: Learning from the Edwardian origins of imperial preference

Brian Varian 23 June 2018

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Brexit has revived the interest of economists in the British Empire and its modern-day successor the Commonwealth. Some speculate that the Commonwealth could be useful for negotiating preferential or even free trade agreements to cushion the shock of Britain’s departure from the EU's Customs Union. 

There is a long history of preferential trade agreements in the British Empire. The agreements formed a system known as imperial preference. The origins of imperial preference can be traced to the Edwardian era, which lasted from the late 1890s until the start of WWI. The policies of imperial preference adopted by the Dominions (Canada, New Zealand, South Africa, and Australia) during the Edwardian era can serve as a reference point for potential post-Brexit trade agreements within the Commonwealth, especially the effect of such agreements on the UK's exports.

British imperial preference in economic history

Imperial preference during the interwar era has been the subject of much research. According to de Bromhead et al. (2017), the imperial preference that Britain adopted under the Ottawa agreements of 1932 explains the majority of the increase in the Empire share of Britain’s imports between 1930 (27%) and 1935 (39%). A prerequisite for Britain’s adoption of imperial preference was the abandonment of (mostly) free trade under the Import Duties Act of 1932. Until then, the traditional policy of free trade meant there was no scope to extend preferential tariffs to imports from the Empire. 

As de Bromhead et al. (2017) have argued, Britain’s adoption of imperial preference produced a major intra-Empire diversion of Britain’s imports. But did the Dominions’ adoption of imperial preference produce an intra-Empire diversion of their imports, including Britain’s exports? To answer this question, one must look back to the Edwardian era. 

By the close of the 19th century, the Dominions possessed tariff autonomy and were, to varying degrees, protectionist. Unlike Britain, therefore, the Dominions could adopt policies of imperial preference with respect to their imports. 

Canada (1897), New Zealand (1903), South Africa (1903), and Australia (1907) did so in quick succession. These initial policies of imperial preference differed in several respects, including whether imperial preference was extended to the entire British Empire or just to Britain, whether preference was conferred by means of tariff reductions on Empire imports or tariff increases on non-Empire imports, and whether preference applied to all commodities, or just selected commodities. Table 1 outlines the principal features of the Dominions’ initial policies of imperial preference.

Table 1 Initial policies of imperial preference in the Dominions, 1897–1907

Sources: Canada: Knowles (1930, p. 382), New Zealand: Preferential and Reciprocal Trade Act (1903), South Africa: Knowles (1936, p. 302), Australia: Sullivan (2001, p. 50).

Research results on the effect, or lack thereof, of Edwardian imperial preference, are inconsistent. The accepted narrative on imperial preference cites the rising value of British exports to the Dominions as evidence of the efficacy of Edwardian imperial preference (Russell 1947). More recently, however, Magee and Thompson (2010) have argued that imperial preference did not produce an intra-Empire diversion of Britain’s exports, observing that an index of Britain’s ‘revealed advantage’ in the Dominions – calculated as the share of Dominion income allocated to imports from Britain, relative to the share of income in industrial Continental Europe allocated to imports from Britain – did not increase following the Dominions’ adoption of imperial preference. 

Of course, this approach ignores the possibility that imperial preference arrested what would have otherwise been a decline in Britain’s relative advantage. Yet, this finding would be contrary to what Mitchener and Weidenmier (2008) found for preferential trade policies in various empires (not just the British Empire), between 1870 and 1913. Preferential trade raised intra-Empire bilateral trade flows by between 26% and 168%, depending upon the specification of their model.

Focusing on Edwardian New Zealand

In recent work I attempt the first econometric study of Edwardian imperial preference specifically within the British Empire (Varian 2018). I focus on New Zealand. New Zealand’s initial policy of imperial preference, codified in the Preferential and Reciprocal Trade Act of 1903, was unique among the Dominions, because it applied preference to certain commodities only. (New Zealand did not officially gain Dominion status until 1907.) 

I am therefore able to exploit this cross-commodity variation in the application of preference to determine whether the Preferential and Reciprocal Trade Act produced an intra-Empire diversion of New Zealand’s imports.

The enactment of the Act of 1903 followed a decade-long rise in the share of New Zealand’s imports coming from the newer industrial economies of Belgium, Germany, and the US, as Figure 1 shows. 

  • The increase in the American share in the late 1890s. This is consistent with Irwin’s (2003) account of the ‘surge’ in American manufactured exports of iron, steel, and manufactures thereof, a result of a favourable movement in the Anglo-American relative price of iron ore. 
  • The increasing share of imports from industrial continental Europe. These included commodities from relatively labour-intensive manufacturing industries in which Britain was comparatively disadvantaged (Varian 2016). For example, Germany supplied 62% of New Zealand’s imported pianos from 1900-2.

Figure 1 Non-Empire share of New Zealand’s imports, 1890-1902

Source: Varian (2018).

The Act was passed during a period of imperial fervour. In Britain, Joseph Chamberlain was campaigning for tariff reform, including an abandonment of free trade and the implementation of imperial preference. In 1903, New Zealand legislated imperial preference, mindful that it might soon be reciprocated by a protectionist mother country – although this did not actually occur until the 1930s.

By constructing a database of more than 4,000 commodity-year observations of New Zealand’s imports, I find that the Preferential and Reciprocal Trade Act raised neither the Empire share nor the British share of imports. As in Huberman et al. (2017), I then consider whether the Preferential and Reciprocal Trade Act produced an intra-Empire trade diversion of New Zealand’s imports of those not highly differentiated commodities covered by the Act, on the assumption that the elasticity of demand for relatively undifferentiated imports would be higher. 

Even for these commodities, the act did not divert imports toward the Empire. Possibly, the margins of preference created by the act were too small to raise the Empire share of New Zealand’s imports. As the margins of preference in New Zealand’s policy were similar to the margins of preference in the policies of the other Dominions, this calls into doubt whether the more general system of Edwardian imperial preference had any effect.

Lessons for Britain’s post-Brexit trade

At the beginning of the 20th century, Britain’s exports received preferential access to Dominion markets – precisely what some desire for Britain’s post-Brexit trade. While there are many examples of policy-induced trade diversion, imperial preference was an ineffective trade policy in the case of New Zealand. Just as in the Edwardian era, the presence of trade agreements with Empire (Commonwealth) countries in the post-Brexit era does not guarantee any substantial increase in Britain’s exports. 

Appealing to imperial sentiment does not guarantee an effective trade policy. If that was true in the Edwardian era, it is probably also true today.

References

de Bromhead, A, A Fernihough, M Lampe and K H O’Rourke (2017), “When Britain turned inward: protection and the shift towards empire in interwar Britain”, University of Oxford Discussion Papers in Economic and Social History No.152.

Huberman, M, C M Meissner and K Oosterlinck (2017), “Technology and geography in the Second Industrial Revolution: new evidence from the margins of trade”, Journal of Economic History 77: 39-89.

Irwin, D A (2003), “Explaining America’s surge in manufactured exports, 1880-1913”, Review of Economics and Statistics 85: 364-76.

Knowles, L C A (1930), The economic development of the British overseas empire, vol. 2, Comparative view of Dominion problems: Canada, George Routledge & Sons.

Knowles, L C A (1936) The economic development of the British overseas empire, vol. 3,The Union of South Africa, George Routledge & Sons.

Magee, G B and A S Thompson (2010), Empire and globalisation: networks of people, goods and capital in the British world, c. 1850-1914, Cambridge University Press.

Mitchener, K J and M Weidenmier (2008), “Trade and empire”, Economic Journal 118: 1805-34.

New Zealand (1903), Preferential and Reciprocal Trade Act, no. 78, 3 Edw. VII.

Russell, R S (1947), Imperial preference: its development and effects, Empire Economic Union.

Sullivan, E (2001), “Revealing a preference: imperial preference and the Australian tariff, 1901-14”, Journal of Imperial and Commonwealth History 29: 35-64.

Varian, B (2016) “The revealed comparative advantages of late-Victorian Britain”, EHES Working Papers in Economic History No. 97.

Varian, B (2018) “The economics of Edwardian imperial preference: what can New Zealand reveal?”, LSE Economic History Working Papers No. 281. 

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Topics:  Economic history International trade

Tags:  Britain, British Empire, Imperial preference, New Zealand, trade agreements, tariffs, free trade, Brexit

Lecturer in Economics, Swansea University

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