World Trade

World Trade: The First 6,000 Years

Thilo R. Huning

Historical Perspectives on Economic Growth

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Questions of this lecture

I Why was there so little trade before the Industrial Revolution?

I What explains why only spices, salt, gold, and other ‘luxury
goods’ were traded during the Middle Ages?

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The Two Waves of Globalization

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The Two Waves of Globalization

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The Two Waves of Globalization

I Starting around the 11th century, the Commercial Revolution

increases the share of Europeans in world trade
I Before the Industrial Revolution, there was still little
international trade (<10% GDP)
I With the First Industrial Revolution comes the First Wave of
Globalization (until 1913)
I After the two world wars comes the Second Wave of
Globalization (after 1945)
I Let’s look at the goods that were traded!

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Trade before the Industrial Revolution

I Archaeological evidence suggests that precious metals have

been traded over long distances for thousands of years
I Let’s look at the goods that were transported over long
distances in the European Middle Ages

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Some theory: The Alchian-Allen effect

I Assume that the costs of moving a unit (say a ton) over a
distance of d miles is dc, c is any amount
I For example c = 0.02£, shipping a ton from York to London is
4£ and to Moscow is 40£
I Suppose York produces two qualities of a good, L and H, priced
at 100£ and 200£ per unit
I In York, H is twice as expensive as L
I In London, L is 104 and H is 204, only ≈ 96% more expensive
I In Moscow, L is 140, H is 240, only ≈ 71% more expensive
I ⇒ The further the good is transported, the lower the fraction of
the shipping price
I ⇒ The further a good is transported, the lower the difference
between different qualities
I ⇒ It ‘pays’ to ship only goods that have a high value to weight.
Bulky goods are shipped last
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The main determinants of trade costs

What determines c, the costs of shipping a unit?

I Physical trade costs
I The state of technology (better roads, ships, today: the
container)
I Other trade costs
I Political trade costs (tariffs, taxes)
I Risks from long-distance trade (being stolen from!)

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Physical trade costs before the Industrial Revolution

I Since the shipping routes around Africa were undiscovered
before 1500, the largest distance between Asia and Europe
had to be crossed by land, e.g. camels
I This was physically expensive, compare the weight of the
camel and its rider with the cargo
I After ship routes were found, sailing ships became larger and
larger, reducing the shipping costs per unit through economics
of scale

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Political trade costs

I Historically, states received a large
share of their income from tariffs,
as this was easier to collect than
e.g. income tax
I The tariff burden on trade was high
I But a main impediment for world
trade was how trade was organized
I These are both formal institutions,
such as city constitutions
I There were also informal
institutions (norms and values)
that were established within city
walls
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The role of informal institutions

Economists since Greif (1991) have been interested in the

institutions that allowed long-distance trade
I He argues that long-distance trade, in the absence of formal
international institutions only worked with strong norms
I Using documents from the 11th and 12th centuries, he argues
that cheaters were punished using a complex reputation
system
I You could only trust people within your coalition they would
not run with the cargo, because punishment is organized
within small groups

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The role of finance

Innovations that eased financing of long-
distance trade were established in the
Middle Ages
I Banking and predecessors of
‘traveller’s cheques’ (Templar Bank)
I The amount of trustworthy minted
money also increased
I New institutions such as trade
companies, insurances, and later
the stock market, spread the risk of
long distance trade
I We will look into this in another
lecture
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The role of trade companies

Starting with the 15th century, European states granted
monopolies to trade companies, which were a mix between an
army and a trade fleet, who often became stronger than states at
the time
I For example, the Dutch East India Company competed with
the English East India Company
I These companies had the monopoly over exports from their
colonies, and they would make sure they are the only ones
producing a good if they can
I For example, the Dutch in the 17th uprooted all clove trees not
owned by them, and would even go to other islands they did
not own to burn the trees
I As such, trade was often monopolized, increasing price and
reducing the volume traded below socially optimal levels
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Concepts of this lecture

I Long-distance trade
I Commercial Revolution
I Alchian-Allen effect
I Physical trade costs
I Political trade costs

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Reading for Today

Please read O’Rourke and Williamson (2002)

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References I

Greif, Avner (1991). “The organization of long-distance trade:

Reputation and coalitions in the Geniza documents and Genoa
during the eleventh and twelfth centuries”. In: The Journal of
Economic History 51.2, pp. 459–462.
O’Rourke, Kevin H. and Jeffrey G. Williamson (2002). “After
Columbus: Explaining Europe’s Overseas Trade Boom,
1500–1800”. In: The Journal of Economic History 62.2,
pp. 417–456.

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