Market Integration

The nineteenth century saw substantial advances in international market integration, and the creation of a truly world economy. Technological advance was critical in this. The railroad locomotive and the marine steam engine revolutionized world transport from the 1830s onwards. Steamships connected the world's ports to each other, and from the ports the railroads ran inland, creating a new and faster world transport network. Freight rates fell, and goods could be carried across the world to ever more distant markets and still be cheaper in those faraway places than the same item produced locally. Linked closely to these changes was the electric telegraph, whose lines often ran along the new railroad networks. Telegraph systems were established in most countries, including the major market of British India, until 1854. Beginning with the first transatlantic cable, which was laid by steamship in 1866, these existing domestic telegraph systems were linked together by marine cables. The resulting international information network was crucial in communicating details of prices and price movements, reducing the cost of making deals and transactions. An infrastructural change of major significance came in 1869 with the opening of the Suez Canal, which linked the Mediterranean Sea by way of Egypt to the Red Sea: now ships sailing from Europe to Asia could take the new shortcut rather than sail all the way around Africa. Immediately Asia was some 4,000 miles closer to Europe in transport terms, and freight costs fell. Yet the low efficiency of early steamships meant that many bulk cargoes such as rice still were carried to Europe from Asia by sail around the Cape of Good Hope. Technological change in the shape of steel hulls and steel masts made sailing ships larger and more efficient, and they continued to be active until the more efficient triple-expansion engine finally drove the sailing ships from the oceans during the last quarter of the nineteenth century.

RISE OF FREE TRADE

Physical changes in lowering freight and transaction costs were not the only forces stimulating market integration. It was normal for countries to impose import duties on foreign goods, seeking to gain an inflow of gold in their foreign trade accounts by selling more to each of their trading partners than they bought from them. But in 1846 the merchants of Manchester, England, the center of the world's cotton textile industry, struck their famous victory for free trade by forcing the British government to abandon tariffs on all imported goods apart from a few luxury items. The tariffs on wheat were the first to go, opening up the Great Plains of the United States for wheat production to supply Britain. With free trade, no longer did trade relations with a foreign country have to balance or be in surplus; rather, a deficit in trade with one country could be offset by a surplus in trade with another country, liberalizing world trade in a way never previously seen. Britain moved heavily into deficit on trade account, but this was sustained by considerable invisible inflows generated by her substantial overseas investments, particularly in the railroad systems of the United States.

This policy of open markets became a dominating principle extended through much of the British Empire, including the key market of India, although Canada and the State of Victoria in Australia chose to be notable exceptions. The United States retained import duties, and after short periods of trade liberalization most European countries also returned to protectionism so that their new manufacturing industries could establish themselves safe from the competition of cheaper goods from Britain. Britain itself ran heavy trade deficits with the United States due largely to grain purchases, and it also had deficits with the newly industrialized countries of continental Europe, due to purchases of manufactured goods. Britain was able to sustain these deficits because of its own sales of manufactures, especially cotton yarn and textiles, to India and the rest of Asia, including China. So the open-market polices of the British Empire played a crucial role in sustaining a complicated interrelated mesh of world payments, and newly industrializing countries took advantage of these open markets whilst maintaining their own protective walls. Each country could specialize in producing those goods they were best endowed by nature to produce, and could exchange them for the other products they needed. The vast market of British India was crucial, and though Britain, the colonial power, was the leading supplier of manufactured goods there, Germany and other industrial nations were free to trade, and did so very effectively. India itself had big surpluses with the rest of Asia, particularly China, because of its sales of opium and of cotton yarn and textiles from Bombay.

INTEGRATION OF GRAIN MARKETS AT THE TURN OF THE CENTURY

Within Asia major effects of market integration were seen. Where a market area is fully integrated, prices of a particular commodity will equalize across that area. Fluctuations in prices across the region will synchronize, demonstrating that they are subject to the same influences. Transport costs are crucial, and a commodity will only move from one location to another if the cost of production in the place of origin plus the cost of transport is less than the prevailing price for that commodity in the destination. In Asia the late nineteenth century saw market integration in one of Asia's key commodities, rice. Prices moved in the same way in the exporting countries (Burma, French Indochina, and Siam), in the great redistribution centers (the British free ports Singapore and Hong Kong), and in the receiving countries (India, Ceylon, the Straits Settlements, the Dutch East Indies, the Philippines, China, and Japan). The movement of migrant workers to tin mines and rubber and tea plantations in places like the Straits Settlements, the Dutch East Indies, and Ceylon had created increased demand for rice in those countries which was now satisfied by rice imports from those countries capable of producing supplies. Shifts in the flow of rice from country to country and from year to year reflected harvest variations in both producers and consumers. The transport and information networks established in the second half of the nineteenth century had created an intra-Asian economy in which the income received by rice cultivators was spent on the products of the new manufacturing industries of the region, particularly the cotton yarn and textiles of the factories of Bombay, Shanghai, and Osaka. Rice was also supplied in very substantial quantities to Europe, where it was used for food, brewing, and starch. It joined a flow of wheat to Europe from Karachi. This period saw the integration of the world wheat market and the world rice market, creating a global market in basic food grains. The two markets interlocked in British India, which both consumed and exported both crops. Now the world price of wheat and rice moved in unison, which meant that the incomes of U.S. farmers and other world wheat producers were influenced by forces such as a monsoon in India!

But this integration of the world wheat markets and world rice markets had serious consequences. During the 1920s there was great expansion in the amount of land under wheat and rice in the world at large. Normally, good wheat harvests were offset by poor rice harvests, and good rice harvests were offset by poor wheat harvests. But when favorable climatic conditions occurred for both grains, particularly beginning in 1928, this resulted in a glut, forcing down prices and bankrupting farmers all over the world. As farm incomes fell, so did the ability of farmers to purchase manufactured goods, and this affected manufacturers, contributing to the worldwide Great Depression of the 1930s. As the depression bit, countries increased their tariff duties to keep foreign products out of their markets in order to help their own manufacturers and farmers. In 1932 even Britain, with its deep commitment to free trade, was forced to turn to protectionism and surrender the free trade ideal. Free trade and open markets were unfortunate casualties of the Great Depression, and in fact their breakdown contributed to the slump's prolongation. The restoration of free trade and open markets was one of the primary aims of those planning the operation of the world economic system after the end of world hostilities in 1945.

SEE ALSO Free Trade, Theory and Practice; Globalization, Pro and Con;Treaties.

BIBLIOGRAPHY

Farnie, D. A. East and West of Suez: The Suez Canal in History. Oxford, U.K.: Clarendon Press, 1969.

Latham, A. J. H., and Neal, Larry. "The International Market in Rice and Wheat, 1868–1914." Economic History Review 2, no. 36 (1983): 260–280.

Latham, A. J. H. "The International Trade in Rice and Wheat Since 1868; A Study in Market Integration." in In The Emergence of a World Economy 1500–1914, ed. Wolfram Fischer, R. Marvin McInnis, and Jurgen Schneider. Wiesbaden, Germany: Franz Steiner Verlag, 1986.

Latham, A. J. H. "Modernisation and Progress: Southeast Asia in the World Economy 1860–1941." In Proceedings of the International Symposium Southeast Asia: Global Area Studies for the Twenty-First Century. Kyoto, Japan: Centre for Southeast Asian Studies, Kyoto University, 1996.

O'Rourke, Kevin H., and Williamson, Jeffrey G. "When did Globalization Begin," European Review of Economic History, 6 (2002), 23–50.

A. J. H. Latham