Russ Roberts

Nye on Wine, War and Trade

EconTalk Episode with John Nye
Hosted by Russ Roberts
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John Nye of George Mason University talks with EconTalk host Russ Roberts about his book, War, Wine, and Taxes. The conversation covers the history of Britain and France's trade policy, why the British drink beer and why Ricardo's example of Britain trading wool for Portuguese wine is bizarre. Nye turns the traditional story on its head--he argues that France was more of a free trader than Britain and that the repeal of the Corn Laws was not the dividing line between Britain's protectionist past and free trade future. At the end of the discussion, Nye emphasizes the importance of domestic free trade for economic growth.

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0:36Intro. Traditional view of British trade policy: mid-1800s move toward free trade starting with the repeal of the Corn Laws in 1840s. By contrast, the French are traditionally viewed as intransigently protectionist. Bernstein podcast; word "corn" is misleading--it means grain. Repeal of corn laws lowered price of grain. Accompanied understandings of Smith that wealth is not gold and Ricardo, comparative advantage. Economic success of England is seen as reflecting the virtues of free trade. Revisionist take: Smith condemned the mercantilist system and its various tariffs. At the time he was writing, most of the Corn Laws didn't exist; and many of the most significant tariffs remained afterwards. Ricardo's example of comparative advantage was the exchange of British cloth for Portuguese wine. Horrible example of comparative advantage--Portugal was an extremely inefficient producer of wines and was exporting wine to Britain only as a consequence of the tariffs that favored Portugal; Methuen Treaty of 1704. Statistics comparing average tariffs in Britain and France--total value of customs duties divided by the value of imports--graph illustrates fall in British tariffs do fall after Corn Laws but remain at a very high level. French average tariffs started lower and remained throughout. Average tariff is not the only measure, but other measures show similar results, for most of the 19th century.
10:04Through ¾ of the 19th century, French had lower tariffs than Britain; both had falling tariffs. The fall didn't actually start with the repeal of the Corn Laws, though. Look at average tariff levels in England or France and see if by looking at the data you can pinpoint the repeal of the Corn Laws; what you see is there is no sudden drop; slow steady fall starting before the repeal of the Corn Laws. French path is choppier but they start from a lower level. How did the perceived story come to be viewed as the correct story? Trivial answer: the British told us they were free trade. But many tariffs they removed were on items that were not significant for trade. More serious answer: The focus on free trade was on industrial products and Britain moved quickly to remove tariffs on those goods; but England had the comparative advantage in those goods. Equivalent would be if Japanese removed their tariffs on cars and electronics but kept their tariffs on rice; we wouldn't look at them as free traders. Don't want to just look at the printed tariff rates. Wine, sugar, coffee, rum, tea were a very important part of British trade going back the 1600s and were the center of the controversy. Overall trend: if it wasn't an intellectual triumph of Ricardo and Cobden, what was it? Combination of genuine technological transformation of the Western world pushing countries to become more productive; and also a general political economy movement and understanding that opening trade was beneficial, plus special interest groups. Also, financial markets and capital markets were becoming better.
17:41Tariff still on wine in 1850 in both France and Britain. Did tariff on wine have a crucial impact on these economies? How had this been overlooked? Detective story putting together the work of wine historians, fiscal historians, commercial historians, but never quite put it together. Go back to the 1600s, time of Louis XIV, Britain and France were trading partners, and Britain had a big trade deficit in things like wine, silks. British felt if they could eliminate trade in those things they would have a trade surplus, and a surplus was viewed as a good thing--the mercantalist viewpoint. British were roughly a quarter of the population of French, yet the British imported a great deal of wine. Glorious Revolution, William of Orange, House of Hanover takes over, basically a coup, more agreement between Parliament and the Crown. Increased power of the state. Now the state could more credibly incur debt because it was credible that they could repay the debt by raising taxes. Britain and France at war: Nine-years War and War of Spanish succession; for a quarter century wine and many other products were suddenly not entering the British economy merely because of the war, 1683. Alcoholic drinks were not just popular but probably the safest drink at that time since water was not very clean. Booze provided nutrition as well, beer was thought of as a staple. Research: 18th century, largest item in the budget of Dutch orphanages was beer. Behavioral control plus nutrition. Home-brewed ciders.
25:35No wine coming in from France, but wine from Portugal was available--Port, Porto, as a drink, though, was not available and the quality of the available wines was not good. Fortified wines--dump brandy into the wine to keep it from spoiling during transport. "Factories"--processing zones where stuff was made in Portugal for re-export to Britain. Many of these "factories" switched to producing wine for export to Britain. To this day, names like Sandeman, English names, are the labels for port. Could export only to Britain. The relationship between Britain and Portugal from this period was institutionalized in the Methuen Treaty, guaranteeing that the Portuguese will receive a tariff that is never to exceed 2/3 of the tariff received by any other country on wine and spirits; in exchange for which they must receive cloth free of tariff. Ricardo's example--why did he choose it? 1713, war is over. But now new groups are making money hand over fist. Opening up trade with France again mobilizes the industry and they lobby the Crown. Government obliges by imposing new onerously high tariffs on French wines. Fixed tariffs, not percentage tariffs. Volume-tariffs discourage the lowest quality of wine. Imagine a tariff of $20/bottle. Distorts consumption toward the high end. At low end, alternative is beer. As a result of the tariffs French exports fall by 90% relative to before the war, and are only consumed by the most wealthy. Explains why Britain is a beer-drinking as opposed to wine-drinking nation today. John Bull, British pub image. Insignificance of wine: Protection of French wine protected not British wine but its substitute--beer. What is the impact on France? Painful for France but not crippling. French substituted toward producing higher and higher quality wines. Research and innovation in France. Wine was the second or third largest cash crop for export at the time even though the volume was small; large in value, had effects on land values.
35:36Taxes. Would you expect the state to let the domestic beer brewers to keep their profits from this industry that was created by the tariff on wine? Previously tax revenue was hard to raise; tax revenue was hard to raise on beer, in part because there were many small producers. Now the government had both a carrot and a stick: If you want to keep the protections, you'd better pay your taxes. Alliance forms between the state and the leading brewers. State moves from encouraging free trade in domestic beer to limiting entry to breweries--from many hundreds to less than a hundred. Easier for the breweries to maintain an oligopoly if your prices can be monitored and easier for the government to deal with politically. The loser in this is the consumer. Industry now siding with government. Sugar tariff--sugar is the largest single input for alcoholic beverages. Revenues to the state grow 5 times the size of GDP at the time of Adam Smith. Used to fund war--U.S. War of Independence. The French had trouble collecting tax money. Standard of living in Britain may have suffered, though it was the center of the industrial revolution. Tax burden is conjectured to have been the cause. War is not good for the economy. Can't pick and choose which wars, though. Protection of sea lanes.
42:56So Britain, while increasingly free trade, was not really free trade. France was actually more free trade, slowly and steadily moving toward freer trade. Role of trade and development today: Populist protectionists such as Pat Buchanan point to the late 19th century as the glory days of the U.S. economy, high growth rate, claiming that the cause was protectionism. During that period we had high tariffs. Industrial sector employs smaller percentage of people today but thrives because of technological progress. More important point: free trade was of secondary importance between Britain and France. Domestic trade was more relevant. Today we take for granted the virtues of internal trade, but for France, it was a patchwork of different internal trade areas. Easier for Bordeaux to trade with London than with Strassbourg. When Smith talked about free trade, he meant trade and exchange in general, not just internationally. Britain worked to encourage domestic trade and benefited from it by the end of the 19th century. France had to go through more struggle. Napoleon imposed a uniform set of rules on the domestic economy. True across Europe: Germany unified the trading system as a precursor to political union. Rise in British productivity from the industrial revolution overwhelmed the problems caused by their tariffs. Protectionists worry about trade deficits. From 1750-1914 there may not have been a single year in which Britain ran a trade surplus--but that's when Britain ruled the world. Role of technology--to the extent you can trade freely within your country you start to get some economies of scale. If you take away the economies of scale you take away many of the advantages. Suggests that British innovation was driven by the fact that they were successful in domestic trade. American revolutionaries made a big point about this fact in issues on open interstate commerce. Not a justification of tariffs. It's a way of pointing out that you can't use superficial measures of its benefits or drawbacks. Hard to find evidence that free trade is generally harmful to nations. Supporters of free trade should acknowledge that it's no panacea. A nation which is corrupt, inefficient, and has a poorly functioning domestic market may not benefit from free trade.
53:45Bernstein cites the work of economic historians, impact of trade on growth is small. Counter: really hard to measure. In general, till recent economic history the natural barriers to international trade were so great and governance was so corrupt and inefficient meant that the other things are secondary. Technologies so inefficient meant there was so much room for development. Interest groups have to develop to lobby for opening up, say in ports, instead of the historical interests acting to limit trade.
55:40Only around 1870 had the average tariff in Britain finally become somewhat low level. What changed in the political economy? Tobacco Settlement: government created an oligopoly, industry likes it because it keeps out new entrants; taxes tobacco users to finance the state. Big thing that changed: the groups that were benefiting from protection were getting weaker at a time when the industrialists who wanted freer trade were getting much stronger. Technology-driven. Second, an 1849 Parliamentary Inquiry showed that lowering tariffs would raise customs revenue but they were worried that the short-run disruptions would be so great that revenue would go down. Income tax experimentation. In 1860 British agreement with France removed the remaining French prohibitions on remaining products in exchange for British reduction of wine tariffs. Other European nations noticed bilateral trade agreement and didn't want to get locked out. Signed bilateral treaties with Britain and France right away. Trigger system, interlocking economies. England and France ultimately become allies after being enemies for centuries. EU seems unlikely to go to war with each other. Income and corporate taxes dwarf tariff revenue today; but in 19th century, excise taxes and tariffs were more important as sources of revenue than income taxes. Early small version of income tax in 1850s, considering various revenue sources as trade-offs.

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COMMENTS (5 to date)
Unit writes:

I would drop the slightly pejorative label of 'revisionist' research and just call it deep and well-documented research.

About Ricardo's example, I understand that it's distorted by the tariffs, but given the complex web of existing taxes how else does one measure comparative advantage?

The conclusion seems to redeem the general consensus that England was more free-trade than France, albeit one needs to use the general Smithian meaning of trade, not exclusively international.

On why the barriers were coming down, it seems then partly a Laffer-curve effect, but mostly a by-product of the industrial revolution. Namely, exporters became a lobby for free-trade, because they wanted foreign markets to open up and could achieve this by lobbying for bilateral agreements.

Finally, about the influence of the theoreticians Smith and Ricardo. Maybe they weren't responsible for the changes in the nineteenth century, but they certainly are heroes today, in England and the US. On the other hand, France also had several excellent thinkers (Bastiat comes to mind) and yet they are completely ignored in their own country. Ironically they are more influential in the US, and the general attitudes of modern France towards trade reflect the disreputable state of the theory of free-trade in that country.

Schepp writes:

This is a case where I would want some confidence intervals. The point that free traders have protectist tendencies and protectionist have free trade tendencies. Given that there is much we don't know about how our government today establishes rules. How efficient are we in judging history?

Brian-NJ writes:

This was a cool podcast, I dig the history themes. I am very curious however, Russ asked Nye to talk about what happened in 1703, and he said he would get to it after he finished current story but didn't find the opportunity to return. So, what happened in 1703?

Jeff writes:

Very interesting podcast and shows numerous examples of unintended consequences of tariff policy.

But when talking about the volume tariffs the British placed on French wine the host and guest seem to use the tariff to describe why Britain is a beer-drinking nation as opposed to wine drinking.

Is it not more likely that the reason Britain is not a wine drinking country has far more to due the fact that the climate is terrible for grapes? Ireland has a very similar climate to Britain and, to my knowledge, did not have a tariff in place against the French, but are and have always been a beer/spirit drinking nation.

In the podcast with Ayers on Supercrunching the Orley Ashenfelter wine example is introduced which would suggests that great wine is a function of weather and rainfall. Britain has lots of rain but relatively little warmth - a bad combination for grapes.

Not to push too much on this fairly minor point but I do not see the correlation between the tariffs and drinking habits of the British.

Steve writes:

Jeff, the entire point is that the British were not drinking wine because it was at a higher cost to buy it from the French due to the tarrifs.

I think you missed the whole point about international trade. It has nothing to do with domestic production and consumption of wine.

Because it was artificially more expensive to buy imported wine, the British substituted domestically produced beer.

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