9.10 Reciprocity and Free Trade

By the middle of the 19th century Britain was well established as the leading industrial economy on Earth. An alignment of domestic resources (especially iron and coal), innovations in harnessing new energy sources (from hydraulics through to steam), developments in the mechanization of looms, access to raw materials from colonies and non-colonial suppliers, an abundance of local free labour, and the extent to which British merchants as well as naval fleets ruled the waves produced and perpetuated a high-speed transformation of the economy of the British Isles. Western Europe as a whole played catch-up (some countries better than others) while the United States exploited its own natural advantages and ploughed ahead at a dramatic pace. The days of rough equality with France were well within living memory for many British leaders and capitalists; they could recall a time when mercantilism made sense. By the 1840s they and their younger counterparts were wondering whether it should continue. After all, British goods were in demand everywhere, and Britain had the economic and military muscle to impose commercial arrangements where needed. Increasingly influenced, as well, by free market economic theories that held to the view that one should always buy in the lowest market and sell in the highest, capitalists in particular thought that preferential tariffs interfered with the natural workings of the marketplace. What became known as laissez-faire capitalism was coming into fashion.

This was, of course, terrible news for a British North American economy that had been finely crafted to work within the comfort zone of protectionism. Under mercantilism (French and English alike) there were direct and indirect disincentives to diversification: some kinds of production were simply not allowed or not worth attempting. A thriving market in Britain for unprocessed products from the sea or the forests gave settlement and society its shape; the smart money went after those opportunities and little investment was sunk into manufacturing.

The staple theory describes how the pursuit of natural resources both expands and restricts an economy, both spatially and structurally. Whether they were chasing beaver pelts or trees, British North Americans followed rivers deeper into the interior rather than building up market towns with a healthy surplus of labour that could be used in small, artisanal factories of five to 20 people, the sort of operation that might expand to 50 or 100 employees one day. Staples, moreover, tend to favour what are called backward linkages: harbours, warehouses, some shipping capacity. These are things that are useful in any economy but they don’t propel it forward. A dock is a dock; it cannot be redeployed into the production of new kinds of goods. Forward linkages are more likely to arise from basic manufacturing: iron production begets iron tools, tools lead to machinery, machinery leads to manufacturing of shoes or clothing. In each of those steps value is added to the product as is the potential for movement into entirely different economic activities (e.g., the iron foundry becomes the parent of the cotton textiles industry). By mid-century, the colonies of British North America were breaking out of the staple economy, but only tentatively. The end of British protectionism would necessitate accelerated change.

Sudden Adjustments

The end came quickly. In 1842 the tariff on squared timber was amended and exports fell by 25% the very next year.^[1] In 1846 Britain abolished the Corn Laws; now grain and flour produced in the United States competed toe-to-toe with the British North American (more specifically, Upper Canadian) wheat economy. Fears grew across the colonies that farmers, shipping interests, dockworkers, freight handlers, and millworkers would all suffer.

The difficulty at the time facing policymakers in British North America was twofold. First, they needed to decide how to respond to changes in tariffs when the legislative power to do so still resided mainly with the mother country. Second, they needed to determine with some certainty whether free trade was a bad thing or a good thing. British North America was a world leader in the production of squared timber: would it not benefit from a more open market? As well, it was easy to confuse the causes for economic troubles: did sales of staples fall because of free trade or because of falling demand? To what extent were those factors related? In the 1840s and 1850s, political and financial leaders in the colonies didn’t have the statistical information to guide them (or mislead them). What they did know was that tariffs were falling away and everything had to be considered in light of that fact.

Overall, despite a few setbacks, the British North American economies performed well after the shock of tariff removals. From the late 1840s through to the 1860s shipping production continued to grow in the Atlantic colonies (serving American demand for additional capacity) and wheat exports from Canada West increased. Demand for grain in famine-stricken Ireland helped matters after 1847, as did British military needs during the Crimean War of 1854-56 and American requirements during the Civil War in the early 1860s.

The First Free Trade Agreement

Although British North America was not an early adopter of industrial processes, the United States was, and demand for raw materials accelerated there by mid-century. The forests of New England were badly depleted, agricultural lands were no longer sufficient to supply the rapidly growing manufacturing towns and the major cities, and the British North American colonies could provide both timber and food. As well, the British North American ports were a good source of materials derived from British markets and other British colonies. This made the northern colonies very attractive partners to the Americans and it made the American marketplace more attractive to British North America’s leading capitalists. In return, the Americans could provide agricultural implements, textile products, and other goods that were less conveniently sourced from Britain. And often they could do so much more cheaply. The Reciprocity Treaty signed by Britain and the United States in 1854 thus opened up trade between the colonies and the Americans while constituting a further step in Britain’s efforts to create a world without trade barriers. This was, however, a short-lived experiment.

Protectionist interests in the United States, combined with anti-British feeling at the end of the Civil War, led to the treaty being terminated in 1866. For 12 years, however, Canadian products enjoyed unprecedented access to American markets.

It is worth underlining again that, whatever the inherent benefits of reciprocity, the context is critical. Had it not been for the additional and dramatic demand created by the Civil War south of the border, it is unlikely that British North America would have benefited as much as it did. After Confederation until the Great War (1914-1918) there would be nostalgia for reciprocity in some Canadian political circles but it would tend to ignore that important piece of the equation.

Attributions

Figure 9.17
Philip V Coin by Coinman62 is in the public domain.