Foreign and domestic protectionism: what impact on the British economy?

In the late 19^th century, Britain faced rising protectionism in some of its key export markets. Then, in the early 20^th century, the country itself embraced a protectionist trading agenda. These experiences had long-term consequences for the structure and productivity of the national economy.

In the closing decades of the 19^th century, a number of Britain’s export markets pursued protectionist trade policies as a means of industrialising – and producing for themselves the manufactured goods previously supplied by British producers. One consequence was that the late-Victorian British economy suffered from what has been described as ‘export-retarded growth’.

In the interwar era, Britain protected its own market – a policy that was to persist undiminished into the post-war years. The resulting decline in competition between British and foreign firms was productivity-reducing.

Economic historians allege that these developments – both foreign and domestic protectionism – stymied Britain’s productivity growth.

Yet the effects of protectionism were not limited just to productivity. Protectionism contributed to a geographical reconfiguration of Britain’s trade, notably including the formation of the British imperial trade bloc.

Foreign protectionism and late-Victorian export-retarded growth

By the 1880s, there was an increasing recognition that the British economy was not growing at the same pace as it had during its heyday in the 1850s and 1860s. In 1885, the Royal Commission on the Depression in Trade and Industry was established to inquire into the causes of the slow-growing economy.

The Commission’s final report observed: ‘We are disposed to think that one of the chief agencies which have tended to perpetuate this state of things is the protectionist policy of so many foreign countries which has become more marked during the last ten years than at any previous period of similar length’ (Final Report of the Royal Commission on the Depression in Trade and Industry, 1886, p. xviii).

While Britain was a free-trade nation with only revenue-motivated tariffs – for example, on tea – this was not the policy of the country’s industrialising trade partners (Juhász and Steinwender, 2024). These partners tended to increase their tariffs even further in the 1880s and 1890s.

By the early 20^th century, so heightened were foreign tariffs that Britain’s Board of Trade decided to undertake a substantial study aimed at quantifying the average tariff level that British exports encountered in 25 foreign markets in 1902. To give some examples, British exports faced a cross-commodity average tariff of 3% in India, 25% in Germany, 34% in France, 73% in the United States and, the highest among the average tariffs, 131% in Russia (Board of Trade, British and Foreign Trade, P.P. 1905, LXXXIV, p. 354).

These tariffs reduced British exports substantially, relative to the level of exports that would have been realised if Britain’s export markets had emulated the country’s free-trade policy.

Recent research making use of the tariff data collected by the Board of Trade (for its aforementioned study) found that a 1 percentage-point increase in the tariff on an exported British commodity was associated with a 3.1% decrease in the volume of British exports (Varian, 2023). This relationship (the elasticity of exports to foreign tariffs) is nearly identical to that seen today – in other words, to the elasticity of exports to tariffs estimated in studies using modern data (Kee et al, 2008; Soderbery, 2018).

Foreign tariffs had the effect of dampening the growth of British exports – but what then is the connection between exports and productivity growth?

Figure 1: British exports, labour productivity and total factor productivity, 1856 to 1899

Sources: Exports calculated from Imlah, 1958; labour productivity and total factor productivity from Crafts and Mills, 2020

Britain’s productivity growth was indeed slowing – but still positive – in the late-Victorian era. One study finds that the country’s trend rate of labour productivity (output per hour worked) growth peaked in 1870 at 2.11% per year (Crafts and Mills, 2020).

Figure 1 presents the annual growth rates of British exports, labour productivity and total factor productivity (a measure that reflects improvements in technology). All three measures decelerated in the late 19^th century.

The relationship between British exports and productivity growth is articulated in the export-retarded growth hypothesis (Coppock, 1956; Feinstein, 1996). It can be summarised as follows:

Foreign industrialisation occurs, assisted by protectionist policies.
Demand for British exports is reduced.
British manufacturing firms reduce their investment in new capital equipment in response to flagging demand.
Due to the lower level of investment, there is less scope for the economy to benefit from the most cutting-edge productivity-enhancing technologies, which are embodied in new capital equipment.

The export-retarded growth hypothesis has considerable power for explaining Britain’s lacklustre productivity growth during the late-Victorian era, especially given the significance of overseas demand to the British economy. As late as 1913, 45% of Britain’s manufacturing output was exported (Magee, 2004).

British protectionism and weak competition in the 20^th century

There was some chipping away at Britain’s free-trade policy in the 1920s (Varian, 2019). The McKenna duties imposed during the First World War, which mainly applied to motorcars, were retained. Tariffs on chemicals and scientific equipment were also imposed in the interest of national security.

In the late 1920s, Britain imposed ‘safeguarding duties’ on an assortment of minor industries, such as cutlery and gloves, which were suffering from acute levels of import competition. Still, most of British manufacturing was unprotected until the 1930s.

Britain’s full-scale abandonment of free trade came in 1932, amid the exigencies of the Great Depression. The Import Duties Act applied a 10% duty on nearly all imports. The legislation also created the Import Duties Advisory Committee (IDAC), which was empowered to (and frequently did) recommend even higher duties on specified commodities.

Economic historians debate the short-term consequences of the country’s turn to protectionism for productivity. One study actually finds that tariff increases improved industry-level productivity growth in the 1930s (Lloyd and Solomou, 2020).

Figure 2: Weighted average tariff levels in 1939 and 1964

Source: Bown and Irwin, 2015

Figure 2 presents the weighted average tariff levels of selected industrialised economies in 1939 and 1964. As shown, among countries participating in the General Agreement on Tariffs and Trade (GATT), Britain had one of the highest weighted average tariff levels by the 1960s (Bown and Irwin, 2015).

According to one account of the post-war British economy, ‘Weak competition in product markets was buttressed by protectionism which the United Kingdom was very slow to give up by comparison with its European peer group’ (Crafts, 2018).

The weak state of competition in Britain from the 1940s to the 1970s was the outcome not just of protectionism, but rather a suite of policies that also included nationalisation, subsidies and a tolerance of cartels and price-fixing. This translated into relatively slow productivity growth (Crafts, 2012).

There were several channels by which weak product competition adversely affected productivity growth, including the lack of incentives for firms to adopt new technologies and improve their management practices.

The culmination of Britain’s relatively slow productivity growth was that by the 1970s, it had been surpassed by both France and West Germany – and by a considerable margin.

Protectionism and the British imperial trade bloc

In the final years of the 19^th century, foreign tariffs were the grist for greater imperial unity. This included the application of preferential tariff rates to goods imported from within the British empire – what was known as ‘imperial preference’.

One important episode of foreign protectionism was the McKinley tariff of 1890, which had the effect of significantly raising the American tariff on British goods (Varian, 2018). According to historical research, it was the McKinley tariff that emboldened calls for imperial preference at the Intercolonial Conference in Ottawa in 1894 (Palen, 2010).

In the ensuing years, the (tariff-autonomous) British dominions adopted policies of imperial preference with respect to imports from Britain: Canada in 1897; New Zealand and South Africa in 1903; Australia in 1907; and eventually India in 1927.

According to one study, the preferential market access that Britain received was consequential. For example, Canada’s initial policy of imperial preference nearly doubled the value of British exports to this market (Keay and Varian, 2024).

As a free-trade country, Britain had little scope to reciprocate the preferences that its exports enjoyed in dominion markets. But the situation changed in 1932, when Britain embraced protectionism, thereby enabling preferential tariff reductions.

Finally, Britain could acquiesce to the dominions’ clamouring for preferential access to the British market. Later that same year, the country signed numerous bilateral agreements extending imperial preference to its imports from much of empire. One study estimates that, by 1935, these preferential agreements raised the empire’s share of British imports by 8 percentage points (de Bromhead et al, 2019).

Imperial preference would remain a feature of British trade policy until the country’s accession to the European Economic Community in the 1970s.

Summary

Economic historians are interested in counterfactuals, in this case: what if there had not been a rise of protectionism overseas and, later, in Britain itself? Productivity growth would have been faster, and the 20^th century British imperial trade bloc would have been of a weaker form.