Tariffs and economic growth in the first era of globalization

Abstract

Are liberal trade policies good for growth? Sceptics often point to the late nineteenth century as a period when protectionist policies promoted economic development. This apparent blueprint for the benefits of protectionism paradoxically comes from a period that is often described as the first era of globalization. In this paper we reassess the empirical evidence about the relationship between tariffs and growth between 1870 and 1914. Our key findings challenge the idea that in the nineteenth century countries that raised tariffs thereby increased their own growth rate. Using new and improved data and employing a whole portfolio of econometric tests we do not find evidence that increased protectionism raised the rate of individual countries’ growth. While some positive cross-sectional correlation exists between tariffs and growth, this may reflect unobserved country traits rather than a causal relation. There is equally little evidence that other external factors, such as real exchange rates and terms of trade changes, were key drivers of economic performance. A paradox of this first era of globalization is not that free trade was bad for growth; it is that international economic policies seem to have mattered little to countries’ growth trajectories.