The Terms of Trade as a Tax on Agriculture: Hungary's Trade with Austria, 1883–1913

Abstract

Protection of a domestic manufacturing industry to encourage its expansion through import substitution is equivalent (in the absence of equal protection for agriculture) to a “tax” on agriculture to support the development of the industrial sector. To call this policy of biasing the intersectoral terms of trade to favor industry a typical strategy of underdeveloped countries would be, if anything, to understate its universality. The arguments for and against such a strategy are well known, and an approximation of the benefits to the industrial sector can be gleaned from the national accounts of many countries. What remains hidden in the accounts, however, is the cost to the agricultural sector as a result of its being forced to trade at less favorable terms of trade than those provided by the world market. The purpose of this paper is to work out a simple methodology for measuring this cost and then to attempt an estimate of the cost in a particular case.