Wednesday, March 12, 2008

"The sun never sets": Empire and Trade

A globalisation post that seeks to at least illustrate that globalisation is not a recent phenomenon. Famously, writer John Wilson once said of the British empire:

"His Majesty's dominions, on which the sun never sets,"

which was then simplified to ""the sun never sets on the British Empire."

All of which brings us back to the effect of empire on trade. In once sense the answer is obviously yes and probably to a significant extent. The reasons are also intuitively obvious - reduced transaction costs, common language, no trade barriers and of course, and relevant to today's Euro debate, a common currency.

This new NBER paper uses a standard gravity approach to examine this issue.


Trade and Empire

Santa Clara University - Department of Economics; National Bureau of Economic Research (NBER)
Claremont McKenna College; National Bureau of Economic Research (NBER) January 2008

NBER Working Paper No. W13765

Although many modern studies find large and significant effects of prior colonial status on bilateral trade, there is very little empirical research that has focused on the contemporaneous impact of empire on trade. We employ a new database of over 21,000 bilateral trade observations during the Age of High Imperialism, 1870-1913, to quantitatively assess the effect of empire on trade. Our augmented gravity model shows that belonging to an empire roughly doubled trade relative to those countries that were not part of an empire. The positive impact that empire exerts on trade does not appear to be sensitive to whether the metropole was Britain, France, Germany, Spain, or the United States or to the inclusion of other institutional factors such as being on the gold standard. In addition, we examine some of the channels through which colonial status impacted bilateral trade flows. The empirical analysis suggests that empires increased trade by lowering transactions costs and by establishing trade policies that promoted trade within empires. In particular, the use of a common language, the establishment of currency unions, the monetizing of recently acquired colonies, preferential trade arrangements, and customs unions help to account for the observed increase in trade associated with empire.


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