by Carla Salvo (Sapienza University of Rome)
This blog is based on a paper presented at the 2022 Economic History Society Annual Conference in the New Researcher Session: NRIIC (Innovation).
The effect of trade and trade liberalization on domestic manufacturing performance is still debated. Growing international competition, not least from developing countries like China, raises important questions about the reaction of national firms to increasing foreign trade. In particular, do firms attempt to increase their productivity via technical change? Recent work disagrees.
My contribution turns to the historical record. Multiple and continuous technological shocks nowadays make it challenging to capture innovation activities today, and the historical context eases identification. I estimate the effect of trade liberalization on technical change at a time (like now) when trade openness took large steps forward, that is, during the nineteenth century. I explore how trade liberalization impacted the decisions of local industries to adopt the emerging general purpose technology of the time—steam power, which, during the nineteenth century, gradually replaced the more traditional technologies including water, wind, and animal power.
Figure 1. Lord Palmerston addressing the House of Commons
In particular, I exploit the reaction of French industrial producers to the trade liberalization resulting from the Cobden-Chevalier Treaty of 1860, an Anglo-French trade agreement that reduced import tariffs and eliminated trade protection on manufactured products between England and France; see figure 1. England, at the time, was a technologically advanced, highly competitive economy, compared to other countries. France, in contrast, was industrializing more slowly. This makes nineteenth-century France a well-suited case for studying the effects of trade-liberalization and increased competition exposure from an industrial leader and global first mover.
Thanks to the two earliest industrial censuses of French industries that surrounded the 1860 treaty, I am able to construct an outcome variable which I call ‘steam intensity’. The variable indicates how much steam power (the emerging technology at the time) was used relative to the more traditional powers, viz. wind, water, and animal. To study the effect of trade liberalization on steam intensity, I used the original text of the treaty to define local sub-industries exposed and not exposed to import tariff changes due to the Anglo-French trade agreement.
Figure 2. Steam intensity before and after trade liberalization
My preliminary findings show that steam-power use rose 60 per cent more if the local industry was exposed to the trade liberalization contained in the treaty than would have occurred otherwise; see figure 2. Industries with no import tariff changes, or industries that were located in areas far from London or were difficult to reach in terms of transportation, were relatively more anchored to old technologies. I thus propose that the differences in technical change were ultimately caused by more or less exposure to competition from the British producers.
The historical findings have some implications for modern times. Firstly, my study expands on the existing literature which debates the effect of import competition on innovation. It also finds evidence of the so-called ‘escape competition effect’, suggesting that producers respond to the reduction of domestic demand caused by the increasing foreign competition by improving their technology. Hence, my data do not support the negative effect of trade on innovation. Key to the contrasting effects could be how the outcome is designed. I pay attention to the general purpose technology already adopted by technological leaders and not on patent activities, which would reflect producers’ ambition to change using non-existent technologies. Moreover, I test the role of trade by focusing on innovation in more mature industries belonging to 82 diverse sectors.
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