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Management in Practice

How has trade shaped the world?

Moving goods around the globe is such an everyday phenomenon that it has become almost invisible. But the business, policy, technology, and politics of trade have been powerful forces throughout history. William J. Bernstein, author of A Splendid Exchange: How Trade Shaped the World, talked with Qn about both the sweep and the intricacies of the endeavor through history.

Q: What are the key threads to follow in understanding how trade has shaped the world?
First, trade almost always benefits the nations that engage in it, but only when averaged over the entire national economy.

Second, there is always a minority that is hurt by evolving trade patterns, and they will always call for protection. As early as the sixteenth century, Madeiran sugar growers demanded, and obtained, prohibitions against cheaper sugar from Brazil. Going back even further, by the third millennium BC, there was a vigorous trade between grain-rich Mesopotamia with mineral-rich Magan (modern Oman), and Dilmun (modern Bahrain) was the focal transshipment point for this operation. Although we have no record of it, you can bet that Dilmun's farmers were not happy with the cheap barley and wheat arriving on that city's wharves.

Q: What did you discover about trade through looking at it with a long historical lens?
The urge to trade is hard-wired into our DNA, and new patterns of trade always produce stresses, strains, cracks, and discontents. If you look at the historical record, you see that this process has been going on for centuries. For example, "tea parties" protesting taxes have been much in the news lately. This is beyond irony. The historical Boston Tea Party had almost nothing to do with taxes; rather, it was a protectionist backlash by middlemen and smugglers cut out of the tea trade by the decision to allow the East India Company to directly market its products in the colonies. Good for tea consumers, bad for those who had previously controlled the trade.

Q: How has the role of the trader changed? How much has business changed?
In the pre-modern world, the trader was a solitary, self-sufficient figure who more often than not sat and slept on his cargo and endured discomforts and dangers we cannot even begin to imagine. Today, the highest-value cargoes whip around the world at nearly the speed of sound on aircraft piloted by skilled specialists who end their workdays in taxis and four-star hotels. Lower-value cargoes travel on reasonably comfortable and safe vessels with well-stocked pantries and video collections, and both the aircraft and ship's crews are nearly always the employees of very large corporations.

Q: Did your understanding of globalization change in doing the book?
It could not help but do so. First, before I began the process, I hadn't realized just how relevant historical trade was to the modern story. As Harry Truman famously said, the only thing that's new in the world is the history we haven't read. You can take the stories of the opening up of the Manila Galleon route or the 1697 riots by London weavers displaced by Indian calicoes, change a few of the proper nouns and modernize the grammar, and you're reading James Fallows on the dumping of Chinese textiles or the AP coverage of the 1999 Seattle disturbances.

Second, I hadn't realized what an intrinsic part of human behavior trade was. About 50,000–100,000 years ago, a small group of our ancestors in northeast Africa acquired the genetic endowment that gave them the language, social, and, intellectual skills that enabled them to break out of that continent through a barrier of their hominid competitors and go on to dominate the six habitable continents. The desire to trade — of which there is ample evidence in the prehistoric record — was part of that repertoire.

Finally, I hadn't realized that trade's economic benefits pale in comparison to its intangible ones. In fact, you can make a pretty good case that before the mid-twentieth century, trade was not that much of an economic boon, although the post-1950 data leave little question of trade's material value.

By contrast, trade's intangible benefits are enormous and indisputable: the desire to do business with your neighbors rather than to annihilate them. To convince yourself of that, look at the twentieth century: the Smoot-Hawley Tariff probably triggered the Second World War by embittering the Germans with their inability to recover and pay the Versailles reparations. No Smoot-Hawley, no Hitler chancellorship; no Hitler chancellorship, no World War II. By contrast, European free trade has made a major party conflict among western and central European powers unthinkable for the first time in history.

Q: How important has technology been in shaping trade?
Obviously, transport and communications technology played an enormously important role. Rather than mention the obvious advances — the steam engine, telegraph, aircraft, and computer — I'll focus here on a few less obvious ones that were just as important.

The first of these more subtle technologies was the decoding of the planet's wind system. One great advance was the discovery of the Indian Ocean monsoon system by mariners around the dawn of the Common Era, which transformed the cities ringing it into prosperous trading states. The second great advance was the exploitation of the prevailing "trade winds" by European sailors in the sixteenth and seventeenth centuries, which gave birth to the first flush of true "globalization" by about 1600.

Another subtle but great advance in trade history was the invention of a process for mass producing inexpensive high-quality steel by Bessemer, Siemens, and Martin in the mid-nineteenth century. Prior to that, the soft iron rails and low-pressure iron boilers of the early steam age were not up to carrying very large volumes of grain. The new blast steel process yielded high-tensile strength rails and high-pressure boilers, which made possible, for the first time, an efficient global trade in bulk commodities, particularly grain, which would in turn ignite a protectionist backlash by European farmers that endures to this day.

Finally, I can't resist mentioning the refrigerator. It's not commonly realized that by the early nineteenth century massive amounts of ice, and with it, chilled perishables, were being shipped around the world. Unfortunately, this was a one-way affair, and could originate only in places, such as New England, that had a reliable supply of it. If you were trying to ship beef from Argentina or Australia, you were out of luck. The invention of mechanical refrigeration around 1880 ignited a worldwide revolution in the growing of beef and pork for consumption halfway around the world.

Q: Did the importance of policy, regulation, and finance as supports for successful trade change at some point?
Trade has always required, and always will require, capital, which is why the Dutch were able to control it for much of the seventeenth and eighteenth centuries, and why global trade volume has suffered a steep decline in the past year.

The essence of free trade is the very absence of regulation. Unfortunately, as we've already seen, free trade always produces losers, who must of necessity be bought off, lest they clog up the works. As John Stuart Mill first pointed out, and as Paul Samuelson and Wolfgang Stolper have reiterated, the benefits of free trade will always be sufficient to "bribe the suffering factor."

As a practical matter, free trade is joined at the hip with a generous social welfare system. When a worker loses his or her job to a better and/or cheaper foreign product, he or she not only deserves retraining, but should also not lose their health care coverage and all their income. Reasonable people can argue over the ethics of a generous social welfare policy, but there's no arguing over its political economy: if you don't compensate the losers, they wreck the system.

Q: Is there anything distinctive about cities that are defined by trade?
Sea transport has always been cheaper and more efficient than land transport. This was especially true in the pre-rail era. Genoa was the quintessential example of this. Hemmed in by mountains and facing the sea, it was easier to get to Lisbon or even London than to Milan or Geneva. A Genoese was more a citizen of the world than Italian, and it was perfectly natural for him to make his career abroad. Christopher Columbus, for example, spent most of his adult life in Portugal, Spain, and on the high seas.

The same was also true of all of the great medieval Indian Ocean emporium ports, tied together by the monsoons and the institutional power of Islam. The commercial upper crusts of Cambay, Malacca, Calicut, and Mombasa had more in common with each other than with their fellow countrymen.

Q: What are the relationships between legal and illicit trade?
First, where there are tariffs, there is also smuggling; this is particularly true of high-value goods, whether licit or illicit: tea in the eighteenth century, heroin and cocaine today.

Second, throughout most of history, the central calculus facing most leaders in the pre-modern era was the trilemma of whether to trade, raid, or protect. Today, we take the first as a given, but as we have recently learned off the Somali coast, the latter two options are still around.

Read the introduction to the A Splendid Exchange on William J. Bernstein's website.

Interview conducted and edited by Ted O’Callahan.