United States International Trade:  
Proximate Causes, 1870-1910 (A Brief Description)
William K. Hutchinson Department of Economics Miami University Oxford, OH 45056 HUTCHIWK@MUOHIO.EDU August, 1999 JEL Classification: International Trade, F1, and Economic History, N0 I would like to thank James Dunlevy, participants at the Southeastern Economic Theory and International Trade conference, UNC-CH, November, 1997, participants at the All Ohio Economic History Meetings, April 30, 1999, and two anonymous referees for helpful suggestions on earlier drafts of this paper.

Draft: Not to be quoted without author's permission. Comments welcome.

It has often been said that ... the spread of industrialization ... tends to diminish the importance of international trade by reducing those differences in economic structure and skill which are the basis for profitable exchange. The importance of international trade in the nineteenth century was therefore considered to be a temporary phenomenon. Robert Lipsey (1963: p 36)

Explaining the current pattern and volume of international trade continuously challenges economist to build better models and/or find better data. The challenge for the economic historian who attempts to explain the pattern and volume of trade for the late nineteenth century United States is no less daunting. Although the volume of United States trade during the period 1870 to 1910 increased 3.73 percent per year, we know that total trade declined from 15.6 percent to 14.0 percent of gross national product in 1913 prices. The composition of this trade changed dramatically as agricultural trade, exports plus imports, declined from 29.8 percent to 21.3 percent and manufacturing trade increased from 27.3 percent to 37.8 percent of total trade. On the other hand, the changing composition of imports reflects a shift toward raw materials and semi-manufactures, which increased from 25.9 percent to 55.4 percent of total imports, and away from manufactures and processed foods, which decreased from 61.9 percent to 35.3 percent of total imports, during the period 1870 to 1910. Manufactures increased from 14.8 percent of exports in 1870 to 29.2 percent in 1910. Exports of agricultural goods only declined slightly but the proportion of manufactured food to crude food exports increased from a 45/55 to a 70/30 relationship, respectively. (Historical Statistics, 1975) Thus, United States international trade shifted from exporting crude agricultural goods and importing manufactured goods to importing crude materials and semi-manufactures and exporting manufactures and manufactured foods.

The pattern of trade reflects structural changes that occurred in the economy during the period 1870 to 1910, when during the 1880s manufacturing output surpassed agricultural output to the extent that by 1890 the value of manufacturing output was three times that of agriculture. (Atack and Passell, 1994: 457) The 1880s were years of rapid change in United States manufacturing as the optimal size firm increased significantly for many manufacturing industries and capital investment more than doubled the capital-labor ratio in manufacturing between 1870 and 1890; over 70 percent of this increase came in the 1880s. These substantial changes in the factor proportions in manufacturing are nearly matched by the 170 percent increase in the capital-labor ratio in agriculture during the same period.(Hutchinson, 1998)

When attempting to explain the pattern of international trade in specific commodities for the period 1870 to 1910, the rapid expansion of capital relative to labor in both manufacturing and agriculture must have had some bearing in determining the goods for which the United States possessed a comparative advantage. Increased relative capital abundance as well as the existence of scale economies no doubt affected both exports and imports.

Explaining Trade
Nearly everyone agrees that international trade occurs because of mutual gains perceived by traders in each country. Determining which products will be produced and traded and the volume of this trade are not as well understood. Industries that produced products for export and the products that were imported depend on comparative advantage, which, according to the Heckscher-Ohlin version of the factor proportions theory model of international trade, was determined by relative factor abundance. That is, trade is presumed to be interindustry in nature, with exports from industries that use more intensively the relatively abundant factor(s), whereas industries that are intensive in the relatively scarce factor(s) comprise the body of imported products.

An alternative theory of international trade, the Linder hypothesis, (Linder, 1961) argues that countries export products that are similar to those consumed in the home economy. That is, in order to minimize the risk associated with producing new products, firms are inclined to produce goods for export that are also expected to appeal to the home market. Thus, trade is hypothesized to occur among countries that have similar tastes and incomes, and this trade is in products that are similar but differentiated. The Linder hypothesis implies that trade is primarily intraindustry rather than interindustry and is determined more by income and taste similarities than by relative factor endowments.

This paper analyzes bilateral trade in 31 products between the United States and seven trading partners during the period 1870 to 1910. I attempt to determine whether the factor proportions theory or the Linder Hypothesis more adequately explains bilateral trade in these 31 products.

A factor proportions model is estimated using factor input data for these 31 industries and a gravity model is estimated as a representation of the Linder explanation of trade. The difficulties and pitfalls associated with econometric expressions of each of these theories are discussed in Section II, the data sources are discussed in Section III, empirical results are presented in Section IV followed by concluding comments in Section V.

The proximate causes of international trade during the period 1870 to 1910 appear to have been the relative use of capital, various types of labor, and materials per dollar of output. Controlling for country fixed effects, the evidence for these 31 industries does not support either the gravity equation or the Linder explanation for trade, except possibly for imports. However, the factor proportions model indicates that net exports were greater in industries where more capital was employed per dollar of output. Moreover, for 1900-1910, where data are available for salaried employees, industries with larger numbers of salaried employees per dollar of output (greater human capital) were observed to have larger net exports.(cf Crafts and Thomas, 1986)

To the extent that materials inputs are a proxy for natural resource inputs, the results in this paper are consistent with Gavin Wright's results for these years, i.e., Wright (1990: 659) found a negative but insignificant relationship between his natural resource input coefficient and net exports of manufactures for 1879 and 1899. Evidence indicates that imports were positively related to the use of materials per dollar of output. This is consistent with the shift noted above in the proportion of total imports comprised of crude materials and semi-manufactured good. Female labor is negatively related to net exports as is child labor, with the exception of the 1900-1910 estimates in which salaried workers are identified separately. In the latter case, both child labor and salaried labor are positively related to net exports.

Although it is generally assumed that intraindustry trade was limited in this period, Grubel-Lloyd indexes indicate significant intra-industry trade in these 31 industries. Intra-industry trade during this period occurred primarily in industries where larger amounts of labor and materials were used per dollar of output. Cain and Paterson (1986) found evidence of scale economies for many of these 31 industries which is consistent with intra-industry trade arguments based on product differentiation and specialization. (Helpman and Krugman,1985) Whether or not one believes intra-industry trade was important during the period 1870-1910, the factor proportions theory has been shown to provide a better explanation than the gravity model for international trade in these 31 manufacturing industries. References
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