The effects of market integration: trade and welfare during the first globalization, 1815-1913

We investigate the effect of the decline in trade costs on trade, terms of trade and welfare of Europe (the United Kingdom and the Netherlands) and three large exporters (India, Indonesia and the United States) during the first globalization using a ‘bottom-up’ approach. We measure total route and product specific trade costs for a representative sample of commodities with price gaps predicted by observed trade costs. We use a simple microeconomic model and we buttress our findings with additional econometric testing. We find that price convergence accounted for almost all the improvement in terms of trade of producing countries and increased significantly welfare in both producing and especially consuming countries, while its positive effect on bilateral trade was often swamped by other factors. The findings caution against the substation of proxies to actual measures of trade costs.