Imperial Preference as Tariff Policy

For much of the 19th and 20th centuries, trade was liberalized so that goods could be imported without tariffs being imposed in progressively more and more cases. However, there have been waves of protectionism, the Smoot-Hawley Tariff of 1930 introduced by the United States being one of the most notable of the 20th century. Even the United Kingdom stepped away from its rigorously free-trade oriented policy to adopt higher tariffs on goods from most countries. However, tariffs were kept low or nonexistent on goods coming from other parts of the British Empire, under a policy of ‘Imperial Preference’. While the empire may have been coherent and long-lived in other respects, as a trade bloc it was unnatural and short-lived.

Free Trade Policy

By the end of the 19th century, Britain had been pursuing a free trade policy for decades, dating to at least the 1846 repeal of the Corn Laws which had imposed tariffs on imported grain. The following century would see this position challenged politically, at least partly because of the rise of new industrial powers, most notably the Unites States and Germany. Tariffs were raised in 1919, but primarily for revenue raising purposes in the immediate post-First World War period when Britain was grappling with its high debt burden, and not to protect domestic production. As late as 1931, the bulk of U.K. imports entered the country without any tariff being imposed at all.

Imperial Preference

That said, starting from the very late 19th century, more in Britain wanted to prioritize trade within the British Empire, a policy known as Imperial Preference. It was championed by Joseph Chamberlain, the political entrepreneur who had founded the Liberal Unionist Party and father of later British politicians Neville and Austen Chamberlain.

It may seem a straightforward position; indeed, one would be forgiven for presuming that the British Empire already constituted a free trade area. But, it did not. Constituent parts of the empire could, and did, impose tariffs on each other and sometimes imposed lower tariffs on products from foreign countries than they did on products made within the empire. Further, fitting Imperial Preference into Britain’s historical trade policy with any semblance of continuity was impossible.

Put simply, lowering customs duties on goods imported from other parts of the British Empire sufficient to meaningfully prioritize that trade was impractical since Britain had low tariffs as a general policy; thus, there was no room to create a meaningfully favorable policy for the likes of Canada or South Africa. What could be more favorable than the 0% tariffs already imposed on most imports from most places? So, while superficially welcoming of trade, Imperial Preference was essentially a protectionist policy. It favored raising tariffs on goods from other countries, like France, in order to create a favored status for countries within the empire.

Ottawa Agreements

Legislation in 1931 allowed the President of the Board of Trade and the Minister of Agriculture and Fisheries to impose tariffs, with subsequent government and parliamentary approval, provided products coming from within the British Empire were exempt. More room to grant a special status to intra-empire trade came the following year. The Import Duties Act of 1932 increased tariffs on many imports to 10% and marked a clear departure from Britain’s former trade policy. Under this legislation, products from within the empire were exempt temporarily.

To discuss these tariffs and trade more generally, the Imperial Economic Conference was convened in July 1932. The result was the Ottawa Agreements. Under these trade agreements, Britain decisively adopted Imperial Preference. It did so in large part in search of favored access to markets for its manufactured goods during a global economic downturn. The dominions within its empire could fashion such a market.

The other dominions had autonomy on trade but several others besides Britain adopted Imperial Preference as well, including Canada, New Zealand, South Africa, and Australia. Indeed, all of these countries preceded Britain itself in adopting the policy; Australia was the last of these to adopt Imperial Preference, all the way back in 1907.

In many ways, the Ottawa Agreements were merely Britain’s adoption of an orientation already maintained by its dominions; the result was a tariff advantage of between 5% and 15% for trade between parts of the British Empire. However, it shows how strongly held was Britain’s prior orientation that while Imperial Preference may have been supported by imperialists in Britain, it was the metropole itself that was most hesitant to adopt the policy. It only accepted its role at the center of a new trade bloc more than two decades after its own dominions backed the idea.

For Britain, the effect of the Ottawa Agreements on one side of its trade balance was substantial. The share of Britain’s imports from other British dominions rose from approximately 29% in 1930 to 40% in 1938. This came at the expense of trade with countries as close as Denmark to as far away, but historically significant, as Argentina. That said, this displacement of non-Empire trade was largely confined to foods. With respect to other products, the rest of the British Empire was either not a major producer or was so large a source of the product in question that they had already furnished Britain’s needs almost exclusively without any preferential tariff being needed.

As for the other side of the trade balance, British exports were not stimulated much overall. This is rather interesting considering, for Britain, better market access for its products was part of the goal of the Ottawa Agreements. However, the share of its exports bound to the other parts of the empire rose only from 43.5% to 49.9% between 1930 and 1938. Looking closely also makes it difficult to say there was much decisive change here; the proportion of trade bound for some dominions like India and the Irish Free State was actually decreasing and there was almost no change in trade with Canada. Further, the proportion of trade with the empire in some product categories was falling or more-or-less flat. So, for the U.K. at least, the effect of Imperial Preference on exports, even within the empire, was rather underwhelming.

Canada

Unlike Britain, Canada had already pursued a protectionist policy since 1878. It was also the first country to adopt Imperial Preference in 1897. At first, the preferential treatment amounted to only a one-eighth reduction in tariffs but the difference increased to one-third in 1900. It was also extended only to Britain and its possessions in the Americas at first. However, in this respect too the policy was extended; Imperial Preference by Canada eventually included more-or-less the entire empire following the conclusion of a trade treaty with Australia in 1931.

Before the Ottawa Agreements, a Canadian tariff bill introduced in 1930 and the American’s Smoot-Hawley Tariff introduced that same year had already had the effect of furthering Imperial Preference. These measures meant that Canadian trade with the United States was disfavored and that between Canada and Britain became, at least comparatively, more favorable. By the Ottawa Agreements, Canada cemented the new trade orientation by agreeing to eliminate an across-the-board 3% tariff surcharge that had existed and tariffs were eliminated altogether for some U.K. products.

At least partially as a result of Imperial Preference, Canadian imports arriving from Britain rose from 16.1% of Canadian imports in 1930 to 24.4% in 1933. U.K. exports to Canada increased after the Ottawa Agreement but Canadian imports from the rest of the British Empire actually decreased.

Also, imports from the U.S. may have been disfavored but the impact on that trade was not large. In part, this seems to be because the tariff advantage given to the U.K. was greatest in the import categories where Canada was most dependent on the United States, meaning the policy may have increased prices without really shifting dependence away from the United States. As it happens, the profile of American and British industry was different enough and the difference in distances involved great enough that there were fewer areas where Canadian firms could substitute an American product for a British product, at an attractive price, than one might think.

In the end, the U.S. abandoned its high-tariff policy after Franklin D. Roosevelt was elected President and a new U.S.-Canada trade treaty was signed in 1935. Thereafter, trade with Britain was still favored but the gap in tariffs between U.K. and U.S. imports to Canada was substantially reduced. Consequently, the share of Canadian imports arriving from Britain fell from the 24.4% proportion of 1933 to 17.6% by 1938, more or less the same level from before the Ottawa Agreements.

So, while Canada was in some ways the first mover with respect to Imperial Preference, it was also quick to effectively abandon the policy when America’s orientation changed in favor of lower tariffs once again. It may also have been one of the largest beneficiaries of Imperial Preference. Canada benefited from the favored status of its own goods in Britain, with the share of its exports bound for the U.K. rising from 26.7% in 1930 to over 40% by the middle years of the decade and this strong demand from Britain continued to the end of the 1930s. As just one example, Canada’s share of U.K. bacon and ham imports rose from 2% to 20% between 1930 and 1938.

As for what Britain got out of Imperial Preference, at least as far as its trade with Canada was concerned, its gains with respect to exports were more modest and temporary than those enjoyed by Canada. Another consideration making the effects of Imperial Preference less clear is that in the years when Canadian trade with Britain was increased at the slight expense of the United States, sterling was devalued more than two years before a subsequent devaluation of the U.S. dollar. Devaluations of a currency make a country’s exports more competitive. So, it’s logical to assume that even absent Imperial Preference, Britain would have seen an increase in its exports to Canada at the expense of the United States anyway, at least for those short years until America’s own devaluation and subsequent trade treaty with Canada.

New Zealand

The less-than-transformational effect of Imperial Preference is exhibited in another country too. New Zealand was the second to adopt Imperial Preference with the Preferential and Reciprocal Trade Act of 1903. Unlike Canada’s policy, this one applied to the whole of the British Empire from the start. Like Britain nearly thirty years later, this policy was imposed not by a reduction of tariffs on products from the empire but as an increase in tariffs on forty-four products from other countries. Like Britain’s Import Duties Act of 1932, this effectively made imports from within the empire more competitive by comparison. Prior to imposing the new tariffs, trade with the United States and Continental Europe had grown from less than 10% in the early 1890s to over 16% of New Zealand’s trade by the early 1900s.

As in Canada, the degree of Imperial Preference increased with the Ottawa Agreements. However, by this point the share of New Zealand exports bound for Britain was already over 80% and the proportion of its imports coming from Britain was close to 50% so there was little room for the composition of trade to shift further towards Britain. In this way, it was rather unlike Canada which conducted a very large fraction of its trade with a country outside the empire. New Zealand by contrast was already extremely closely tied to the U.K. which imported a lot of frozen meat, particularly mutton, from the distant dominion.

In any case, because New Zealand’s implementation of Imperial Preference applied only to certain products, it is possible to estimate the effect of the policy by comparing the evolution of trade in these products to others. Research (by Brian Varian, cited below) suggests the program did not meaningfully shift trade in the products subject to Imperial Preference to sources within the British Empire. Thus, for New Zealand at least, arguing about whether the change in economic ties was worth the higher tariffs on products sourced from outside the empire is made less important by the fact the policy was hardly efficacious to begin with. To an even greater extent than Canada, there was simply little room to alter the composition of trade.

Lesson

Imperial Preference was not straightforward to implement for a free-trade committed country like the United Kingdom. Adopting the policy about three decades after the likes of Canada and New Zealand, British hesitation highlights the friction in abandoning a trade policy. The move meant stepping away from traditional trading relationships, often with neighboring countries that had satisfied Britain’s needs before and had actually shared a more similar trade policy to Britain than had its peers within the empire. Any consequential change in policy like this involves re-orienting an economy, affecting prices, and to some extent involves picking winners and losers.

For Britain and its dominions alike, the policy amounted to the creation of an economic bloc that was unnatural for some, such as Canada which was bound to trade more with the U.S. than the U.K. and perhaps even the U.K. itself which was economically closer to Europe than its overseas dominions. In any case, as for the Ottawa Agreements, it’s difficult to assess its impact on trade because the world was in the middle of the Great Depression; trade was unlikely to be strong under any policy. Still, protectionist changes in tariff policy have been blamed, at least partially, for the Depression so Imperial Preference can accordingly be assigned at least part of the blame for soft commercial activity.

More from the Tontine Coffee-House

Read about Montagu Norman, who served as Governor of the Bank of England in the long period from 1920 to 1944, and how during that period the Bank of England got involved in reorganizing Britain’s textile industry. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.