Problems with trade: mercantilism, free trade and protection

Britain's large empire helped her to become wealthier through trade. Britain regarded her empire as her own property, and tried to keep foreign traders out. During the eighteenth century, trade was controlled by "Navigation Acts", laws which said that:

  - all trade to and from British colonies had to be carried in British ships;

  - British colonies were prevented from sending goods such as sugar and cotton 

    to countries outside the Empire;

  - British colonies had to import all manufactured goods via Britain.

This system of controlling trade was called mercantilism. Most trading countries had similar mercantilist policies to Britain. This made it harder for Britain to export, even when she was able to produce manufactured goods, like cotton cloth and steam engines, more cheaply than other countries. Adam Smith, a Scottish economist, called for free trade. He argued that it was natural for each country to export goods it could produce most cheaply, and to import goods which could be produced more cheaply elsewhere.

In the early nineteenth century, most countries, including Britain, taxed imports and exports. Many British manufacturers and merchants believed that these taxes restricted their ability to sell more goods abroad: other countries could not produce manufactured goods as cheaply as Britain. By 1850, almost all restrictions on foreign trade had been abandoned, and British goods could be exported freely. Although Britain still imported foreign goods, these tended to be raw materials (which were used to make manufactured articles which could be sold abroad at a profit), or foodstuffs which could not be grown in Britain.

By the 1870s, however, Germany and the United States were beginning to catch up with British industry, particularly in steel production, engineering and chemicals. In addition, cheap food was now available from abroad - wheat from North America, lamb from New Zealand and Australia, and beef from Argentina. By 1900, Britain was importing more goods than she was exporting, and her share of world trade was falling.

Some politicians demanded an end to free trade, and a return to 'protectionist' policies - placing high tariffs (taxes) on imported goods, to protect British industry from foreign competition.

Jon Cresswell, Peter Laurence: Expansion, trade and industry; Oxford University Press, 1993 (2000), page 28 f.