Trade was a source of conflict as far back as conflict is recorded. The system of Imperial Preference was designed to encourage trade within the British Empire by lowering tariff rates between members, while maintaining discriminatory tariff rates against outsiders. Imperial Preference was popular in England in the 1900s and implemented in the Ottawa Agreement of 1932 as an attempt to beat the Great Depression.
This practice of colonial preference duties dated as far back as the "Old Subsidy" of 1660, which fixed such low duties on certain imported colonial products as to give them a virtual monopoly of the English market. England and other countries applied import duties on sugar arriving from their colonies almost from the time of their establishment. The colonies were supposed to be profitable to the government of the mother country. The rate of duty in England prior to 1651 was 5 percent ad valorem. Specific duties of so much per pound, the rate varying with the type or purity of the sugar, were substituted for the ad valorem duties that year. The law also provided that foreign sugar should pay double the rate applicable to that from English colonies. This seems to have been the beginning of imperial preference, at least for sugar.
The preference given to these so-called "enumerated articles" was from time to time extended to other colonial commodities, so that by 1840 there were more than eighty articles of commerce thus protected. In the Peel tariff of 1842, the principle of colonial preference was even further extended. The tariff schedule of that year contained some 825 items, and upon no less than 375 of them differential duties were levied in favor of colonial products.
In 1844, however, there was a distinct relaxation of the preferential system. By the customs act of that year the duties on foreign wool were repealed and the preference hitherto allowed colonial coffee was greatly reduced.10 But it was not until 1846 that the preferential system received the severe shock that foretold its destruction. By the act of 1828, a duty of one shilling per quarter was imposed on imports of foreign cereals when the price stood at 73 shillings or above, and this duty rose as the price of grain fell, thus reaching 345. 8d. when the price sank to 525.
Colonial grain, however, was given a special preference under the act of 1828, a duty of 55. per quarter being imposed when the price fell below 675., and only the purely nominal charge of 6d. per quarter when the price rose above 675. Thus when the price of grain in England stood at 575., Canadian grain could freely enter at but 55., while American or foreign grain was really excluded by the excessive duty of 345. 8d."
Peel's corn law of 1842 revised the import duties on imported grain so that thereafter colonial wheat was admitted at uniform duties. From the moment of the repeal of the Corn Laws in 1846, Canada made systematic efforts to induce the Government of the United States to enter into some sort of reciprocal arrangement whereby the raw materials of each country would be admitted within the boundaries of the other free of duty. The economic organization of Canada at this time made the question of a reciprocal arrangement with the United States doubly important. The repeal of colonial preference duties would deal a severe blow to Canadian export trade, and particularly to that export trade that had sprung up since the Parliamentary regulation of 1843, which admitted all wheat cleared from Canadian ports, whether grown in Canada or in the United States, at a fixed duty of one shilling a quarter.
In the autumn of 1845 it became only too evident that the destruction of the potato crop in Ireland meant impending famine. Peel, a deeply religious man, interpreted the Irish misfortune to be an expression of divine displeasure against the Com Laws, and this fact, added to his growing conviction in favor of their repeal, meant the overthrow of the whole protective system.18 On January 27, 1846, Peel began his notable fight for the repeal of the Corn Laws, and on June 26th of that year a bill embodying his proposal became law.19 Colonial grain was to receive a preference until February, 1849, after which date all importations of oats, barley, and wheat, wherever grown, were to pay only a nominal duty of 1s. per quarter.
England had imposed an import duty on sugar from 1651 to 1846. Starting in 1846, with the enactment of the corn laws, duties on sugar were generally reduced, the reductions being greater on sugar from foreign countries so that the preference to British colonies was reduced. The sugar industry declined in the 19th cent., partly because of the abolition of slavery in 1833 (effective 1838) and partly because of the elimination in 1846 of the imperial preference tariff for colonial products entering the British market. Sugar became free of duty in England in 1874 and remained free until 1901.
Germany was one of the few great powers bucking the trend towards protectionism in the 1890s. Since German industrial products could match those of any state, Chancellor Caprivi set policies to expand German trade in Europe and overseas. Other great powers indicated their opposition to any German penetration pacifique. Severe tariffs from the United States (McKinley tariff, 1890) and France (Meline tariff, 1892) were the response. Even Britain, the bastion of free trade, indicated after 1895 that its fear of rising German commercial strength. In 1896, the British had raided the Transvaal region of South Africa, jeopardizing German commercial interests. In mid-1897, Canada placed a tariff on non-British goods, contrary to the 1865 Most Favored Nation treaty between Germany and the British empire. The British upheld the Canadian decision, and renounced the 1865 treaty in July 1897. Soon thereafter Joseph Chamberlain opened talks with British colonies on the possible formation a general imperial preference system.
The policy of closer alliance within the Empire was pursued along both the political and economic path. A colonial conference had been held in 1887 on the occasion of Queen Victoria's Jubilee ; another was held at Ottawa in 1894. Chamberlain took advantage of the presence of the colonial representatives at the Diamond Jubilee of 1897 to hold another conference which discussed economic matters affecting the Empire and questions of defences and preferences. Vet another was held in 1902 at the coronation of King Edwar'l wiiiofr coincided with the end of the Boer War.
The major challenges to free trade in Britain were from Conservative campaigns for fair trade and for imperial preference. Beginning in 1903, Prime Minister Arthur Balfour called for using retaliatory tariffs to knock down foreign trade barriers. Around the same time, his former Colonial Secretary Joseph Chamberlain launched a public campaign for an imperial-preference scheme. Chamberlain's main interest in imperial preference was to promote imperial integration and thereby keep Britain abreast of the more populous great powers, rather than to reduce unequal trading gains. German leaders had good reason to believe that Britain would be forced to move to imperial preference to protect its empire from the German economic challenge and to lend support to its entente partners.
But these proposals only led the Conservative Party to a landslide electoral defeat in January 1906 and again in 1910. In 1903, Chamberlain had left the Government and the Liberal party came into power in 1906. Although the parties had changed, the policy continued and another colonial conference was held in 1907. Hitherto the conferences had been between the Colonial Secretary and the Premiers, now it was attended by the Prime Minister and the Cabinet, and changed its name to Imperial Conference and at that meeting the conferences were made permanent institutions to be held every four years. The next was accordingly held in 1911.
Each conference resulted in some arrangement for closer economic union, either along the lines of preferences given by the colonies as an offset for defence, the main burden of which fell on the mother country ; or by a closer approximation to a common commercial law, a common patent law, a common shipping policy and a common emigration policy. Not merely were these meetings held every four years but a permanent secretariat was set up to preserve continuity of policy and to diffuse information in the interval. The United Kingdom thus became the clearing house of imperial policy.
The outbreak of war in 1914 postponed the conference due in 1915, but an Imperial War Cabinet was summoned in 1917 which was followed by an Imperial War Conference. To this representatives from India were summoned. It was again affirmed that " each part of the Empire having due regard to the interests of our allies shall give specially favourable treatment and facilities to the produce and manufactures of other parts of the Empire." Thus, by the end of the war, the declared policy of the Premiers in Council and the representatives of India and the United Kingdom was in favour of an Empire serving itself first in the matter of raw material and developing preferences with all its parts.
The inability of the European powers - the established ones - to accommodate the enormously increased economic importance of Germany had, in considerable measure, led to the First World War.
In the Smoot-Hawley Tariff Act of 1930, the US raised tariffs to an average of 60 percent in the United States. At that time, 1,028 economists pleaded with Herbert Hoover not to sign that bill. He signed it. Imports dropped by two-thirds; exports dropped by two-thirds. The Japanese embarked on plans that eventually led to to the Greater East Asian Prosperity Sphere. And in 1933, with unemployment at 25 percent, Adolf Hitler became Chancellor of Germany in a free election. Germany before Hitler was caught up in a world economic crisis that was essentially the crisis of a liberal economic system based on the principle of free international trade.
By 1931 the British Cabinet was considering import tariffs, a policy supported by manufacturing indusrty. The enactment of the Import Duties Act in February 1932 inaugurated protectionism in Britain, bringing to end a long period of commitment to free trade. The Act placed a 10 per cent tariff on manufactured imports, while foods, raw materials and empire manufactures were exempted. In 1932 the Import Duties Advisory Committee doubled the basic tariff to twenty per cent. Thereafter, import duties were increased piecemeal, and in the case of steel, reached 50 per cent by 1935.
During the early 1930s, Britain looked towards fostering trade with its Empire to offset effects of trade barriers and shrinking world trade. While empire self-sufficiency was not possible given that a high percentage of colonial exports went to countries outside the Empire, an Imperial Economic Conference met in Ottawa between July and August 1932 to improve the situation. The British hoped to persuade the dominions to lower tariffs and enable free trade within the Empire. The circumstances, however, limited the extent to which this could be achieved. The dominions decided to keep their import tariffs while making preferential concessions to British imports in exchange for similar concessions in British markets. For political reasons, the British negotiators were determined to maintain a degree of protection for farmers, something that annoyed dominion representatives. The system of imperial preference therefore did not have the coherence of the old free trade system.
During World War II, Roosevelt openly and persistently demanded that England give up the principle of imperial preference, which had been established by the British Government during the Great Depression. The Atlantic Charter was a joint declaration released by U.S. President Franklin D. Roosevelt and British Prime Minister Winston Churchill on August 14, 1941 following a meeting of the two heads of state in Newfoundland. Roosevelt wished to arrange the terms by which Great Britain would repay the United States for its Lend Lease assistance. Roosevelt wanted the British to pay compensation by dismantling their system of Imperial Preference. Churchill worried that the abandonment of Imperial Preference would anger the protectionist wing of his Conservative Party. On 7 February 1942, Churchill angrily replied: "The great majority of the Cabinet felt that if we bartered the principle of imperial preference for the sake of lease-lend we should have accepted an intervention in the domestic affairs of the British Empire."
The end of World War II brought forth a shift in the global balance of power. After two World Wars, Europe was economically and militarily devastated. The colonial empires of France and Great Britain were crumbling from imperial overstretch. The United States emerged as the dominant power, determined to develop and nurture an international system conducive to liberalism and the dismantlement of imperial preference, which finally happened after the War. Britain has had to accept whatever help the Americans were willing to offer, for exampic, trading destroyers for bases early in the War, Imperial Preference for financial aid after the War. British secured a loan, much hedged around with restrictive terms. These included insistence that pounds sterling should be made convertible within a year and that imperial preference end following the ratification of the Bretton Woods agreement.
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