Saturday, April 20, 2019

"Disruptions to trade during the American Civil War and the reigns of Napoleon and Louis XIV had long-term consequences for financial markets"

From Winton:

In September 2018, speaking at Alibaba’s annual investor conference in Hangzhou, the Chinese tech giant’s founder Jack Ma warned that the trade war between the USA and China could last as long as 20 years.
There are historical precedents for such a prolonged and significant shift in international trade. The American Civil War permanently reshaped the international trade in cotton, while France’s access to sugar imports was severely restricted during the Napoleonic Wars. These episodes, as well as innovations in public finance during the Nine Years’ War, show us how seemingly temporary market perturbations can prefigure important long-term changes.
‘King Cotton’ and the American Civil War (1861-1865) One of the most significant fractures in the trade of a single commodity between nations was the sharp decline in the export of cotton from America to Britain during the American Civil War. At the start of the internecine conflict, when Confederate forces opened fire on Fort Sumter, South Carolina in April 1861, the textile industry was central to the British economy: exports of cotton cloth made up 38% of British trade revenue in 1860. And the vast majority of the raw cotton used to manufacture textiles in British cotton mills came from the American south – around 80% throughout the 1850s.
Jefferson Davis and other Confederate leaders were aware of this dependency and tried to exploit it by pursuing a policy known as ”King Cotton Diplomacy”. The premise was to try to secure British diplomatic support for the Confederacy by stopping all cotton exports from the Southern plantations to Britain. As can be seen in the chart below, British imports of cotton from America were non-existent between 1862 and 1865.

This example of attempted trade manipulation for political purposes failed. Rather than being cowed into supporting the Confederacy, British textile manufacturers found alternative suppliers of cotton – in India, Brazil, Egypt and northern Australia. Egypt’s cotton exports, for example, increased from 27,000 tons in 1861 to 90,000 in 1865. In the end, the Confederacy only ended up harming itself as it diminished the main source of its own wealth. Even as Confederate leaders came to realise the flaws in this strategy, the south was unable to resume exporting cotton in any significant quantity. By then, the union had established a robust sea blockade, which restricted the Confederacy’s ability to export goods....MORE
Previously from Winton:

Winton on the Railway Mania
The panic of 1825, the Sovereign Debt of a Made Up Country and Vampire Bats
Winton on Lesser Known Speculative Manias