New research by Pierre Cotterlaz and Etienne Fize, to be presented at the annual congress of the European Economic Association in August 2020, highlights the role of information in shaping international trade flows.
They study the historical context of the First Globalisation (1850-1914) and show that the creation of international news agencies and telegraphic lines strongly contributed to the rise of trade flows observed during this period. When a pair of countries became part of the coverage area of a news agency and of the global telegraphic network, trade between these two countries increased on average by as much as 70%.
In the second half of the 19th century, unprecedented and large-scale improvements to the international transmission of information occurred. First, the expansion of the international telegraph network made coordination easier and faster since it became less costly for buyers and sellers to communicate.
Second, global news agencies appeared, collecting, gathering and selling information that could then be accessed by anyone at a low cost. The information available to potential traders became more abundant, was delivered faster and at a cheaper price between countries covered by a news agency and a telegraph.
Using trade flows for each pair of countries between 1850 and 1913, and the precise timing of coverage of each country by the network formed by the international news agencies and telegraphic lines, the study finds that:
- The connection of two countries by a telegraphic line (directly or indirectly) allowed for better and faster coordination between traders, resulting in a 40% increase in trade.
- Furthermore, the improved access to public information, made possible when a pair of countries become both covered by a news agency, increased trade flows by an additional 30%.
- The effects on trade were immediate, but increasing over time and long lasting.
The results are particularly strong for pairs of country ‘indirectly’ connected, i.e when the telegraphic line is not direct and when none of the countries is a country of origin of one of the main news agencies. These pairs of countries are likely to be the ones for which less information was transmitted prior to the connection.
How does information technology result in higher trade flows?
The inclusion into the news agency and telegraph network made information flow faster. Indeed, the average delay between the date of an event and its publication in other countries went from very large (sometimes months) to a couple of days.
It also increased the quantity of information available to all. For example, the study uses a corpus of texts from French newspapers to document an increase in the presence of foreign countries in the articles once these countries are connected to France through the telegraph and a news agency.
Trade flows also became more volatile after two countries were connected, suggesting a better ability to adapt to changes in foreign demand thanks to the better information.
ENDS
Contact:
Etienne Fize, economist at the French Council of Economic Analysis
Email: etienne.fize@gmail.com
Web page: https://scholar.google.com/citations?user=56i1ongAAAAJ&hl=fr