A Splendid Exchange | How Trade Shaped The World by William J. Bernstein

I. Brief Summary

William Bernstein’s shares a collection of pivotal historical events which illustrates the profound impact of trade on human enterprise, shaping societies, economies, and cultures. Bernstein explores the interplay between various entities in global trade development, including religion, royal communities, merchants, governments, and militaries. The book explores the conflict between free trade, characterized by low tariffs, and protectionism, which advocates for high tariffs. Bernstein’s exposition of global commerce is both insightful and informative, providing a valuable understanding of the complexities and dynamics of international trade.

II. Big Ideas

• What is more important—free trade or protectionism?
  • Free trade (low tariffs) offers cheaper goods but displaces workers due to foreign competition. The government can provide welfare and job training, but this is rarely implemented. Whereas protectionism (high tariffs) shields domestic industries from foreign competition, allowing them to grow and compete effectively. However, it preserves inefficient companies with legacy technologies putting a nation at long-term disadvantages.
  • History shows us that free trade has offered more rewards than isolationism and protectionism have, but it has also led to widespread inequality, and for this reason must be refined and improved.
  • Bernstein found a positive correlation between high tariffs and economic growth in the 19th century. Despite this, he favored free trade, not for its economic miracle benefits (which he deemed overstated), but to foster bonds between potential enemies.
• Bernstein emphasizes the dramatic impact of trade on empires.
  • “Choke points” in shipping trade, still relevant today in the Persian Gulf, played a crucial role. The defeat of Athens by Sparta in 404 B.C. exemplifies this. Spartan control of the Hellespont, now known as the Dardanelles, blocked grain shipments to Athens, leading to its starvation.
  • The Roman Empire’s Pax Romana fostered long-range trade. After its decline, desert Arabs created Pax Islamica, which promoted world trade. Bernstein argues that Islam’s rapid expansion from Spain to India was driven by trade. Muslim traders dominated commerce in the Red Sea, Persian Gulf, and Indian Ocean for centuries.
  • That domination evoked Portuguese and Spanish responses. Looking for a route to the riches of India and the Spice Islands that wasn't controlled by Muslim traders, da Gama circled Africa in the late 15th century, and his voyage marked the beginning of Portuguese control of Spice Island trade. Bernstein's discussion makes clear the brutality with which Portugal built and maintained its grip.
  • With the same goal but a different direction, the Spanish circled to the west, leading eventually to the settlement of the Caribbean and the Americas. Bernstein's account of the development of Barbados and other Caribbean islands is a gruesome tale of slave plantations, and his discussion of the trading triangle between the New World, England and Africa is both fascinating and horrifying. Over 9.5 million African slaves arrived in the New World. The majority were sent to Brazil and the Caribbean; 5 percent landed in the United States and Canada.
  • The Dutch, renowned for their advanced political, legal, and financial institutions, constructed the inaugural world trading system. The privately owned Dutch East India Company pioneered novel strategies for financing trade, particularly offering private investors the chance to diversify their risk. Trade ventures were readily available to risk-averse individuals who could acquire a fraction of a share in a diverse fleet of ships. This arrangement ensured that if a single vessel encountered difficulties, the profits generated by the remaining vessels would provide adequate compensation.
  • Not all viewed trade favorably. As cheap exports, particularly cotton, flooded into England, antitrade sentiment surged. In response, a British lawyer and essayist, Henry Martyn, championed free trade in a pamphlet titled “Considerations upon the East India Trade” (published in 1701, a whopping 75 years before Adam Smith). While Adam Smith is often credited as the original advocate of free trade, Henry Martyn made a compelling case long before Smith’s birth. His argument remains relevant and poetic over 300 years later:
    • Why are we surrounded by the Sea? Surely that our Wants at home might be supply'd by our navigation into other Countries, the least and the easiest Labour. By this we taste the spices of Arabia, yet we never feel the scorching Sun which brings them forth; we shine in silks which our Hands have never wrought; we drink of Vinyards which we never planted; the Treasures of those Mines are ours, in which we have never digg'd; we only plough the Deep and reap the Harvest of every Country in the World.
• The start date of civilization was the Fertile Crescent in Mesopotamia, where early agriculture and tool-making materials emerged in 3000 BC.
  • Obsidian, a black volcanic rock, was one of the earliest traded goods due to its ease of turning into razor-sharp weapons or tools in prehistoric times.
  • The Mesopotamian nations of Sumeria, Assyria, and Babylonia quickly recognized trade’s benefits and traded surplus goods for metals from Oman, marble from Persia, and lumber from Lebanon. By 3000 BC, the Persian Gulf became a prominent trade center.
• As civilization spread westward to Egypt and Greece, new trade routes emerged in the Red Sea and Mediterranean. Greece traded wine and oils for grains, like wheat from Egypt.
• The first traders faced the most fundamental problem—how to get stuff from one location to another.
  • Bernstein describes evidence of early “boats”: large floating barges made from animal skins wrapped around a wood or antler frame, guided downriver.
  • These barges carried goods and donkeys for the return journey, carrying home “imports” and valuable animal skins.
• The Pleistocene, also known as the Ice Age, was a period of millions of years when massive glaciers formed. It ended around 10,000 years ago, allowing humans to migrate across the ice connecting east Siberia to the American continent.
• Camels revolutionized trade in Asia and Muslim Arabs opened trade with China.
  • Camels were primarily kept for their milk before 1500 BC, while donkeys were the preferred pack animals. However, nomadic tribes began using camels for transportation, realizing their superior cargo-carrying capacity due to their large, padded hooves. Camels could also carry twice as much weight as donkeys and move twice as fast across the desert terrain.
  • Shallow waters, pirates and adverse winds made the Red Sea a poor option for transporting incense from modern day Yemen to Egypt and the Mediterranean. So traders turned to the land and used camels.
• Islam provided the glue that held together an advanced system of great commercial ports.
  • Islam was great at uniting far-flung peoples in one system with efficient trade policies but limited in its interest in considering and borrowing from others.
    • “Islam’s backbone is a system of law covering all areas of conduct, including commerce … especially attractive to those engaged in any organized economic activity that flourished wherever rules were plainly visible and vigorously enforced by disinterested parties—again, as in more secular English common law.”
  • The Prophet Muhammad, born in 571 AD, was raised by his prosperous uncle Abu Talib. As he grew, Muhammad helped manage his uncle’s leather, raisin, textile, and frankincense trade.
  • As trade progressed into the medieval era, China and the Muslim world began to increase their business with one another. Chinese sources suggest that Muslim traders arrived in China around 620 AD, carrying goods like copper, ivory, incense, and turtle shells. Upon their return to Arabia, they brought gold, pearls, silk, and brocade.
  • Romans believed silk from overland caravans and sea arrived from different places, though it all came from China.
• Spices became hugely popular, while slavery and disease were exacerbated by trade.
  • The spice market sold cinnamon, nutmeg, mace, and cloves. Venetian galleys transported these spices between Alexandria and Italy.
  • Bay leaves, thyme, rosemary, marjoram, and oregano originated in Europe.
  • Java became a major source of coffee.
• Dark Ages in Europe
  • Before the Common Era, trade was neither rapid enough nor direct enough to allow the widely separated ‘disease pools’ of Asia, Europe, and Africa to interact; plague was isolated by time and distance.
  • The Black Death helped create the Dark Ages in Europe, which had little effect on Arabs and early Muslims and a reason they were effective in their invasions and cut off the Silk Road from Europe: “Plague is a disease of trade.”
  • The Black Death hit Italy in 1347.
  • It particularly ravaged the port cities, losing half or more of the population.
  • The same should have happened in the dense Muslim trade cities. It hit Tunis but the tent-dwelling Bedouins were little affected.
  • Some 14 epidemics happened between 1441-1541.
  • The plague disappeared from England after the Great Fire of London in 1666, suggesting the importance of brink building which replaced the wood did not harbor lots of rats.
  • Modern sanitation and medicine reduced the threat.
• Spanish and Portuguese explorers greatly expanded the known world and its trade routes.
  • The desire for long-range trade improved ship design and nautical skills. The brutal Silk Road overland route from China to the Mediterranean was difficult. Boating was no luxury, but shipping times were reduced by learning to use seasonal monsoon winds across the Arabian Sea.
  • The allure of trade rewards in the 15th and 16th centuries drove explorers to remarkable feats or perilous deaths. Bernstein recounts the 3 major journeys:
    • Vasco da Gama’s 28,000-mile round-trip journey from Europe to India
    • Christopher Columbus’s misguided quest for the Spice Islands
    • Ferdinand Magellan’s successful circumnavigation of the globe, discovering the Magellan Straits
  • While these explorers achieved fame, many ships vanished without a trace.
• The 17th century marked the start of worldwide trade, with Holland as the center of commerce.
• Cotton became a major British export mainly from India, including Indian textile centers—textiles were the major manufactured product. Like sugar, it was easy to grow but took considerable labor to process.
• The Suez Canal decreased the sailing distance from Bombay to London from 11,500 to 6,200 miles. Sailing ships were still useful on many long voyages.
• Within a few decades of Columbus’s second voyage in 1493, the exchange of crop species such as corn, wheat, coffee, tea, and sugar between continents had revolutionized the world’s agricultural and labor markets.
  • The sugar plantation explosion began in the Caribbean and beyond.
• Forming of corporations:
  • The Dutch West India Company (WIC) was established in 1627 as a joint stock company to dominate the sugar market and the slave trade, with limited success. They established New Amsterdam.
  • The Dutch East India Company (VOC) reached Indonesia (Java) in 1611, by rounding the Cape of Good Hope, heading east for 7,000 miles and turn north.
  • The Spanish silver dollars became the de facto world currency, legal tender in the US until 1857.
  • The VOC was successful until challenged by the English East India Company (EEIC).
  • The EEIC gained a major foothold in India when Robert Clive defeated a native force at Plassey in Bengal.
  • Monopolies would cost the monarchs nothing, but they would share in the profit.
  • The VOC was different than the English companies. Holland became a major trading hub. The VOC was created to include the competing groups, behaving like a sovereign nation in aggressive ways. The VOC established an outpost as the Cape Colony. They were adept at finance, including the idea of permanent capital. Their success was not based on size but political, legal, and financial systems by 1600. They were still fighting Spain for independence (until 1648). It took England decades to catch up.
• Letting the English East India Company (EEIC) run India was a disaster. The monopoly ended in 1813 as Britain took over.
  • When 18th-century Britain’s tea trade depleted its silver reserves and China rejected British goods, the infamous East India Company began trading opium. The narcotic, harvested in colonial India, continues to haunt East-West trade negotiations.
  • This led to the Opium War in 1842, which opened Canton and other Chinese ports. Hong Kong became a permanent colony. The Second Opium War ended in 1858.
• The New World foods changed the diets of Europe.
  • Britain started the Corn Laws in the 15th century.
  • Cheap imports of grain aided laborers with cheap bread and increase productivity.
  • “Corn … can grow in ‘in-between’ climates too dry for rice but too wet for wheat. An impoverished swath of Southern Europe stretching from Portugal to the Ukraine filled this bill precisely. By 1800 it had become one of the world’s largest corn-growing regions.”
  • By 1913 England imported 80% of its wheat.
• Steamships and refrigeration revolutionized global and transcontinental trade.
  • “Ice ships” moved ice and later perishables since early in the 19th century.
  • Inventions in the 19th and early 20th centuries made traded goods accessible and affordable globally. Bernstein illustrates Henry Bessemer’s process for producing cheap, high-quality steel for railroads, the steam engine, and shipping. Between 1830 and 1910, sea and land shipping costs fell by 65% and 87%, respectively.
  • New York City became the financial capital by 1825 and the shipping point from Eric Canal goods.
• The Smoot-Hawley Tariff in the 1930s was the highest tariffs of protectionism, creating winners and losers.
  • The Great Depression was the result of protectionist acts that limited free trade.
  • The repeal of the Corn Laws had pushed to free trade, aided by cheaper shipping.
  • British thinkers like Adam Smith and David Ricardo advanced the basic free-trade argument in the 18th century.
  • Politics complicated matters, as the Boston Tea Party, celebrated as patriotic, was committed by tea merchants against a British open-market move lowering colonial prices.
  • Bernstein doesn’t believe high tariffs (Smoot-Hawley Tariff Act) caused the Great Depression, as often claimed. Free traders face the challenge of convincing the damaged minority to share a larger pie or bribe them with subsidies.
  • The Stolper-Samuelson theorem predicted that protection benefitted those who owned a relatively scarce factor and harmed those who owned an abundant one. The opposite with free trade (land, labor, and capital). Free trade helped farmers when land was abundant. Their theorem could also be extended to shipping costs. When the US had abundant land, free trade helped farmers (and Southern plantation owners). Free trade helped capitalists and laborers after the Industrial Revolution.
  • “Between 1720 and 1998, world real GDP grew by an average 1.5% per year, while the real value of trade grew by 2.7% per year.”
  • The US favored protectionism under Republicans and free trade under Democrats after the Civil War, e.g., under FDR in the 1930s.
  • After World War II the US did not have to worry about any of the factors of production and favored low tariffs.
  • The General Agreement on Tariffs and Trade (GATT) attempted lower tariffs. The use of stacked shipping containers (by Malcolm McLean) lowered shipping substantially.
  • The United States embraced free trade in the post-war years, but globalization has also created dangerous inequality.

III. Quotes

• Our urge to trade has profoundly affected the trajectory of the human species. Simply by allowing nations to concentrate on producing those things that their geographic, climatic, and intellectual endowments best enable them to do, and to exchange those goods for what is best produced elsewhere, trade has directly propelled our global prosperity.
• What investment banking is to the ambitious and acquisitive today, the pepper trade was to the Romans—the most direct route to great riches.
• Whoever is lord of Malacca has his hand on the throat of Venice. — Tomé
• The Stoic philosopher and playwright Seneca is said to have owned five hundred tripod tables with ivory legs—no small irony, since he was a vocal critic of the empire's extravagances.
• In one of history's most bizarre chains of causation, the brutal, efficient newcomers were driven by a hunger for, of all things, culinary ingredients that today lie largely unused in most Western kitchens.
• Whereas theology is the primary driving force behind Christianity and the great Eastern religions, Islam's backbone is a system of law covering all areas of conduct, including commerce. Thus, the new monotheism from Arabia was especially attractive to those engaged in any organized economic activity that flourished wherever rules were plainly visible and vigorously enforced by disinterested parties—again, as in the more secular English common law.
• Although the Muslim commercial web possessed many advanced features, including bills of exchange, sophisticated lending institutions, and futures markets, no Islamic state ever established the bedrock financial institution of the modern world: a national or central bank
• The highly decentralized nature of the medieval world of Indian Ocean trade produced a bubbling stew of Darwinian economic competition, in which those states whose political "mutations" were best suited to trade and commerce thrived, and those whose institutions were not withered.
• Venice earned its wealth not only from rare Oriental goods, but also from the pilgrim and crusader traffic to and from the Holy Land.
• Genghis Khan roared out of the steppes to conquer all of central Asia; within a few decades, the Great Khan's descendants ruled over a group of empires comprising more territory than any dynasty before or since.