Set on the wrong track: tariffs and shipbuilding in Canada

I was recently on the emergence of shipbuilding in Canada, especially in the years prior to Confederation. I was shocked to discover that when ships were built in Canada and sold in England, there were subject to absolutely no import duties. In short, a profit of 1,000 pounds sterling on a 100 ton ship in 1820 would not have to be dilluted by import duties. Some of my free-market friends might point out that this was a good thing, I would tend to disagree.

I am saying this because I am asking myself the following question: what if distortionnary trade policy made it profitable to invest in shipbuilding and shipowning in Canada even in the absence of such a policy, shipbuilding and shipowning would have been the speciality of another country (say Spain or the United States)? Once investments were made in the shipping industry as a whole (drydocks, shipyards, etc.), costs would have been sunk, making it harder to shift production factors between industries.

Up until the 1850s, Canadian shipbuilders often built ships to carry shipments of timber to England which they would then sold. This allowed them to be protected from fluctuations in freight rates and insurance premiums whilst also allowing them to sell a product which was free of import duties. However, once the Navigation Acts were repealed (these acts regulated shipping between Britain and non-British countries), there was an increase in the share of total shipping volume that was foreign to the British empire and an increase in the share of ships sold in Britain which were the product of countries outside the British empire.

This would tend to indicate that distortionnary trade policy incited individuals in the Canadian colonies to invest massively in the development of shipbuilding and its corrolaries. Once these distortions appeared, fixed investment costs had already sunk in and an important share of locked-in capital investments lost their value. I possess important data on Quebec’s shipbuilding output and the case seems defendable since output per capita declined dramatically after 1849 (the year of repeal). It is to be noted that between 1815 and 1849, the value of output per capita in shipbuilding grew at the rate of 1.4% per annum (t-stat for a time trend is significant and yields high R2).

ShipBuild

The 1850s are widely presented as years of poor economic performance in Canada (I am not sure to which extent I buy the argument presented by some, but it does seem like growth was slower than in the United States or Britain). Maybe it could be worthwhile to consider how much the argument of “being set on the wrong track” by distortionnary trade policy plays in the economic growth of the British colonies in the years leading to Confederation.

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