Canadian Economic History: Reciprocity Treaty, 1855 - 1866

The Reciprocity Treaty of 1855-66 gives us insight into the impact of free trade in natural

products on Canadian economic development. We temporarily skip over the Canal Era of the

1820s to 1840s and only allude tangentially to the Railway boom of the 1850s since later we will

discuss the effect of this transportation construction on Confederation.

The Reciprocity Treat was an agreement between the United States and British North

America primarily for free trade in natural products between the two countries. The Treaty also

introduced reciprocal fishing rights on the east coast of North America and same nation status for

boats on inland waterways. These latter two clauses meant that Americans and British North

Americans could fish anywhere on the east coast or move by boat anywhere on inland

waterways, including the Great Lakes, without distinction by national status. The Treaty was

implemented in 1855 and abrogated (repealed) in 1866 at the behest of the United States.

The Traditional View: Reciprocity significantly stimulated trade

Commentators before the 1960s almost uniformly viewed this Treaty as a major contributor

to the dynamic growth of British North America in the 1850s and 1860s. W. A. Mackintosh, for

example, thought that Reciprocity “gave an extraordinary impulse to advancement” by opening

up U.S. trade. Supporters of the Treaty variously cited the following statistics in support of this

imputed contribution to growth.

1. Canadian exports to the United States jumped 33% in 1855, the first year of the Treaty,

while imports from the United States rose slightly less.

2. The proportion of BNA exports to the U.S. as a proportion of total BNA GDP [(BNA

Exports)/(BNA GDP)] leapt from 3% to 7.5% for a 150% increase between 1850 and 1860.

Imports from the U.S. as a proportion of BNA GDP fell from 8.6% to 8% in the same

decade. (Comparison is between 1850 and 1860 because those were census years when

-1-
 Canadian Economic History: Reciprocity Treaty, 1855 - 1866

sufficient data was collected to estimate GDP. Export/Import Data was collected every

year.]

3. BNA exports doubled during the life of the Treaty, with grain and timber exports recording

the greatest increase.

4. British North Americans gained more than Americans since Reciprocity eliminate U.S.

tariffs that were much higher than comparable Canadian tariffs. In fact, the average tariff

on reciprocity goods before the Treaty was 21% in the United States and 6% in British

North America. [A person might wonder, of course, why U.S. tariffs were so high in the

first place]

The two important books of the 1950s that dealt with the Reciprocity Treaty period in

Southern Ontario (Masters) and the Maritimes (Saunders) reiterated the importance of the Treaty

for development but noted that other factors, such as the arrival of railways were important as

well. We will review the argument of a 1968 article by Officer and Smith1 that questioned the

traditional view of the importance of the Treaty for growth. They think that Reciprocity had

very little effect on the increase in trade and doubt that even this small increase in trade

represented a net benefit to British North America.

Officer and Smith’s critique of Reciprocity as insignificant for trade and development

‘Disaggregative Approach’

Officer and Smith criticized previous commentators for analyzing the trade of all

commodities rather than only the trade in natural resources affected by the Treaty. They utilize a

‘Disaggregated Approach’ in two senses. First, they divide the aggregate trade data into separate

data for reciprocity items and non-reciprocity items. Secondly, they measure the impact of the

1
L.H. Officer and L.B. Smith. "The Canadian-American Reciprocity Treaty of 1855 to
1866", Journal of Economic History (1968) 28, 598-623.

-2-
 Canadian Economic History: Reciprocity Treaty, 1855 - 1866

Treaty not merely absolutely through the movement of reciprocity items but relatively through

comparison with the movement of non-reciprocity items. This relative comparison allows them

to control for other factors that might influence both types of trade independent of reciprocity.

This disaggregative approach differentiates 3 different periods during the Reciprocity Treaty.

1855: The trade in reciprocity items more than doubled while trade in non-reciprocity items

stagnated.

1856-1860: There was no distinction between the behaviour of Reciprocity and non-Reciprocity

items in trade in this period since movements of one paralleled that of the other.

1861-1865: The trade in natural products soared relative to the trade in manufactured products

in response to demand and hyperinflation of prices in the United States during the Civil

War.

Officer and Smith conclude that the Reciprocity could only have had an effect on trade in

1855 since factors other than the Reciprocity Treaty must have caused the similar trade

movements of reciprocity and non-reciprocity items from 1856 to 1860 and the impact of the

Civil war eclipsed the comparatively negligible reduction of tariffs from 1861 to 1865. Our

authors therefore focus on 1855 for evidence of a Reciprocity effect on Trade.

Why did trade in reciprocity items jump in 1855?

Officer and Smith marshal evidence undermining Reciprocity as an explanation for the

growth in trade in reciprocity goods in 1855.

1. The Statistics may be misleading for several reasons.

a) Systematic records do not exist for British North America before 1849, making it difficult

to determine whether an increase in official trade was an increase in trade or an

improvement in the recording of trade

-3-
 Canadian Economic History: Reciprocity Treaty, 1855 - 1866

b) There are significant discrepancies between BNA Exports to the U.S. or U.S. Imports into

BNA reported in BNA statistics and the same items recorded in the U.S. as BNA Imports

into the U.S. and U.S. Exports to BNA.

c) It is impossible to tell whether the jump in trade in natural products in 1855 was a jump in

actual trade or reporting of previously smuggled products that were now legal.

2. The Railway and Investment boom of the 1850s may have caused the jump in trade.

BNA had only 66 miles of railways in 1849 but 2,000 miles of railway were constructed in

the 1850s. Foreign investment, primarily from Britain, of about $100 million flowed in to

finance this construction compared with an inflow of only $15 million in the 1840s for earlier

projects such as the canals. This construction and investment peaked in 1855, producing

exceptional demand for imports of natural products in that year but also opening up the export of

natural products.

3. The international business cycle peaked in 1855.

The international economy expanded from 1849 to 1855 following a serious recession in

1847 and 1848. The combination of this international expansion and the construction in BNA of

railways powerfully affected exports of BNA wheat and timber/lumber.

a) Timber/Lumber

BNA and U.S. railways connected the forests of the Ottawa Valley and the Peterborough

area to U.S. demand and capital. Water routes were the only export routes available for forest

products before the railways but the railways allowed overland transport of bulky products.

Lumber exports grew with the railways and before the Treaty in the early 1850s, during the

Treaty, and after the Treaty in the late 1860s, suggesting that something other than Reciprocity

was the cause of growth.

-4-
 Canadian Economic History: Reciprocity Treaty, 1855 - 1866

b) Wheat

Wheat production increased 400% in the 1840s before the Reciprocity Treaty or the

railways and despite the repeal of the British Corn Laws. (The British Corn Laws imposed high

tariffs on grain imported into Britain from 1815 to 1845, but grain from commonwealth countries

received preferential treatment through a tariff lower than that on non-commonwealth countries.)

The construction of track by various railway companies brought most land in Canada West

within 20 miles of cheap overland transportation that was even faster than by water routes. This

meant that virtually all the land in Canada West was within the range of profitable production for

the market set by the limits of haulage by wagon.

1855 was also a year of exceptional European demand for BNA wheat due a failed U.S.

harvest and the cessation of Russian exports due to the Crimean War. Officer and Smith feel that

this timing and the rapid expansion of the railways up to 1855 explain much of the increase in

grain exports in 1855.

Did the Reciprocity Treaty Benefit British North America?

Officer and Smith note that the most striking evidence for the effect of the Reciprocity

Treaty was a jump in BNA grain exports of 50% in 1855, even given the other factors that might

have influenced this leap. This leap increased overall exports by 15% since grain comprised 30%

of all exports. They point out, however, that there was a corresponding 50% increase in grain

imports into BNA in the same year. This explanation of this apparent contradiction was that the

Treaty allowed farmers to save transportation costs by moving grain to closer markets across the

border rather than to more distant markets within the country. In particular, Canada West

producers exported grain to western New York while central and northern New York producers

exported grain to Canada East. Since the effect of Reciprocity was primarily a redistribution of

-5-
 Canadian Economic History: Reciprocity Treaty, 1855 - 1866

grain production, the net benefit of the Treaty was at most only the saving in transportation costs

along the Lake Ontario and the St. Lawrence between Upper and Lower Canada. Officer and

Smith aren’t even willing to accept these transportation savings as a net benefit since the

redirection of trade deprived the St. Lawrence canal system, recently upgraded at considerably

government expense, of revenue. The net benefit of the Treaty was probably negligible

therefore.

The Impact of the Treaty on Infant Industries

Officer and Smith think that Reciprocity may have delayed diversification of the economy

by stimulating the export of raw materials before they were transformed into manufactured

products. The most striking example they cite was the explosion of cheese factories in Canada

West from 12 in 1865 during Reciprocity to 235 in 1867 and 323 in 1870 in Ontario after

Reciprocity. They argue that Reciprocity induced Ontario (Canada West) farmers to export milk

rather than process milk into cheese. R.H. Jones (1946), however, explained the sudden

appearance of cheese factories as a consequence of a technical change in the early 1860s that

allowed profitable small-scale cheese factories after 1866. Officer and Smith also suggest that

the export of barley during Reciprocity reduced Canadian production of beer.

Regardless of the accuracy of their claims for specific industries, Officer and Smith make

the valuable point that differential application of tariffs can distort an economy. Free trade in

natural products alongside tariffs on manufactured goods favour the export of natural products

over the export of manufactured goods. Such an arrangement favours the export of wheat but

not flour, metallic ores but not refined metals or metal products, timber but not lumber,

pulpwood but not paper, and oil but not chemical products, for example. (The United States

imposed tariffs on these examples of manufactured goods while reducing tariffs on their natural

-6-
 Canadian Economic History: Reciprocity Treaty, 1855 - 1866

components in later years for the express purpose of decreasing competitive Canadian output).

Such a policy would help perpetuate Canadian dependence on staple exports and inhibit the

transformation to investment in forward linkages.

Conclusion

Office and Smith conclude that the net benefit of Reciprocity to British North America was

negligible at best. They argue that the savings in transportation costs on grain from Canada West

to Canada East in 1855 was the only demonstrable benefit but that this benefit must be weighed

against the loss of revenue for recently upgraded canals from reduced transportation of grain,

which contributed to the subsequent bankruptcy of the canals, and the impediments to infant

industries from 1855 to 1866.

The Unites States abrogated (terminated) the Reciprocity Treaty in 1866. They blamed the

introduction of protection on manufactured goods in the Province of Canada through the

implementation of the Cayley-Galt Act of 1858/59 for violating the spirit of the Treaty. This

was a very curious justification given that the pre-Civil War Morrill Act of 1861 increased the

average tariff on imports into the U.S. to 30% from 24% in 1857 and the Tariff Acts of 1862 and

1865 increased the average U.S. tariff to 37% and 47% respectively. The more likely explanation

was that doubling of U.S. prices during the Civil War necessitated protection against relatively

cheap Canadian imports after 1865. In fact, U.S. goods were not competitive in Canada until

1876 following years of deflation in the U.S.

-7-