The political economy of an exclusive trading company: comparative advantage, terms of trade, and distributive conflict

Official URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5121627

We examine the effects on a metropolis and its colony of an exclusive trading company that monopolizes the foreign trade of the colony, using Great Britain, India, and the East India Company as the central historical illustration. Theoretically, we show that such a company has incentives to impose a tax on colonial exports; that this tax may improve or deteriorate the metropolis's terms of trade, depending on whether the colonial economy is a rival or a complement to the metropolis, and these shifts in the terms of trade create both winners and losers within the metropolis. Additionally, we show that these changes influence the metropolis's GDP and income distribution, thereby shaping political support for the exclusive trading company. Our analysis sheds light on the rise and eventual dismantling of the East India Company, with the British Industrial Revolution playing a transformative role. More broadly, the paper suggests that colonial policies might be particularly burdensome for colonies with rival economies, a situation often overlooked in studies of the New World, where colonies were typically complementary to their metropolises.