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Trade Policy during the Interwar Period. Lecture 8 – Thursday, 30 September 2010 J A Morrison. Barry Weingast. Judy Goldstein. Michael Hiscox. Lec 8: Interwar Trade Policy. The Global Trade Regime before WWI The Interwar Collapse Reconstructing the Global Trade Regime
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Trade Policy during the Interwar Period Lecture 8 – Thursday, 30 September 2010J A Morrison Barry Weingast Judy Goldstein Michael Hiscox
Lec 8: Interwar Trade Policy • The Global Trade Regime before WWI • The Interwar Collapse • Reconstructing the Global Trade Regime • Conclusions & Further Questions
Lec 8: Interwar Trade Policy • The Global Trade Regime before WWI • The Interwar Collapse • Reconstructing the Global Trade Regime • Conclusions & Further Questions
Here’s a very quick and dirty review of the trade regime before WWI. (Check Krasner for more details.)
Pre-war Trade Regime • 1815-1860: Britain moves towards free trade; sets trend and pace for other countries • 1860: Cobden-Chevalier Treaty • Britain brings arch rival France on board • Most-favored-nation clause • 1870s-1914 • Rise of Germany; “Merkantilismus” as state-building (G Schmoller) • General continental retreat from free trade • British retain free trade unilaterally
World War I • Economic warfare during war (even in GB) • Shattered spirit of European cooperation • Accelerated British relative decline, not so good for imperial relations • Gave us Versailles (Oh joy.)
Lec 8: Interwar Trade Policy • The Global Trade Regime before WWI • The Interwar Collapse • Reconstructing the Global Trade Regime • Conclusions & Further Questions
II. The Interwar Collapse Who will take the reigns of power? The US: Smoot-Hawley Britain: Imperial Preference The Axis: Self-Sufficiency
The War reflected and inspired a crisis of global economic leadership.
Hostilities had largely been a product of competition between competing visions and centers of power: GB, Germany, AH, & the Turks.
Beginning in 1860, Japan wanted to be set on an equal footing with the Western powers.Japan wanted, at a minimum, regional hegemony in East Asia.
After the War, Britain sought to retake the reigns of power.But, as we’ll see, Britain was incapable of doing so. Too much had changed.
The United States had the capacity but not the desire to lead.
The crisis of leadership shaped the course of events that followed.
II. The Interwar Collapse Who will take the reigns of power? The US: Smoot-Hawley Britain: Imperial Preference The Axis: Self-Sufficiency
In the wake of the stock market collapse, the US felt compelled to respond.And the Smoot-Hawley tariff of 1930 was one of the most significant responses.
Smoot-Hawley Tariff • Became law: 17 June 1930 • Authors • Senate: Reed Smith (R-UT) • House: Willis Hawley (R-OR) • Highest tariff rates of 20th Century • Fordney-McCumber Tariff (1922): 38.48% • Smoot-Hawley: 41.14% Source: http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff
Smoot-Hawley: Effects • Triggered retaliation (particularly in Canada) • But what were the total effects? • Total Decline in Real GDP (1929-1931): 16.5% • Exports (1929-1931): Max Decline 1.7% of 1929 real GDP • Estimated Multiplier Effect (x2) on GDP: 3.4% • Portion of 16.5% total decline caused by decrease in exports: 21% S-H lessened trade and deepened the depression Source: http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff
And Smoot-Hawley, of course, has achieved legendary significance…
Eichengreen explains S-H using Gerschenkron’s model.How does Gerschenkron’s model work?
Gerschenkron on the “Marriage of Iron & Rye” • The case: Bismarckian Germany • Nuanced view of “Interest Groups” • Agriculture: Large (Junkers) & Small • Industry: Heavy & Light • Interest-Groups Model: Narrow, well-placed groups compromise & form coalitions to secure compatible objectives • The Coalition: Heavy Industry + Large Agriculture
Eichengreen on Smoot-Hawley • Agriculture • Unsheltered: Border states compete with imports • Sheltered: Spoilage allows interior to be insulated • Industry • Heavy: US has comparative advantage in heavy industry • Light: Specialty goods face competition from abroad • The Coalition: Light Industry + Unsheltered Agriculture
The United States turned its back on the world economy with Smoot-Hawley (among other things).
Even with the election of FDR in 1932, the US still saw restoring world trade as secondary to—and separate from—reinvigorating the American economy.
“Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy. I favor as a practical policy the putting of first things first. I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment.”--FDR, First Inaugural (1933)
What about the former hegemon, Britain—the birthplace of free trade?
II. The Interwar Collapse Who will take the reigns of power? The US: Smoot-Hawley Britain: Imperial Preference The Axis: Self-Sufficiency
The story in Britain is a bit complex.In short, Britain’s declining position combined with its domestic politics to initiate a major shift in its trade policy.
British Domestic Politics • Conservatives (Tories) increasingly support commercial management • But Liberals and Labour remain committed to free trade • Throughout the 1920s, the Liberal-Labour coalition is able to prevent protetionism
The 1931 Financial Crisis • As we’ll discuss, Britain had difficulty defending the gold standard in the 1920s • The global “slump” in 1929 made things even more difficult • In 1931, the Labour Government failed to defend sterling against attack • This initiated a decade of Tory domination
After winning the largest electoral victory in modern British history, the Tories pushed through extensive commercial regulation.
British Protectionism • Import Duties Act (1 Mar 1932) • Introduced by N Chamberlain, son of J Chamberlain • General tariff of 10% (excepting foodstuffs & raw materials) • Specific tariffs ratcheted up to as much as 33% • British Empire Economic Conference • “Ottawa” Conference; Summer 1932 • Official abandonment of gold standard • Established “imperial preference” system: tariffs highly favor empire goods
II. The Interwar Collapse Who will take the reigns of power? The US: Smoot-Hawley Britain: Imperial Preference The Axis: Self-Sufficiency
The Treaty of Versailles (1919) unequivocally established the subordination of Germany’s economy to the welfare of the allied powers.
The global economic slowdown hit Germany particularly hard. When unemployment rates rose above 30% in 1933, Hitler ascended to power, largely on a platform of reversing the effects of Versailles.
Germany’s foreign economic policy was carefully managed first by Hjalmar Schacht and later by Hermann Goering.
Nazi Germany’s FEP • Money • Abandoned Fixed Exchange Rate • Heavy capital controls, restrictions on foreign ownership • Trade • Heavily managed; high restrictions • Creation of German trading bloc
Imperial Japan’s FEP • In 1930s, Japan relied heavily on trade—particularly with US for oil (~80%) • Second Sino-Japanese War (1937-1945) • After WWI, Japan took Germany’s sphere of influence in China • Chinese resistance prompted crackdown • July 1941: US imposed oil embargo • Japan became more deeply committed to self-sufficiency
Agenda: Interwar Trade Policy • The Global Trade Regime before WWI • The Interwar Collapse • Reconstructing the Global Trade Regime • Conclusions & Further Questions
The first stepping stone back to liberalization was place by the US with the 1934 Reciprocal Trade Agreements Act (RTAA).
The RTAA • Enacted 12 June 1934 • Transfers power of setting tariffs from Congress to President • Major provisions • Bilateral negotiations for reciprocal reductions • Tariff reductions up to 50% • Continued most-favored-nation (MFN) practice
2 Key Questions about the RTAA • How do we explain the passage of the RTAA • How do we explain its durability?
III. Reconstructing the Global Trade Regime Bailey, Goldstein, & Weingast: Institutions Hiscox: War Implications
What is the key variable that BGW suggest explains the shift in American trade policy?