Trade Policy during the
Interwar Period
Judy Goldstein
Barry Weingast
Michael Hiscox
Lecture 8 – Thursday, 6 October 2011
J A Morrison
1
Lec 8: Interwar Trade Policy
I. The Global Trade Regime before
WWI
II. The Interwar Collapse
III. Reconstructing the Global Trade
Regime
IV. Conclusions & Further Questions
2
Lec 8: Interwar Trade Policy
I. The Global Trade Regime before
WWI
II. The Interwar Collapse
III. Reconstructing the Global Trade
Regime
IV. Conclusions & Further Questions
3
Here’s a very quick and dirty
review of the trade regime
before WWI.
(Check Krasner for more
details.)
4
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 statebuilding (G Schmoller)
– General continental retreat from free trade
– British retain free trade unilaterally
5
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.)
6
Lec 8: Interwar Trade Policy
I. The Global Trade Regime before
WWI
II. The Interwar Collapse
• Reconstructing the Global Trade
Regime
• Conclusions & Further Questions
7
II. The Interwar Collapse
1.
2.
3.
4.
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.
9
Hostilities had largely been a
product of competition between
competing visions and centers
of power: GB, Germany, A-H, &
the Turks.
10
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.
11
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.
12
The United States had the
capacity but not the desire to
lead.
13
The crisis of leadership shaped
the course of events that
followed.
14
II. The Interwar Collapse
1.
2.
•
•
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.
16
Smoot-Hawley Tariff
• Became law: 17 June
1930
• Authors
– Senate: Reed Smoot (RUT)
– House: Willis Hawley (ROR)
• Highest tariff rates of 20th
Century
– Fordney-McCumber Tariff
Source: http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff
17
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
Source: http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff
18
And Smoot-Hawley, of course,
has achieved legendary
significance…
19
Ferris Bueller’s Day Off (1986). YouTube
20
Al Gore & Ross Perot on Larry King
(1993) - YouTube
21
So, how do we explain the
passage of Smoot-Hawley?
22
Eichengreen explains S-H using
Gerschenkron’s model.
How does Gerschenkron’s
model work?
23
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, wellplaced groups compromise & form
coalitions to secure compatible objectives
• The Coalition: Heavy Industry + Large
Agriculture
24
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
25
The United States turned its
back on the world economy with
Smoot-Hawley (among other
things)...
26
“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)
28
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.
27
What about the former
hegemon, Britain—the
birthplace of free trade?
29
II. The Interwar Collapse
1.
2.
3.
•
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.
31
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 protectionism
32
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
33
After winning the largest
electoral victory in modern
British history, the Tories
pushed through extensive
commercial regulation.
34
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:
35
“Buy Empire”
36
II. The Interwar Collapse
1.
2.
3.
4.
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.
38
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.
39
Germany’s foreign economic
policy was carefully managed
first by Hjalmar Schacht and
later by Hermann Goering.
40
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
41
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
42
Agenda: Interwar Trade Policy
I. The Global Trade Regime before
WWI
II. The Interwar Collapse
III. Reconstructing the Global Trade
Regime
• Conclusions & Further Questions
43
The first stepping stone back to
liberalization was placed by the
US with the 1934 Reciprocal
Trade Agreements Act (RTAA).
44
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
45
2 Key Questions about the
RTAA
1. How do we explain the passage of the
RTAA
2. How do we explain its durability?
46
III. Reconstructing the Global Trade
Regime
1. Bailey, Goldstein, & Weingast:
Institutions
2. Hiscox: War
3. Implications
Previous Explanations of RTAA
Explanation
Problems
48
Previous Explanations of RTAA
Explanation
Problems
Lazy Congress
Possible to Do Nothing;
Easier ways to streamline
without abdicating authority
Lesson Thesis: Policy-makers Counter-intuitive; Partisan
learned lesson from Smoot- Voting
Hawley
New Agenda-Setting
Authority for President; Part
of Larger Expansion of
Presidential Power
Insufficient; Doesn’t explain
shift in Congress’s
preferences
49
What is the key variable that
BGW suggest explains the shift
in American trade policy?
50
BGW emphasize change in
institutions. (309)
But that doesn’t mean that
institutions matter more than
ideas & interests.
51
What are the key institutional
features according to BGW?
52
BGW: Key Institutional Features
•
Power to the President
–
–
•
Satisfying Congress with Reciprocity
–
–
–
•
Broader district  preference for more liberalization
Presidents stop logrolling (like “line item veto”)
Reciprocity created export opportunities
Now: Broadened Range of Acceptable Tariff Cuts
Later: Exporters become entrenched advocates of
liberalization
Conclusion: RTAA jumpstarted export industry
which never looked back
53
III. Reconstructing the Global Trade
Regime
1. Bailey, Goldstein, & Weingast:
Institutions
2. Hiscox: War
• Implications
So, that’s our explanation of the
US move towards trade
liberalization between 1930 and
1945?
-- The RTAA nurtured exportoriented industry.
Um…Aren’t we forgetting
something?
55
SAINT PAUL’S, LONDON
56
STALINGRAD
57
DRESDEN
58
TOKYO
59
Hiscox: Let’s not underestimate
the extent to which the
complete evisceration of foreign
industrial capacity created
export markets that the US
wanted to ensure remained
open!
60
“These changes reflected the dramatic,
exogenous effects of World War II on
U.S. export and import-competing
industries as well as longer-term shifts
in U.S. comparative advantage and in
party constituencies. In this alternative
account of the RTAA and U.S. trade
liberalization,
the historical coincidence of several
profound economic and political
changes are central to the eventual
outcome.” (670)
61
III. Reconstructing the Global Trade
Regime
1. Bailey, Goldstein, & Weingast:
Institutions
2. Hiscox: War
3. Implications
What are the implications of these
differing interpretations?
63
BGW: Institutions Matter
• Let’s build institutions
• The institutional design matters
64
Hiscox
• Let’s not spin our wheels about institutions
• Underlying economic variables really
matter. Let’s focus on those. Maybe then
we can at least see what’s coming.
“The dismal conclusion is that, if policy is settled in
a protectionist equilibrium (that is, reform is
needed), it is unlikely that a simple change in
the policymaking rules will also be possible or
sustainable for long in the absence of some
serendipitous change in actor preferences”.
65
(690)
Agenda: Interwar Trade Policy
I. The Global Trade Regime before
WWI
II. The Interwar Collapse
III. Reconstructing the Global Trade
Regime
IV. Conclusions & Further Questions
66
Key Insights about Trade Policy
• Interest Groups…
– Must be understood narrowly (not just “agriculture”)
(BE)
– Form, dissolve, & reform flexible coalitions (BE)
– Shape policy; and are shaped by policy (BGW)
• Trade policy is formulated in context of other
policies (e.g. unemployment policy) (JMK)
• Exogenous variables (like war) still matter (MH)
• Institutions might matter as well
– They shape channels through which interests exert
pressure (BGW)
67
Questions
• The obvious question: what should be our ideal
trade policy?
• Less obvious but equally important
– Where should trade policy stack up in
preference hierarchies? Should trade policy be
subordinate to other policy goals?
– Once we determine the trade policy we want,
how do we go about securing it?
68