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Trade Policy during the Interwar Period. Lecture 8 – Thursday, 6 October 2011 J A Morrison. Barry Weingast. Judy Goldstein. Michael Hiscox. 1. Lec 8: Interwar Trade Policy. The Global Trade Regime before WWI The Interwar Collapse Reconstructing the Global Trade Regime - PowerPoint PPT Presentation
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Trade Policy during the Interwar Period
Lecture 8 – Thursday, 6 October 2011J A Morrison 1
Michael HiscoxBarry WeingastJudy Goldstein
Lec 8: Interwar Trade Policy
I. The Global Trade Regime before WWI
II. The Interwar CollapseIII.Reconstructing the Global Trade
RegimeIV.Conclusions & Further
Questions
2
Lec 8: Interwar Trade Policy
I. The Global Trade Regime before WWI
II. The Interwar CollapseIII.Reconstructing the Global Trade
RegimeIV.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
state-building (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. Who will take the reigns of power?2. The US: Smoot-Hawley3. Britain: Imperial Preference4. 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. Who will take the reigns of power?2. 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 (R-
UT)– House: Willis Hawley (R-
OR)
• Highest tariff rates of 20th Century– Fordney-McCumber Tariff
(1922): 38.48%– Smoot-Hawley: 41.14%
17Source: 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 18
Source: http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff
And Smoot-Hawley, of course, has achieved
legendary significance…
19
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, well-placed 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 Agriculture
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. Who will take the reigns of power?2. The US: Smoot-Hawley3. 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:
tariffs highly favor empire goods 35
36
“Buy Empire”
II. The Interwar Collapse
1. Who will take the reigns of power?2. The US: Smoot-Hawley3. Britain: Imperial Preference4. 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 CollapseIII.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)
practice45
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: War3. Implications
Previous Explanations of RTAA
48
Explanation Problems
Previous Explanations of RTAA
49
Explanation Problems
Lazy Congress Possible to Do Nothing; Easier ways to streamline without abdicating authority
Lesson Thesis: Policy-makers learned lesson from Smoot-Hawley
Counter-intuitive; Partisan Voting
New Agenda-Setting Authority for President; Part of Larger Expansion of Presidential Power
Insufficient; Doesn’t explain shift in Congress’s preferences
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– Broader district preference for more
liberalization– Presidents stop logrolling (like “line item veto”)
• Satisfying Congress with Reciprocity– 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 export-oriented industry.
Um…Aren’t we forgetting something?
55
SAINT PAUL’S, LONDON
56
STALINGRAD
57
DRESDEN
58
TOKYO59
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: War3. 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”. (690) 65
Agenda: Interwar Trade Policy
I. The Global Trade Regime before WWI
II. The Interwar CollapseIII.Reconstructing the Global Trade
RegimeIV.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