NBER WORKING PAPER SERIES

TWO GREAT TRADE COLLAPSES:THE INTERWAR PERIOD & GREAT RECESSION COMPARED

Kevin Hjortshøj O'Rourke

Working Paper 23825http://www.nber.org/papers/w23825

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138September 2017

Preliminary version of a paper prepared for IMF-BNM-IMFER Conference on Globalization in the Aftermath of the Crisis and the IMF Economic Review. The research on which this paper is based was in part funded by the European Research Council under the European Union’s Seventh Framework Programme (FP7/2007- 2013) / ERC grant agreement no. 249546. The paper draws on many collaborations, and I am extremely grateful to my co-authors: Miguel Almunia, Agustín Bénétrix, Roberto Bonfatti, Alan de Bromhead, Barry Eichengreen, Alan Fernihough, Ronald Findlay, William Hynes, David Jacks, Markus Lampe, Gisela Rua, and Jeffrey Williamson. The usual disclaimer applies. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2017 by Kevin Hjortshøj O'Rourke. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Two Great Trade Collapses: The Interwar Period & Great Recession ComparedKevin Hjortshøj O'RourkeNBER Working Paper No. 23825September 2017JEL No. F13,F14,N70

ABSTRACT

In this paper, I offer some preliminary comparisons between the trade collapses of the Great Depression and Great Recession. The commodity composition of the two trade collapses was quite similar, but the latter collapse was much sharper due to the spread of manufacturing across the globe during the intervening period. The increasing importance of manufacturing also meant that the trade collapse was more geographically balanced in the later episode. Protectionism was much more severe during the 1930s than after 2008, and in the UK case at least helped to skew the direction of trade away from multilateralism and towards Empire. This had dangerous political consequences.

Kevin Hjortshøj O'RourkeAll Souls CollegeUniversity of OxfordOxford OX1 4AL, UKand NBERkevin.orourke@all-souls.ox.ac.uk

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1.Introduction

Economichistorianshavealwaysknownthatglobalizationisneithernewnor

irreversible:theworldeconomyhasseenmanywavesofintegrationand

disintegrationoverthecenturies.Whenglobalizationgoesintoreverse,thisis

typicallynotbecausetechnologiesareunlearned,althoughtherearesurely

exceptionstothis,astherearetoanyrule.Rather,allthatnewtechnologiescando

istodefinethelimitsofwhatisfeasible.Howclosesocietiesactuallygettothe

technologicalfrontierdependsonpolitics.Whenglobalizationunravels,thisis

typicallybecausesomeperturbationtothesystemhasdisturbedeitherexisting

domesticpoliticalequilibriafavoringopenness,orthegeopoliticalsystemasa

whole.Theseperturbationscanbelongdrawnoutaffairs–shiftsincomparative

advantage,creatingwinnersandlosers,orgrowthdifferentialsacrossnations,

upsettingtheinternationalbalanceofpower–ortheycanbeshortandsharp,asin

thecaseoffinancialcrises.

SoutheastAsiaisaparticularlygoodlocationinwhichtoreflectuponthe

ebbsandflowsofglobalizationoverthecourseofthecenturies.Therehavebeen

twotraditionaltraderoutesbetweenEastandWestEurasia.1Thefirstwent

overland,fromChina,throughtheTaklaMakandeserttoTransoxiana,andfrom

thereontoeitherEuropeintheWest,orIndiainthesouth.Andthesecondwentby

sea,inthreestages:fromChinatoSoutheastAsia,fromSoutheastAsiatoIndia,and

fromIndiatoArabia.ChinesegoodsmightbetransshippedacrosstheIsthmusofKra,

orshippedthroughtheStraitsofMalaccaortheSundaStrait.Asageneralrule,

1Foralengthydiscussionofthese,seeFindlayandO’Rourke(2007).

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tradebyseawascheaperandfasterthanoverlandtrade,althoughthelandroute

flourishedwhengeopoliticalstabilitymadeitpossibletotravelsafelyacrossCentral

Asia,notablyduringthepaxMongolicaofthe13thand14thcenturies.Anindication

ofthescaleofthetradeflowscomesfromthefamousBelitungshipwreckdating

fromaround830(Flecker,2001).ThiscontainedlargequantitiesofChineseceramics

andothertradegoods(about60,000itemsinall)withdesignsindicatingthatmany

ofthesehadbeenproducedspecificallyfortheMiddleEasternmarket.

Inaseriesofimportantpublications(e.g.Reid,1988and1993),AnthonyReid

haswrittenaboutSoutheastAsia's"AgeofCommerce",stretchingfromsometime

intheearly15thcenturytothemiddleofthe17th.SoutheastAsiantradewasgiven

amajorboostbytheMingvoyagesofdiscovery,whichtookplacebetween1405and

1433underthenavalleadershipofZhengHe.Theseledtoadramaticincreasein

Chineseimportsofgoodssuchaspepperandsandalwood,sufficienttohavelefta

traceintheEuropeanpricerecord.Asimportsintothemostimportantmarketof

theperiod,China,soared,theresidualsupplyofspicesavailabletotheperipheral

Europeanmarketfellsharply,leadingtoasharpspikeinprices(Figure1).

Figure1.EnglishandFlemishrealpepperprices,1400–1500

AlthoughtheMingvoyagesceased,SoutheastAsiantradecontinuedto

expandfortwocenturies,inpartduetothearrivalofnewtraders,particularlyfrom

EuropeandJapan,andinpartduetotheupturninglobaltradefuelledlargelyby

Americansilver.Thereafter,SoutheastAsiantradewentintosharpdecline.While

therewereseveralreasonsforthis,animportantonewastheestablishmentbythe

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DutchEastIndiaCompany,theVOC,ofaneffectivehegemonyinmuchoftheregion.

Theywereabletomonopolizenotjustthetradeincloves,buttheproductionas

well,withanimmediateandstrikingimpactonboththevolumeofexports,which

stagnated,andtheexportprice,whichcollapsed(Figure2).TheEuro-Asianprice

gapforclovessoared(Figure3):despitetheglobalreachofthegreatEuropean

tradingcompanies,insomecasestheyledtoadramaticdisintegrationofmarkets,as

measuredbythegapbetweenconsumerandproducerprices,withextremely

negativeconsequencesforSoutheastAsia.Globalizationhasnotbeenunidirectional,

inthisregionoranywhereelseintheworld.

Figure2.SoutheastAsiancloveexportsandprices,1500–1789

Figure3.Clovepricegaps,Amsterdam-SoutheastAsia,1580s-1880s

Since2008,journalists,politicians,andinsomecaseseconomistswhoshould

haveknownbetter,havewokenuptothepossibilitythatourownera'sglobalization

mightalsosomedaygointoreverse.Inahistoricalperspective,thiswouldnotbeso

surprising–wehavelivedthroughanadmittedlyshort,butverysharpglobal

economiccrisis(whichhasnotbeenparticularlyshortontheperipheryofthe

Eurozone),superimposeduponalongrunshiftincomparativeadvantagethathas

placedtraditionalmanufacturingcommunitiesintherichcountriesoftheworld

underconsiderablepressure.Thepoliticaldisastersof2016suggestthatweshould

taketheriskseriously,althoughitisimportanttopointoutthat,todate,therehas

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notbeenamajorreversaloftradepolicy,despitetheincreasingnumberof

governmentinterventionsdocumentedbySimonEvenettandcolleagues.2

Acomparisonthatisfrequentlymadeiswiththe1930s,acanonicaleraof

deglobalization,althoughtheinterwarperiodisusuallyusedprimarilyasa

bogeyman,ratherthananalyzedinanydetail.Inthispaper,Iwanttooffersome

preliminarycomparisonsbetweenthetradecollapsesoftheGreatDepressionand

GreatRecession.Whatissimilarbetweenthetwoepisodes,andwhatarethemajor

differences?Whywasthelatertradecollapsesomuchsharper,andwhywasthe

subsequentrecoverymoreimpressive?Whydidtheearlierepisodeleadtosomuch

moreprotectionism,andwhatwastheimpactofhigherbarrierstotrade?Andwhat

werethelongrunpoliticalimplicationsofthe1930scollapseintrade?

2.Twogreattradecollapses:somebasicfactsandcompositionalissues

PanelAofFigure4plotsindicesofthevolumeofworldtradeduringandafterthe

GreatDepressionof1929to1933,andtheGreatRecessionof2008-9.Bothseries

areplottedrelativetotheirvaluesinthemonthwhenworldindustrialoutputhitits

pre-crisispeak:June1929,andApril2008,respectively.Ascanbeseen,thetrade

collapseinthelatterepisodewasmuchsharperthanintheformer.Oneyearinto

theGreatRecession,inApril2009,thevolumeofworldtradewas18%belowitspre-

crisislevel,whereasworldtradewas"only"8%lowerinJune1930thanithadbeena

yearearlier.Thiswasbothstrikingandalarming,butalsopuzzling,giventhatayear

intothetwocrises,worldindustrialoutputhaddeclinedbyverysimilaramounts

2Seehttp://www.globaltradealert.orgSeealsoBown(2016).

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(Figure4,PanelB).Tryingtoexplainthisapparentlygreaterelasticityoftradewith

respecttooutputbecameamajorfocusofsubsequentappliedresearch,although

explicitcomparisonswereonlyrarelymadebetweentheGreatRecessionandthe

earlierepisode.3

Figure4.Twogreattradecollapsesandindustrialdepressions

Appealingtotheemergenceinrecentdecadesofglobalvaluechainsdoes

not,onitsown,resolvetheissue.Ifgrosstradeflowsarehigherrelativetonetflows

todaythantheywere80yearsago,thiscanexplainabiggerabsolutetradecollapse,

butitcannotonitsownexplainabiggerpercentagetradecollapse,sincethegross

flowsenterintoboththenumeratorandthedenominatorofthisfigure.However,if

importsofsomecategoriesofgoodsfallmorethanothersduringsharprecessions,

andifthecategoriesthatareparticularlybadlyaffecteddisproportionatelyinvolve

valuechains,thenyoucanindeedexpecttoseealargepercentagedeclineintrade

(O’Rourke,2009).Itisnotthevaluechainsinthemselves,buttheirinteractionwith

compositionaleffects,thatcanhelptoexplaintheveryhighelasticityoftradewith

respecttooutputandincomethatwasseenafter2008.

TherehasbeenagreatdealofworkexploringthecompositionoftheGreat

Recession’stradecollapse(e.g.Levchenkoetal.,2010;Bricongneetal.,2012;

Gopinathetal.,2012).Ifthosecategoriesofexpenditurethatfallthemostduring

economiccrises(investmentandexpenditureonconsumerdurables)areparticularly

3ExceptionsincludeEichengreenandO’Rourke(2009),Almuniaetal.(2010),andEatonetal.(2011).

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import-intensive,thiscanobviouslyhelptoexplaintheverysharpdownturnin

trade.Itturnsoutthattheseasymmetricfallsinexpenditureareveryimportantin

explainingthe2008-9tradecollapse,althoughtheexistencenotonlyofvertical

supplychains,butofinterindustrylinkages,complicatestheanalysis(Bemsetal.,

2010,2011,2013;Bussièreetal.,2013;Eatonetal.,2016).

Butthisstilldoesn'texplainwhytheelasticityoftradewithrespecttooutput

wassomuchgreaterduringtheGreatRecessionthanduringtheGreatDepression.

Afterall,expenditureoncapitalequipmentandconsumerdurablesfallsparticularly

sharplyduringalleconomiccrises.Weretheseexpenditureslessimport-intensive

duringthe1930sthantoday?Ifso,itshouldbethecasethatthecommodity

compositionofthetwotradecollapsesdifferedgreatly.Indeed,giventhatweare

talkingabouttwoeconomicepisodesseparatedbyeightdecades,itmightseem

strangeifthatwerenotthecase.

Whatwasthecompositionofthetradecollapseduring2008-9?Ina

particularlydetailedstudy,Levchenkoetal.(2010)divideUStradeflowsinto10

categories,dependingonsectorandend-use,anddistinguishingbetweendurable

andnon-durablegoods.Theseare:foods,feeds,andbeverages;industrialsupplies

andmaterials(bothdurable,andnon-durable);petroleumandproducts;automotive

vehicles,engines,andparts;otherconsumergoods(bothdurable,andnon-durable);

othercapitalgoods(aircraft,computers,andother);andothergoods.Theyfindthat

tradeinautomobilesdeclinedverysharply,onboththeexportandimportside;that

tradeinindustrialsupplieswasalsoparticularlybadlyhit;thatthevalueof

petroleumimports(therewerenoexports)fellmorethananyothercategory;and

thattradefellbymuchlessinthefoodandconsumergoodscategories(especially

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non-durableconsumergoods).Moregenerally,tradeingoodsfellbyalotmorethan

tradeinservices,whiletradeindurablegoodsfellbyalotmorethantradeinnon-

durables.4

WhatabouttheGreatDepression?Inon-goingworkwithAlandeBromhead,

AlanFernihough,andMarkusLampe(deBromheadetal.,2017a),Iexplorethe

commoditycompositionofthe1929-1931tradecollapseintheUnitedKingdom.This

wasroughlycomparabletothe2008-9tradecollapseintheUnitedStates,inthat

theUKmaintainedagenerallyfreetradepolicyduringtheperiod.Thecollapsein

BritishimportsthusreflectedcollapsingBritishimportdemand,justaswastruein

theUSduringthelaterepisode.WedivideBritishimportsandexportsintothesame

categoriesasusedbyLevchenkoetal.,excludingcomputersthatwerenotrelevant

duringtheearlierperiod.Wethencalculatedthepercentagedeclinesinthevalueof

UKimportsandexportsforeachoftheseninecategoriesduring1929-31,and

comparedthesewiththecorrespondingUSdeclinesduring2008-9.

Wefindastriking,positivecorrelationbetweenthecommoditycomposition

oftradeinbothepisodes:ontheimportside,therewereparticularlysmalldeclines

inimportsoffoodandconsumergoods,andparticularlylargedeclinesinimportsof

industrialsuppliesandautomobiles.Exportsofindustrialsupplieswereparticularly

badlyhitinbothepisodes,whileexportsofconsumernon-durablesdeclinedbya

comparativelysmallamount.Thesimilaritybetweenthetwoepisodesisimpressive,

especiallyforimports,andespeciallygiventhatwearecomparingthetrade

experiencesoftwodifferentcountriesseparatedbymorethaneightdecades.While

4SeealsoBricongneetal.,2012andGopinathetal.,2012.

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itistoosoontogeneralizefromsuchresults,itseemsasthoughsimilarexpenditure

andcompositionaleffectsmayhavebeenatworkduringbothepisodes.

Iftheunderlyingeconomicforcesduringthetwotradecollapseswere

similar,whatexplainsthehigherelasticityoftradewithrespecttooutputduringthe

laterepisode?Themostplausibleexplanationrestsonthechangingstructureof

internationaltrademoregenerally,whichinturnreflectschangingpatternsof

comparativeadvantageandgrowth.ItistothesethatInowturn.

3.Thechangingstructureofinternationaltrade

Themostobviousdifferencebetweentheglobaleconomiesof1929and2008isthe

wayinwhichmodernmanufacturinghasspreadacrosstheglobeinrecentdecades.

Thisprocessbeganinthelate19thcenturyinLatinAmericaandEastAsia,butin

SoutheastAsiaonlybeganinearnestinthe1960s,despiteaprecociousstartinthe

Philippines(O’RourkeandWilliamson,eds.,2017).Manufacturing’sshareofGDP

waswellunder10%inMalaysiaaslateas1960,andwasonlyalittlehigherin

Indonesia.Bytheendofthecentury,rapidindustrialgrowthhadledtotheseshares

peakingataround30%inthosetwocountries,andat35%inThailand(Bassinoand

Williamson,2017).

SoutheastAsia’sdelayedindustrialstartwaslargelyduetopatternsof

comparativeadvantage:resource-andland-rich,andlaborscarce,unskilledwages

werehighthererelativetoinIndiaorChina,whilecolonialeducationalpolicies

meantthatskilledlaborwasrelativelyscarceaswell.Overtime,populationgrowth

loweredrelativewagesintheregion,whileindependentgovernmentsinvestedin

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education.ISIspurredsomeindustrialgrowth,butsmallmarketsmeantthatitwas

lesseffectivethanelsewhereintheperiphery.TradeliberalizationandFDIwould

eventuallyplaycrucialrolesinspurringfurthermanufacturingandaggregategrowth

intheregion(ibid.).

Asaresultofdevelopmentslikethisallaroundthedevelopingworld,the

internationaldivisionoflaborthathaddevelopedinthe19thcentury,andstill

appliedinthe1930s,graduallystartedtounravel.Despitetheearlyindustrialgrowth

inChina,Japan,andelsewherementionedearlier,itstillmadesensein1950tothink

oftheworldeconomyasbeingdividedintoanindustrializedNorthandanon-

industrializedSouth.In1937,primaryproductsaccountedfor96%ofmerchandise

exportsinAfricaandAustralasia,and98%inLatinAmerica(Yates,1959,pp.227-30).

Aslateas1953“developedeconomies”(excludingJapan)accountedfor90.6%of

worldmanufacturingoutput,slightlymorethanin1913(Bairoch,1982,p.304),and

forover90%oftheworld’smanufacturedexports(Yates1959,p.228).5Aslateas

themid-1960s,manufacturesaccountedforlessthan10%ofSouthernexportsto

theindustrializedeconomies:North-Southtradestilllargelyconsistedofan

exchangeofNorthernmanufacturesforSouthernprimaryproducts.

Allofthishaschangedbeyondrecognition.ThankstoindustrializationinAsia

andelsewhere,asubstantialmajorityofSouthernexportstotheNorthnowconsist

ofmanufacturedgoods.Andastheworldasawholehasindustrializedandbecome

richer,amuchgreatershareofworldtradeingeneralnowinvolvesmanufactured

goods.In1929,manufacturesaccountedfor44%ofglobalmerchandisetrade;by

2007,thisfigurehadincreasedto70%(Almuniaetal.,2010,p.228).Thismattersfor

5ThelattercalculationexcludesSovietbloccountries.

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thevolatilityofinternationaltrade,forthesimplereasonthatmanufacturingoutput

andtradeismorevolatilethanprimaryproductionandprimaryproductstrade.

Between1929and1932,worldmanufacturingoutputfellby30%,whileagricultural

primaryproductionremainedconstant;worldmanufacturingtradefellbyover40%

between1929and1933,whilenon-manufacturingtradefellbylessthan7%(Figure

5).Similarly,worldmanufacturingoutputfellby10%between2008and2009,while

agriculturaloutputactuallyrose;worldmanufacturingtradefellby15%between

2008and2009,ascomparedwithdeclinesofjust2%and5%foragricultural

productsandfuelsandminerals,respectively(Figure6).

Figure5.WorldoutputandtradeduringtheGreatDepression

Figure6.WorldoutputandtradeduringtheGreatRecession

Clearly,thefactthattheworldeconomyisnowmoreheavilyconcentratedin

volatilemanufacturingcanhelptoexplainwhytradefellmoresharplyduringthe

GreatRecessionthaninthefirstyearoftheGreatDepression.Indeed,whenthe

focusislimitedtomanufacturingtradealone,thedeclinesexperiencedduring1929-

30and2008-9wereidentical(15%inbothcases:Figure7,PanelA).Thedifferenceis

thatmanufacturingtradewasaminorityoftotaltradeintheearlierepisode,anda

majorityinthelaterone.PanelBofFigure7takesthesectoraltradeindicesinFigure

5,PanelB,andcalculatestwoweightedaveragesofthese.Thefirst,whichisthe

serieslabeled“GreatDepression”,uses1929weightsformanufacturingandnon-

manufacturing(44%and56%respectively),andyieldsaone-yeardeclineintrade

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between1929and1930of6%,closetothe7.5%declineactuallyexperiencedduring

theGreatDepression.Thesecond,labeled“GreatDepressionwithGreatRecession

weights”,uses2007weights(70%and30%),andproducesaone-yeardeclineof

10%,notsofarfromthe12%declineexperiencedduringtheGreatRecession.It

seemsasthoughcompositionaleffectscanplausiblyexplainwhytradefellsomuch

moreviolentlyduringtheGreatRecessionthanithaddoneduringthefirstyearof

theGreatDepression,andtheymayhavealsoplayedsomeroleintherelatively

rapidrecoveryoftradefrom2009onwards.

Figure7.Thechangingcompositionofworldtrade1929-2007andtheGreatTrade

Collapse

4.Regionalimpacts

Thespreadofmanufacturingacrosstheworldalsohadimplicationsfortheregional

compositionoftheGreatTradeCollapseof2008-9,ascomparedwiththetrade

collapseoftheinterwarperiod.Thevolumeofexportsfellinanalmostidentical

mannerinbothadvancedandemergingeconomiesafter2008,althoughthis

averagetrendfortheemergingeconomiesdisguisessomeregionalvariation,with

exportsfromAfricaandtheMiddleEast,andespeciallyLatinAmerica,fallingless

thenelsewhere(Figure8).Insharpcontrast,whilethevolumeofexportsfrom

Europe,includingtheUSSR,fellby31.5%between1929and1932,andwhilethey

fellby41.5%fromNorthAmericaduringthesameperiod,theyfellbyonly4.5%

fromtherestoftheworld.Ontheotherhand,thevalueofexportsfromthevarious

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regionsoftheworldfellbyquitesimilaramountsoverthesameperiod(Findlayand

O'Rourke2007,p.450).

Figure8.RegionalexportvolumesduringandaftertheGreatRecession

Thecontrastbetweentheseinterwarvalueandvolumefiguresreflectsthe

catastrophicdeteriorationinthedevelopingworld'stermsoftradeduringtheGreat

Depression.Itsoutputmaynothavedeclinedtoanygreatextent,butfallingexport

pricesledtoadepressioninthedevelopingworldanyway.Totakejusttwo

examples:between1929and1931,thegoldpriceofrubberfellbyanastonishing

84%inMalaysia,whilethepriceofteafellby62%(FindlayandO'Rourke2007,p.

449).

Thistermsoftradecollapseacrossthedevelopingworldhadavarietyof

politicalimplications.InLatinAmerica,decliningexportearningsmadeitincreasingly

difficulttoservicecountries'internationaldebtobligations,andEichengreenand

Portes(1986)findthatthesizeofthetermsoftradeshockexperiencedbyindividual

countrieshelpstopredictwhetherornottheydefaultedonthosedebts.Elsewhere,

plantationeconomiessufferedgreatly,despitetheeffortsofcolonialgovernments

toprotectplantationowners.AnthonyReid(2015,p.320)considersthistohave

beenthebeginningofanecessaryandhealthyrebalancingofSoutheastAsian

economies,awayfromanartificialdependenceoncashcropexports,organizedby

thecolonizers,towardsamorenaturalsituationinwhichAsianpeasantsand

manufacturers,andintra-Asiantradeflows,playedagreaterrole.

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Insomecountries,however,itwasthepeasantsthemselveswhoproduced

thecashcropsforexportwhosepriceswerenowplummeting,andtherethepolitical

consequencesoffallingcommoditypriceswereoftensevere–especiallywhen

colonialadministratorsinsistedoncontinuingpaymentoftaxes,particularlypoll

taxes.InBurma,awidespreadpeasantrevoltbrokeoutinDecember1930,andwas

onlysuppressedaftertwoyearsoffighting,whileVietnamalsosawapeasantrevolt

atthesametime.InAfrica,therewaspoliticalunrestinNigeria,riotinginTogo,and

outrightrebellionintheBelgianCongo.Inthisway,thetermsoftradeshock

associatedwiththe1930stradecollapsehelpedtopavethewayforpost-1945

nationalistmovementsthatwouldeventuallysweepawaytheEuropeanempires

thatstilldominatedvastareasoftheworldinthe1930s.

Thenewlyindependentcountriesthatwouldemergeasaresultof

decolonizationinmostcasespursuedimportsubstitutionpolicies,atleastinitially.

Theinterwarperiodhelpedtopromotepost-warprotectionisminthisandmany

otherways.Andwherecountrieshad,inthe1930s,thepoliticalindependence

requiredinordertomaketheirownchoicesabouttradepolicy,theytypicallyused

thatindependencetoerectavarietyoftradebarriers.Itistotheriseofinterwar

protectionthatInowturn.

5.Interwartradepolicy:causes

Figure9comparestheevolutionoftariffsduringtheGreatDepressionandGreat

Recession.Intheformercase,theseriesistheunweightedaverageoftheaverage

tariffratein32countries,providedbyClemensandWilliamson(2004).The

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individualcountryseriesareconstructedbydividingimportdutiesbythevalueof

imports,andarethustrade-weightedaveragetariffs.Inthelattercase,theseriesare

thefiguresprovidedbytheWorldBank’sWorldDevelopmentIndicators,forthe

worldasawhole,ofthesimplemeanoftheappliedtariffrateswithingivenproduct

categories.Sincetheinterwardataarebasedonweightedaveragetariffs,whilethe

GreatRecessiondataarebasedonunweightedaverages,theseriesarenotstrictly

comparable.Giventhatweightedaveragetariffstendtobedownwardbiased(since

goodswithhighertariffsareaccordedlowerweights)thecomparisonprobably

understatestherelativeheightofaveragetariffsduringtheearlierepisode

(AndersonandNeary,2005).

Figure9.AveragetariffsworldwideduringandaftertheGreatDepressionand

GreatRecession

Ascanbeseen,therewasnogeneralincreaseintariffsfollowingtheGreat

TradeCollapseof2008-9.Averagetariffsifanythingfellslightly,remainingwithina

bandofbetween6and7%.Insharpcontrast,interwaraveragetariffsrosefrom

14.5%in1928toover22.5%in1932.Thisgreatlyunderstatestheincreasein

interwarprotection,sincetariffswerefarfrombeingtheonlyprotectionistpolicy

deviceusedduringtheperiod–andtheywerecertainlynotthemostrestrictive.The

1930ssawthewidespreadintroductionofquotasandotherquantitativerestrictions

ontrade,includingthewidespreadadoptionofexchangecontrols.Multiple

exchangerateswerealsousedinmanycases,biasedagainstimports.Eventhe

UnitedKingdom,thetraditionalchampionoffreetrade,switchedtowardsa

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protectionistpolicyinlate1931,followingastrongshowingbytheConservative

partyinthegeneralelectionwhichtookplaceinOctoberofthatyear.6Despitethe

increaseinprotectionistinterventionssince2008documentedbyGlobalTradeAlert,

therecentcrisishasclearlyseennothingevenremotelycomparabletothe

worldwideincreaseinprotectionofthe1930s.

Whywerethetwoexperiencessodifferent?Effectivepost-warinternational

institutions,preventingbackslidingonpreviousagreementstoliberalizetrade,are

surelyanimportantpartoftheexplanation.However,itshouldberememberedthat

theinterwarperiodalsohadaninternationalinstitution,theLeagueofNations,

whichattemptedtoliberalizetradeduringtheperiod.Thefactthatthisinstitution

provedineffectivewassurelyinlargepartendogenoustootherpoliticalforces

operatingbothwithincountriesandbetweenthem.Economichistorianshave

tendedtoemphasizethedeepercausesofthefailureofinterwareconomic

cooperationingeneral,andthefailuretopreventthewholesaleerectionoftariff

barriersinparticular.Tosomeextent,thesedeepercauseshadtodowiththe

underlyingsourcesofpoliticaltensionduringtheperiod,mostlyrelatedtothe

aftermathofWorldWarI.Buttheyalsohadtodowithflawedmacroeconomic

policiesandinstitutions.

Noseriouseconomichistorianbelievesthatinterwarprotectioncausedthe

GreatDepression,butthetwophenomenawerelinkedinthesensethatthey

shared,toalargeextent,acommoncause,namelythegoldstandard(Temin,1989;

Eichengreen,1992).Incombinationwiththeopeninternationalcapitalmarketsof

6TheConservativeswerethetraditionalprotectionistpartyinBritain:tothatextent,today’sToryBrexiteersaremerelyrevertingtotype.

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the1920s,thegoldstandardimpliedthatnegativemonetaryshockswererapidly

generalized,asinthecaseoftheinfamous1928decisiontoraiseinterestratesin

theUnitedStates.Worse,whencountriesasaresultfoundthemselvesinrecession,

theyhadnomacroeconomicpolicyinstrumentswithwhichtorespond.Stayingon

goldruledoutactivistmonetarypolicy,whilecountriesdidnotfeelabletouse

activistfiscalpolicyeither.Indeed,theircommitmenttofiscaldisciplinemeantthat

inmanycasestheyengagedinpro-cyclicalausterity,inanefforttokeepbudget

deficitsundercontrol.Andinmanycases,tobefair,itseemedasthoughtheyhad

littlealternative,asnewlendingdrieduponinternationalcapitalmarkets.Itwas

onlyoncecountrieshadshakenoffthe"goldenfetters"ofthegoldstandard,and

regainedmacroeconomicpolicy-makingindependence,thattheystartedtorecover

–theUnitedKingdomin1931,theUnitedStatesandGermanyin1933,andthelast

holdoutsintheso-calledGoldBlocaslateas1935oreven1936.

AsEichengreenandIrwin(2010)argue,thegoldstandardalsoplayedakey

roleinpromotingtheprotectionismoftheinterwarperiod.Inpart,thiswassimply

becauseanythingthatprolongedthedepressionnecessarilyheighteneddemands

forprotectionfromimportcompetition.Andinpart,thegoldstandardmatteredfor

protectionbecausewhengovernmentswereunabletocombatthedepressionwith

eitherfiscalormonetarypolicy,theyinevitablyturned,eventually,tothosepolicy

instrumentsthatwereattheirdisposal,notablytariffs,quotas,andinmanycases,

exchangecontrols.

Butthegoldstandardalsomatteredforprotectionbecauseofthewayin

whichitwasdismantled.AsEichengreenandIrwinpointout,thefirstbestsolution

wouldhavebeenforallcurrenciestodevalueagainstgoldsimultaneously.Thisisnot

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whathappened–instead,somedevaluedearlierthanothers,intheprocessstealing

acompetitivemarchontheirrivals.Countriesremainingongoldfoundthemselves

withovervaluedcurrencies,andtheresultingbalanceofpaymentsdifficultiesthat

theyfaced,exacerbatedbythefactthatinternationalborrowingwasnolonger

possible,ledthemtoprotecttheirdomesticmarkets.Ascontemporary

commentatorspointedout,resorttoprotectionwasgreatestinthosecountries

stayingongoldthelongest:anirony,giventhatadherencetogoldwassupposedto

signalacommitmenttoarules-basedinternationaleconomicorder.Anditwasoften

whencountriesfinallydecidedtoabandongoldthattheystartedtopursuetrade

liberalization.Thus,theUnitedStatesleftgoldin1933,andthefollowingyear

enactedtheReciprocalTradeAgreementsAct,whichDouglasIrwin(1998a)

considerstobethemomentwhentheUSpivotedtowardsitspost-warroleas

defender-in-chiefofthemultilateralinternationaltradingsystem.

Seenfromthisperspective,thebigdifferencebetweenthetradecollapsesof

theGreatRecessionandGreatDepressionwasthemacroeconomicresponsestothe

twocrises.By2009,centralbanksandgovernmentsaroundtheworldwereengaging

inmonetary,andinsomecases,fiscal,stimulus.Whilemanycommentatorshave

sincethendecriedthelackofambitionshownbygovernmentswhenitcametofiscal

stimulus,therecanbenodoubtthatthemacroeconomicresponsetotheGreat

Recessionwasincomparablysuperiortothepoliciespursuedduringthe1930s.This

obviouslyexplainswhytheGreatTradeCollapseof2008-9wassoshortlivedin

comparisonwiththetradecollapseof1929-33,butitalsoexplainswhytherewasso

muchlessprotectionduringthelatercrisisthanwasexperiencedduringtheearlier

one.

18

6.Interwartradepolicy:consequences

Whatwastheimpactofinterwarprotectionism?Ifitwaseffective,thenit

shouldhavedisintegratedinternationalcommoditymarkets,drivingwedges

betweenproducerpricesinexportingcountriesandconsumerpricesinimporting

countries.Economichistorianshavespentconsiderableenergytryingtodocument

theevolutionoftheseinternationalpricegapsinpreviousperiods,asawayof

gauginglong-runtrendsinglobalization.Comparativelylittleworkhasbeendone

exploringtheimpactofinterwarprotectiononglobalmarkets(andIamunawareof

anyworkattemptingtodothesamefortheperiodsincetheGreatRecession,

perhapsbecausethereisnoreasontobelievethatinternationalcommoditymarkets

haveinfactbecomelesswellintegrated).However,whatworkhasbeendonefor

theinterwarperiodsuggeststhatprotectiondidimpedeinternationalcommodity

marketintegration.

Whenusingpricesinordertoaccuratelymeasuretrendsincommodity

marketintegration,ordisintegration,itisimportanttocomparelikewithlike.Hynes

etal.(2012)thereforeusepricedataextractedfromtheInternationalYearbookof

AgriculturalStatistics,publishedannuallybytheInternationalInstituteof

Agriculture,theforerunneroftheFAO.Theyearbookscontained374weeklyprice

seriesforagreatvarietyofcommoditiesandlocations.Fromthesepriceseries,we

wereabletoextract27pairsgivingpricequotationsforidenticalcommoditiesintwo

differentcities–forexample,"Danish,creameryforexport"butterquotedinboth

19

CopenhagenandLondon,or"No.2winter,American"wheatquotedinbothChicago

andLiverpool.

Armedwiththesepairsofpriceseries,wewereabletocalculatecommodity

andcity-pairspecificpricegaps,annually.Wedidsointwoways.First,weestimated

thresholdauto-regressions(TARs),annually,allowingustocalculatethetradecosts

(asapercentageofdestinationprices)abovewhichpricegapshavetorisebefore

arbitragetakesplace.Second,weaveragedtheweeklypricestogetannualaverages,

anddirectlycalculatedtheresultingpercentagepricegaps.Bothmethodstella

consistentstory.InternationalpricegapshadincreasedsharplyduringWorldWarI,

butfellthereafterastheinternationaleconomygraduallyreturnedtonormal.On

average,forthosecommoditiesforwhichcity-pairpricedatawereavailablefor

1913,theTARmethodologyindicatedthattradecostswere60%higherin1922than

theyhadbeenbeforethewar.By1929,theywereonly42%higher,butin1933they

were159%higher.Aslateas1938,marketswerestillmuchlesswellintegratedthan

theyhadbeenin1929:averagetradecostswere168%higherthantheyhadbeenin

1913.Thesefindingsareconsistentwiththeincreaseinaveragetradecostsbetween

1929and1933estimatedbyJacksetal.(2011),whofollowHeadandRies(2001)and

usegravitytechniquesanddataonbilateralaggregatetradeflows.

Thesehigherpercentagetradecostsweremoretheresultofchangesinthe

numerator(tradecosts)thaninthedenominator(prices).Higherfreightrateswere

nottoblame,since,contraEstevadeordaletal.(2003),theyfellinrealterms

between1925-29and1930-34.Tradepolicyseemslikeamuchmoreplausible

candidate:comparisonsbetweenpricegapsinvolvingtheUKandcountriesinside

theEmpiresuchasCanada(whichfacednoagriculturaltariffswhenexportingtothe

20

UK)andcountriesoutside,suchasArgentina,whichdidfaceagriculturaltariffswhen

exportingtoBritain,clearlyindicatethattradepolicywasanimportantfactordriving

highertradecostsduringthisperiod.However,thereisalsoanecdotalevidence

suggestingthatscarcecreditanduncertaintymayhavebeenincreasingtradecosts

duringtheperiod,evenbetweencountriessuchasCanadaandtheUK.

Itseemsasthoughcommoditymarketsdisintegratedduringthe1930s.What

weretheimplicationsofinterwarprotectionismfortradeflows?Thecurrent

consensusisprobablythat,whileprotectionismdepressedtradeflowsoverall,its

impactwasminorrelativetotheenormouscollapseofoutputandincomes

experiencedduringtheperiod.7Inanearlycontribution,Irwin(1988b)usedpartial

equilibriumtechniques(andeconometricallyestimatedelasticities),andfoundthat

evenintheabsenceofanychangeintariffrates(butaccountingfortheincome

declinesoftheperiod),USimportswouldhavedeclinedby31.9%between1930:II

and1932:III,ascomparedwiththe41.2%reductionthatactuallytookplace.Evenin

theabsenceoftheSmoot-Hawleyrevisionstotariffschedules(butaccountingfor

theimpactofincomedeclinesanddeflation),USimportswouldhavefallenby38.3%

overtheperiod,orbyalmostasmuchasactuallyoccurred.Thefindingistherefore

thattradedeclineswereprimarilyduetofallingincome,withdeflationalsoplaying

animportantrole(byraisingtheadvaloremequivalentofspecifictariffs),and

Smoot-Hawleybeingarelativelyunimportantplayerintheprocess.8

7Madsen(2001)isanexception.8Estevadeordal,FrantzandTaylor(2003)estimateagravitytrademodelusingpooleddatafor1913,1928and1938.Theyfindlargenegativecoefficientsonaveragetariffs,althoughtheseareoftenstatisticallyinsignificantatconventionallevels.Theyalsofindthatworldtradecouldhavebeenabout50%higherinthe

21

Perhapsitisnotsosurprisingthatprotectionhasemergedinthecliometric

literatureasarelativelyminorcontributortotheworldtradecollapseof1929-33–

worldincomeandoutputfellbysomuchduringthisperiodthatitcanplausibly

accountforthemajorityofdecliningtrade,leavingrelativelylittleforrisingtrade

barrierstoexplain.Butthequantitativeliteraturehasalsotendedtodownplaythe

impactoftradepolicyonasecondstrikingfeatureofworldtradeduringthisperiod

–itsdecreasinglymultilateralnature.

FolkeHilgertwroteparticularlyfrequentlyonthesubject.Asearlyas1935,

henotedthatthetraditionalmultilateralpaymentssystem,whichhadbeen

establishedinthenineteenthcentury,hadbrokendown(Hilgerdt,1935).Rapidly

industrializingeconomiesinContinentalEuropeandtheUnitedStatestraditionally

paidfortheirincreasingimportsoffoodandrawmaterialsbyrunninganexport

surplusinmanufacturinggoodsvis-à-vistheUK.TheUK,initsturn,financedthis

manufacturingdeficitinlargepartwiththeincomeitmadeonitsenormous

overseasinvestments,butalsobymeansofamanufacturingexportsurplustoits

colonialempire.Debtorcountriesfinancedtheirdebtsbyexportingprimary

products,bothtoBritainitself,andtoContinentalEuropeandNorthAmerica.

Allthischangeddramaticallyduringthe1930s:“Wemaycharacterizethe

changethatoccurredasadisintegrationofworldtrade:whilepreviously

internationalsettlementtookplacewithinaworld-widenetworkofmultilateral

1930sthanitactuallywasifworldtariffshadstayedattheir1913levels.However,theircounterfactualdoesnotaddresstheissueofwhattheimpactwasoftheincreaseinprotectionafter1929onworldtradebetween1929and1932.Similarly,Jacksetal.(2011)donotaddresstheissueofwhatcausedthetradecollapseof1929-33,althoughtheyfindthatfortheentire1921-39period,risingtradecostsfullyoffsettheimpactofGDPgrowthonworldtradeflows.

22

transactions,therewasinthe‘thirtiesatendencytoachievesettlementeitherin

bilateralexchangebetweentwocountries,orwithinthelimitedrangeofcountries

attachedtoeachotherbypoliticalorotherties”(LeagueofNations,1942,pp.90-1;

citedinEichengreenandIrwin1995,p.1).Table1givestheLeagueofNation'sdata

ontheshareofmajorcountries'exportsgoingto,orimportscomingfrom,their

empiresorspheresofinfluence.Ascanbeseen,thesesharesincreased

systematicallyafter1929.TheincreaseoccurredduringtheDepressionyearsinthe

casesofBritain,France,theUnitedStates,andPortugal;itoccurredafter1932inthe

casesofGermany,Italy,andJapan.TheshareofItalianexportsgoingtohercolonies

andEthiopiarosefrom2to23%between1929and1938,whiletheshareofGerman

exportsgoingtosoutheastEuroperosefrom5to13%,andtheshareofJapanese

exportsgoingtoKoreaandTaiwanrosefrom17to33%.Therewerealsolarge

increasesinimperialtradesharesinbothBritainandFrance.

Table1.Theshareofformalandinformalempiretrade,1929-1938

Inapioneeringpaper,EichengreenandIrwin(1995)downplaytheroleof

tradeblocsincreatingthetradebalkanizationoftheperiod.UsingtheLeagueof

Nation’sdataonbilateraltrade,theyfindthatpairsofcountriesthatbothbelonged

totheBritishCommonwealthtradedmoreheavilywitheachotherinthe1930s.

However,theyalsofindthatthiseffectwasalreadypresentin1928,beforeBritain

movedtoprotection,andbeforethe1932Ottawaagreementssetinplace

preferentialtradepolicieswithintheEmpire.Theyconcludethat“thetendency

towardregionalisationcommonlyascribedtotheformationoftradeandcurrency

23

blocswasalreadyevidentpriortotheregionalpolicyinitiativesofthe1930s;toa

considerableextentitisattributabletoongoinghistoricalforcessuchascommercial

andfinanciallinkagesbetweencountriesforgedovermanyyears.”Subsequent

literature(WolfandRitschl2011,GowaandHicks2013),alsousingdataon

aggregatetrade,hascometosimilarconclusions,althoughGowaandHicks(2013)

findthattradepolicymayhaveboostedtradebetweentheUKandherDominionsin

ahubandspokemanner(thoughnotbetweentheDominions).

Inarecentpaper,co-authoredwithAlandeBromhead,AlanFernihough,and

MarkusLampe,Irevisitthequestionofwhethertradepolicywasresponsibleforthe

shifttowardsintra-imperialtrade,butadoptanentirelydifferentempiricalapproach

intacklingtheissue(deBromheadetal.2017b).Ratherthanexploringthe

relationshipbetweenbilateralaggregatetradeflows,ontheonehand,andjoint

membershipofanimperialbloc,ontheother,weexploreingranulardetailthe

changingtradepoliciespursuedbytheUnitedKingdom,andaskwhetherthesecan

helptoexplaintheincreasingshareofUKimportscomingfromtheEmpire.Tothis

end,weconstructadatabaseofUKimportsof258productcategories

(commodities),from42countries,between1924and1938.Wealsocalculate

commodityandcountry-specifictariffrates,andcodeaseriesofdummyvariables

indicatingwhetherquantitativerestrictionsofvariouskindsappliedtoimportsof

particularcommoditiesfromparticularcountriesinparticularyears.Thisallowsusto

computeelasticitiesofsubstitutionbetweenvarietiesofthesamegoodcomingfrom

differentcountries(forexample,wheatcomingfromFranceandCanada).

WethenplugthoseelasticitiesintoasimplemodeloftheUKeconomy,and

calculatecounterfactualimportflows,foreachcommodityandtradingpartner,

24

assumingthattheshifttoprotectionin1931hadnottakenplace(thatis,holdingthe

structureofprotectionfixedatits1930levelinsubsequentyears).Havingdonethis,

wecancalculatecounterfactualImperialsharesofUKimports;bycomparingthese

counterfactualshareswiththeactualshares,weobtainestimatesoftheimpactof

protectionontheshareoftheBritishEmpireintheUK’simports.

Thatimpactwaslarge.Iftradepolicyhadremainedfrozenatits1930level,

theEmpirewouldhaveaccountedforbetween30%and32%ofUKimportsin1935,

whereasinfactitaccountedfor39%.Onaconservativeestimate,tradepolicy

accountedfor70%oftheshiftbetween1930and1933,and60%oftheshift

between1930andeither1934or1935.Discriminatorytradepolicymaynothave

beenthemajorfactorreducingtradeflowsduringthisperiod,butithadamajor

impactonthedirectionofthoseflows.

Atradetheorist,impressedbytheextenttowhichimportsfromsomeparts

oftheworldwereabletosubstituteforimportsfromelsewhere,mightconclude

thatthewelfareimpactofinterwartradepolicieswasnotthatgreat–atleast,ifit

turnsoutthattheresultsobtainedforBritaincanbegeneralized.Butthatwouldbe

tomissthepoliticalcontextoftheperiod,andtherealsignificanceofthese

discriminatorytradepolicies,andtheformationofimperialorquasi-imperialtrade

blocs.Contemporariesandsubsequenthistorians,lookingbackattheexperienceof

theinterwarperiod,wereinlittledoubtthatthemoveawayfrommultilateralism

wasoneofthemostdestructiveanddangerousfeaturesoftheinterwareconomy.It

obviouslyreflectedthegrowingpoliticaltensionsoftheperiod,butobserversfelt

thatitalsocontributedtothem.Writingin1941,J.B.Condliffewrotethat"itisnow

soobviousastohardlyneedstatementthatbilateraltradetookonaggressiveand

25

destructiveaspectsasinternationalrivalriesweresharpenedintheeraofwhatis

nowknownaspre-belligerancy"(Condliffe,1941,p.287).

Bilateraltradecouldbeparticularlyworryingwhencountrieswereheavily

dependentonimportedrawmaterials,sinceitinevitablyledtoconcernsinsome

casesaboutfutureaccesstosuchitems.In1935,Hilgerdtwrotethat"Asbilateralism

particularlyrendersthesupplyofrawmaterialstocertaincountriesdifficult,it

threatenstoleadtoanintensifiedfightforinfluenceupon(orthedominationof)the

undevelopedcountries,andtherebytopoliticalcontroversies,whichmayadversely

affectallformsofpeacefulcollaborationbetweennations”(Hilgerdt,1935,p.188).

Inparticular,countrieswhichfinancedtheirimportsofrawmaterialsfromthe

tropics,or“regionsofrecentsettlement”,byexportingmanufacturedgoodstothe

UKandotherrichcountries,mightfindthemselvesfacing"theproblemof

commercialaccesstorawmaterialswhichovershadowedcommercialandpolitical

relationsduringthethirties"(Hilgerdt1943,p.404).Efficientspecializationrequired

multilateraltrade;"Failingthis,therewillalwaysbeastrongincentiveforeach

countrytoincreasetheefficiencyofitseconomybyincludingforeignareasunderits

domination.Toascertainthefunctioningofthemultilateraltradingsystemis

thereforenotonlyaneconomictask,itisalsoanobjectofgeneralpolicy,asit

reducestensionsofthekindthatareinstrumentalinbringingaboutwar"(ibid,p.

405).

Inarecentpaperco-authoredwithRobertoBonfatti(BonfattiandO'Rourke,

forthcoming),Idevelopamodelthathelpstoelucidatethewaysinwhichsuch

tensionsmightindeedbringaboutwar.Weconsideraworldinwhichafolloweris

catchinguponanestablishedleader,andinwhichthefollowercannotcrediblypre-

26

committonotuseitsgreaterpowerinthefuture.Inthistypeofmodel,thetypical

predictionisthattheleadermaythereforepre-emptivelyattackthefollower,locking

inthebenefitsofitsexistingstrongpositionbeforeitistoolate.However,itwas

JapanthatattackedtheUnitedStatesin1941,notviceversa.Inordertoexplainthis

andvariousothercases,weintroducetwonewassumptionsintothestandard

model.First,weassumethatthefollowerneedstoimportincreasingamountsof

rawmaterialsfromtherestoftheworld,asitundergoesstructuralchange;and

second,weassumethattheleader,astheestablishedhegemon,maybeableto

blockadethefollower’strade.

Theestablishedleadermaywellbelosingouttothecatching-upfollowerin

termsofpotentialmilitarypower.However,industrialcatchingupisadouble-edged

swordforthefollower–whileitmakesitsmilitaryapparatuspotentiallymore

powerful,rapidgrowthandstructuralchangealsomakesitmoredependenton

importedrawmaterials.Iftheleaderhasthecapacitytoblockadetheseimportsin

caseofwar,thefollowermayactuallybecomemilitarilyweaker,ratherthan

stronger,overtime.Inthiscase,itmaybethefollowerthatlaunchesapre-emptive

warontheleader,andnottheotherwayaround.Thefollowermayalsodecideto

attackresource-richperipheralareasinanattempttobecomemoreself-sufficient,

orentirelyself-sufficient,inrawmaterials,evenifbydoingsoitrunstheriskthatthe

leaderwillrespondbydeclaringwaronit.WorldWarIIobviouslyhadmanydifferent

causes,butequallyobviouslyadesiretoachievestrategicself-sufficiencyhelpsto

explainJapan'sinvasionsofManchuria,China,andSoutheastAsia,aswellas

Germany'sinvasionsofPoland,and,especially,theSovietUnion(Barnhart1987,

Tooze2006).ThebreakdownofthemultilateraltradingsystemcannotexplainHitler,

27

ortheoutbreakofWorldWarII,butitwassurelyonefactoramongseveralmaking

theworldamuchmoredangerousplaceduringthe1930s.

7.Afinalthought

LetmeendwhereIbegan,inSoutheastAsia,attheheartoftheoldsea

routeslinkingEastandWest.OneofthemostobviousfeaturesofSoutheastAsian

geographyisthenaturalbottlenecksorchokepointsthroughwhichtradehasto

passonitswayineitherdirection:inparticulartheMalaccaStraits,butalsothe

IsthmusofKraandtheSundaStraits.Whateverpowerwasincontrolofthese

bottleneckscouldpotentiallyearnlucrativerents,basedontaxingthetradepassing

throughthem.Betweentheseventhandeleventhcenturies,astateknownas

Srivijaya,basedinPalembanginsouth-easternSumatra,establishedaprosperous

andpowerfultradingempirebasedoncontrolofthestraits.Araidin1025bythe

CholadynastyofsouthernIndiaendedSrivijayanhegemony,butthestrategic

importanceofthestraitsneverdiminished.APortugueseapothecarynamedTomé

PiresstayedinMalaccabetween1512in1515,shortlyafterthePortuguese

conqueredit.InhisSumaOriental,writtenduringhisstaythere,hewrote

enthusiasticallythat"theLordofMelakahashishandonthethroatofVenice"–

sincebycontrollingthestraits,PortugalcouldchokeoffthesupplyofSoutheast

AsianspicesgoingtoherVenetianrival.Halfamillenniumlater,theChinaYouth

28

Dailywrotethat"ItisnoexaggerationtosaythatwhoevercontrolstheStraitof

MalaccawillalsohaveastrangleholdontheenergyrouteofChina".9

Iftheexperienceofthe1930stradecollapseisanythingtogoby,

discriminatoryprotectiondistortingthepatternoftradecanbeaverydangerous

thing.IftheveryfirstarticleoftheGATTprohibiteddiscriminatorytradepolicies,this

wasforagoodreason.Geographymeansthatwewillalwaysliveinaworldinwhich

somecountriesaredependentonimportedfoodandrawmaterials,sometimes

uncomfortablyso.Therewillalwaysbestrategicvulnerabilitiesfacingsomestates,

andgeographicalchokepointstoexacerbatethese.Despitesomeprotectionist

backsliding,theruleoflawhasgenerallyheldsince2008.Maintainingarules-based,

multilateral,internationaltradingsystemwillbecrucialgoingforward,notjuston

economicgrounds,butinordertokeepthepeace.

9ChinaYouthDaily,June15,2004.

29

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JohnWiley&Sons,.

Temin,Peter.1989.LessonsfromtheGreatDepression.Cambridge,Massachusetts:

MITPress.

36

Tooze,J.Adam.2006.Thewagesofdestruction:themakingandbreakingofthe

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Yates,P.Lamartine.1959.Fortyyearsofforeigntrade:astatisticalhandbookwith

specialreferencetoprimaryproductsandunder-developedcountries.London:Allen

&Unwin.

Inim

ports

Inexports

Trad

eof

Shareof

1929

19

32

1938

19

29

1932

19

38

UnitedKing

dom

BritishCom

mon

wealth

,colon

ies,protectorates,

etc.

30.2

36.4

41.9

44.4

45.4

49.9

UnitedStates

Phillippine

s2.9

6.1

4.8

1.6

2.8

2.8

Fran

ce

Fren

chcolon

ies,protectoratesand

man

dated

territo

ries

12

20.9

25.8

18.8

31.5

27.5

Belgium

BelgianCo

ngo

3.9

3.8

8.3

2.6

1.3

1.9

Nethe

rland

sNethe

rland

soverseasterritories

5.5

58.8

9.4

5.9

10.7

Italy

Italiancoloniesand

Ethiopia

1.5

1.1

1.8

2.1

3.6

23.3

Portug

al

Portug

ueseoverseasterritories

7.9

10.4

10.2

12.7

13.9

12.2

Japa

nKo

reaan

dForm

osa

12.3

26.2

30

16.8

21.6

32.9

Kw

antung

6

41.6

4.8

6.8

13.7

Man

churia

1.9

2.7

92.5

1.5

8.1

Re

stofC

hina

5.8

44.4

10.9

7.3

8

TotalJap

anesesphe

reofinfluen

ce

26

36.9

45

35

37.2

62.7

German

yBu

lgaria,G

reece,Hun

gary,R

oman

ia,Turkey,

Yugo

slavia

4.5

5.5

12

53.9

13.2

Latin

America

12.2

11.2

15.6

7.8

4.3

11.5

To

talG

erman

sphe

reofinfluen

ce

16.7

16.7

27.6

12.8

8.2

24.7

Table1.The

shareoffo

rmaland

inform

alempiretrad

e,192

9-1938

Source:LeagueofNations(1

939,pp.34-5).

38

Figure1.EnglishandFlemishrealpepperprices,1400–1500

Source:O’RourkeandWilliamson(2009).

0

50

100

150

200

250

300

350

400

1400 1410 1420 1430 1440 1450 1460 1470 1480 1490 1500

1500=100

Antwerp England

39

Figure2.SoutheastAsiancloveexportsandprices,1500–1789

Source:Bulbecketal.(1998,table2.15,pp.58–59).

0

200

400

600

800

1000

1200

0

50

100

150

200

250

300

350

400

450

500

1500 1550 1600 1650 1700 1750 1800

Dollarsperton

Tons

Exports(lefthandscale) Price(righthandscale)

40

Figure3.Clovepricegaps,Amsterdam-SoutheastAsia,1580s-1880s

Source:O’RourkeandWilliamson(2002),basedondatainBulbecketal.(1998).

0

5

10

15

20

25

30

1580 1630 1680 1730 1780 1830 1880

Amsterdamprice/SoutheastAsianprice

41

PanelA.Worldtrade

PanelB.Worldindustrialoutput

Figure4.Twogreattradecollapsesandindustrialdepressions

Source:EichengreenandO’Rourke(2009),updatedusing

http://www.cpb.nl/en/figure/cpb-world-trade-monitor-april-2017

40

50

60

70

80

90

100

110

120

130

1

6

11

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86

91

96

101

106

111

June1929=100 April2008=100

40

50

60

70

80

90

100

110

120

1

6

11

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86

91

96

101

106

June1928=100 April2008=100

42

PanelA.Worldoutput

PanelB.Worldtrade

Figure5.WorldoutputandtradeduringtheGreatDepression

Source:Almuniaetal.(2010).

60

70

80

90

100

110

120

130

1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

1929=100

Agriculturalprimary Non-agriculturalprimary

Semi-manufacturedrawmaterials Manufacturing

50

60

70

80

90

100

110

1928 1930 1932 1934 1936 1938 1940

1929=100

Manufacturing Non-manufacturing

43

PanelA.Worldoutput

PanelB.Worldtrade

Figure6.WorldoutputandtradeduringtheGreatRecession

Source:WorldDevelopmentIndicators,WTO

90

95

100

105

110

115

120

125

2008 2009 2010 2011 2012 2013 2014 2015 2016

2008=100

Agriculture Manufacturing Services

80

85

90

95

100

105

110

115

120

2008 2009 2010 2011 2012 2013 2014 2015

2008=100

Agriculturalproducts Fuelsandminingproducts

Manufactures

44

PanelA.Worldmanufacturingtradeduringtwocrises

PanelB.Theimpactofcompositionalshiftsonthevolumeofworldtrade

Figure7.Thechangingcompositionofworldtrade1929-2007andtheGreatTrade

Collapse

Sources:PanelA:asforFigures6,7;PanelB:Almuniaetal.(2010),updated.

50

60

70

80

90

100

110

120

1 2 3 4 5 6 7

1929or2008=100

GreatDepression(1929=100) GreatRecession(2008=100)

60

70

80

90

100

110

120

1929 1929.5 1930 1930.5 1931 1931.5 1932 1932.5 1933

1929=100

GreatDepression

GreatDepressionwithGreatRecessionweights

GreatRecession

45

PanelA.Advancedversusemergingeconomies

PanelB.Regionalexportdeclines

Figure8.RegionalexportvolumesduringandaftertheGreatRecession

Source:http://www.cpb.nl/en/figure/cpb-world-trade-monitor-april-2017

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

Apr-08 Aug-09 Dec-10 May-12 Sep-13 Feb-15 Jun-16

April2008=100

Advanced Emerging

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

Apr-08 Oct-08 May-09 Nov-09 Jun-10

April2008=100

Advanced EmergingAsia CEE

LatinAmerica MENA

46

Figure9.AveragetariffsworldwideduringandaftertheGreatDepressionand

GreatRecession

Source:ClemensandWilliamson(2004),WorldDevelopmentIndicators.

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014 2015

Percent

Now:allproducts Now:manufacturedproducts

Now:primaryproducts GreatDepression(2007=1928)