Tag Archives: trade

Industrialization, Gold, and Empires: Trade Collapse in the Great Recession vs. the Great Depression

Two Great Trade Collapses: The Interwar Period & Great Recession Compared

by Kevin Hjortshøj O’Rourke (All Souls, University of Oxford)

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.

URL: https://econpapers.repec.org/paper/cprceprdp/12286.htm

Distributed by NEP-HIS on 2017-09-24

Review by Anna Missiaia

Comparisons between the Great Depression of the 1930s and the Great Recession of 2008-10 have been performed by several scholars interested in the lessons that we could draw from history. Famous examples are Eichengreen’s Hall of Mirrors: The Great Depression, The Great Recession, and the Uses-and Misuses-of History in which the economic policies in the two crisis are compared, or Crafts and Fearon’s The Great Depression of the 1930s: Lessons for Today” in which contribution from a variety of fields are collected. The paper by Kevin O’Rourke proposed here contributes to the same line of research by using a large body of empirical evidence on both the Great Depression and the Great Recession to compare the different outcomes on trade of the two crises. In both the 1930s and 2008-10, the level of global trade experienced a contraction; however, the effect was initially more sever in the latter but much more persistent in the former, pointing to different dynamics in the two cases. Figure 1 illustrates the two trajectories.

 

Figure 1: World Trade during the Great Depression and the Great Recession: months after June 1929 and April 2008

According to the author, the striking different behaviors of trade in the two crises are linked to a different composition of the world exports. On the eve of the Great Depression, industrial products accounted for roughly 44% of total trade; in 2007 the same figure had risen to 70%. This is important in the light of different volatilities of these two broad classes of goods. Figure 2 shows world trade divided into manufacturing and non-manufacturing during the Great Depression while Figure 3 shows the same for the Great Recession.

 

Figure 2: Manufacturing and Non-Manufacturing World Trade during the Great Depression, 1929-1940

Figure 2: Manufacturing and Non-Manufacturing World Trade during the Great Depression, 2008-2015

From these two graphs, we see that in both cases non-manufacturing trade (basically composed of agricultural products) did not collapse but it was rather the manufacturing exporting sector that suffered the most (of course this is in terms of volumes, not prices). The compositional effect therefore explains the much more violent decrease in the first years of the Great Recession, but also the faster recovery (although the former is discussed by O’Rourke much more in detail compared to the latter). O’Rourke illustrates this compositional effect using counter-factual analysis which basically applies the shares of manufacturing and non-manufacturing of 2007 to trade during the Great Depression, showing that the pattern is very much changed depending on the composition. The different share of manufacturing during the two crises is driven by the catch up of the periphery, and in particular Asia, which was during the Great Recession much closer to the level of industrialization of the core countries, leading to a more “regionally balanced” shock at world level.

The Great Depression had seen a deterioration of the terms of trade of developing countries, leading to an increase in protectionist measures. O’Rourke suggests that one of the explanations to both the depression and the protectionist measures is found in the monetary regime: the Gold Standard had deprived countries of the possibility to implement counter-cyclical monetary policies, leading to the sole use of protectionist policies in the attempt to contrast the former. The lack of coordination among countries, which got off gold in different moments, made the late movers deal with an overvalued currency which worsened their position even further.  The paper also contains a positive assessment of the crisis response after the 2008 crash, when countries behaved in a much more coordinated fashion and were able to apply monetary and fiscal stimulus which ultimately led to a much shorter contraction of trade worldwide.

Figure 4: Victims of High Tariffs during the Great Depression.

Using again a counterfactual analysis, O’Rourke (citing his work with de Bromhead et al., 2017) shows that also the existence of trading blocs, and notably the British Empire, led to a “balkanization” of trade during the 1930s. This ultimately led to a contraction of overall trade that was not observed in the much more multilateral trade environment of 2008-10. More multilateralism also led to more efficient specialization worldwide and therefore to a milder effect of the crisis on trade.

The paper provides several policy-oriented results that should be considered in times of economic crisis (and to some extent cast a positive light on how the latest crisis has been handled). The first result is that multilateralism in trade is good for everyone because of its expansive effect of trade. The recent attacks to multilateral trade agreements, for instance through the threat by the US to leave NAFTA or by the UK to leave the EU single market, are dangerous both economically and politically. The paper also contains a historically grounded praise of the monetary and fiscal policies pursued in this latest crisis compared to the detrimental ones in the 1930s. Maybe, after all, we do learn from our mistakes and this is also thank to the efforts by economic historians.

Bibliography

Crafts, N. and P. Fearon (2013) The Great Depression of the 1930s: Lessons for Today. Oxford: Oxford University Press.

de Bromhead, A., A. Fernihough, M. Lampe and K. H. O’Rourke (2017) “When Britain Turned Inward: Protection and the Shift towards Empire in Interwar Britain”, CEPR Discussion paper 11835.

Eichengreen, B. (2015) Hall of Mirrors: The Great Depression, The Great Recession, and the Uses-and Misuses-of History. Oxford: Oxford University Press.

 

 

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Little Britain? Empire and the rise of protectionism in interwar Britain.

When Britain turned inward: Protection and the shift towards Empire in interwar Britain

By Alan de Bromhead (Queen’s University Belfast), Alan Fernihough (Queen’s University Belfast), Markus Lampe (Vienna University of Economics and Business) and Kevin Hjortshøj O’Rourke (University of Oxford)

International trade became much less multilateral during the 1930s. Previous studies, looking at aggregate trade flows, have argued that discriminatory trade policies had comparatively little to do with this. Using highly disaggregated information on the UK’s imports and trade policies, we find that policy can explain the majority of Britain’s shift towards Imperial imports in the 1930s. Trade policy mattered, a lot.

URL http://econpapers.repec.org/paper/nbrnberwo/23164.htm

Distributed by NEP-HIS on: 2017-03-20

Reviewed by Mark J Crowley

This paper provides an interesting insight into tariffs, and their role in interwar Britain from a perspective that has not been previously examined.  An examination of this issue is timely, especially with the debates surrounding the implication of Britain’s withdrawal from the European Union, and the threats issued by the American Trump administration concerning future trade policy.  It demonstrates that the impact of tariffs during the economic crises of the 1930s had a variable impact, and did not always achieve their intended outcome.  In this respect, the impact of punitive trade policies from a historical perspective can provide a very important context to future negotiations as the world becomes acclimatised to a very different political landscape.

Tariff reform was a huge issue for the British government in the early twentieth century, and the subject of significant political propaganda.

The paper is deeply researched, and draws on a wide collection of data.  One of the main conclusions is that trade blocs made very little difference, nor did the imperial preference scheme, to the balance and nature of the British economy in the crisis years.  However, it does show that the change in the nature of trade, away from free trade to focusing specifically on empire did have specific outcomes that shaped the direction of the British economy, but that these changes were caused specifically by trade policy rather than anything else.  Indeed, the authors show that as a result of the changing nature of the British government’s trade policy, a 70% increase in empire trade was reported in the period 1930-33.  In this respect, the paper poses a very interesting question that is addressed, but will need further historical enquiry:  Did trade policy contribute to return of intra-Imperial trade?

The paper looks at a range of policies pursued by the British government in the period after the First World War, some of which were discriminatory, in order to evaluate the nature of its economic and trade development.  In compiling their conclusions, a huge amount of data was analysed, including data sets from 42 countries examining 200 products categories between 1924-1938.   The data showed that dramatic changes were seen in the nature of Britain’s trade and economic policy in the period 1931-33.  Nevertheless, these changes had long roots.  The abolition of free trade after the First World War saw the introduction of the McKenna Duty, which imposed a 33.5% tariff on cars, clocks, watches, films and musical instruments ad valorem (based on the value of the goods).  This was later intensified with the implementation of the 1921 Safeguarding of Industries Act, where a 33.5% tariff was placed on the imports of key goods.  However, despite the apparent punitive nature of these policies, the British economy was largely Liberal up to 1930, when the Abnormal Importations Act allowed 100% tax on all manufactured goods from outside the empire.

tr2

Utilising goods from the empire was seen as an excellent opportunity for the British government to stablilise its economy during the challenges of the Great Depression.

Realising the potential difficulties that such a punitive law could unleash, a more compassionate deal was reached in the 1932 Import Duties Act, where it was agreed that a 10% tax be imposed on imported goods, although this exempted products from the empire.  This concession was achieved with the aim of ensuring improved access to dominion markets, and resulted in several bilateral agreements with Canada, Australia, New Zealand, South Africa, Newfoundland, India and Southern Rhodesia.  Nevertheless, with the introduction of quotas for agricultural products through the Agricultural Marketing Acts of 1931 and 1933, there were now restrictions on the type of farming products that could be imported.  Moreover, in a tone that is reminiscent of the pro-Brexit camp both during and after the referendum, the British explored deals that went beyond the traditional confines of Europe in order to strengthen its economy, and this included Scandinavian countries and Argentina.  This not only improved British trade prospects, but provided the mutually-beneficial element to these countries in order to maintain access to the British market for the purpose of trade.

tr3.jpg

The 1932 Import Duties Act was seen by many as symbolic of punitive protectionist policies pursued by the British government.

Critique

There are so many fantastic elements to this paper that not only shed new light on the issue of tariffs, but also provide the foundation for future debate.  Nevertheless, the authors have highlighted what they believed were the difficulties in their research, especially concerning the masses of data that they collected.  They believed that there were inconsistencies in the data, but have done a wonderful job in using spreadsheets to predict the results in the absence of concrete data.  In some cases, the use of complicated mathematical formulas has been used to come to these conclusions.  The fact that the paper engages in counterfactual debate provides an important foundation for future discussion, but also lends itself to its own difficulties.  Counterfactuals, although interesting, cannot be definitively proven.   In this respect, the paper poses several “what if” questions relating to tariffs, especially what would have happened if tariffs had not been increased.  In their conclusions, they argue that it appears that the empire did better with tariffs than without, and if there was free trade, there would only have been a modest increase in the empire share of trade.  Thus, the impact of British protectionist policies proved substantial, and, they argue, account for a shift of around 50% of trade towards the empire by 1930.   The conclusions are interesting and useful, but as the authors explain, a lot of work needed to be done to fill the gaps in the data.  It is the interpretation of these gaps in the data, especially the ways in which some conclusions have been reached through the use of counterfactual debate that will undoubtedly provide the platform for future historical enquiry on this topic.

References

Eichengreen, Barry, and Douglas A. Irwin. The slide to protectionism in the Great Depression: Who succumbed and why?. No. w15142. National Bureau of Economic Research, 2009.

Capie, Forrest. Depression & Protectionism: Britain Between the Wars. Vol. 2. Routledge, 2013.

Temin, Peter. Lessons from the great depression. MIT Press, 1991.

On #Trade, #Globalization, #Development and Steamships

The Wind of Change: Maritime Technology, Trade and Economic Development

by

Luigi Pascali (L.Pascali@warwick.ac.uk) University of Warwick (UK) and Pompeu Fabra University (Spain)

ABSTRACT

The 1870-1913 period marked the birth of the …first era of trade globalization. How did this tremendous increase in trade affect economic development? This work isolates a causality channel by exploiting the fact that the steamship produced an asymmetric change in trade distances among countries. Before the invention of the steamship, trade routes depended on wind patterns. The introduction of the steamship in the shipping industry reduced shipping costs and time in a disproportionate manner across countries and trade routes. Using this source of variation and a completely novel set of data on shipping times, trade, and development that spans the great majority of the world between 1850 and 1900, I …find that 1) the adoption of the steamship was the major reason for the …first wave of trade globalization, 2) only a small number of countries that were characterized by more inclusive institutions bene…fited from globalization, and 3) globalization exerted a negative effect on both urbanization rates and economic development in most other countries.

URL: http://econpapers.repec.org/paper/wrkwarwec/1049.htm

Review by Natacha Postel-Vinay

The 1870-1913 period saw the first significant wave of trade globalization, which introduced important economic and social changes throughout the world. Despite an abundant literature on the causes of globalization at the time, there are significant methodological issues with these studies. Even more surprisingly, very little has been said about the impact of globalization in this era on the economies of countries around the world. In particular, an essential question to ask seems to be whether the increase in trade witnessed at the time was conducive to greater economic development worldwide.  In a highly ambitious move, Luigi Pascali’s paper (distributed by NEP-HIS on 2014-07-13) tackles both issues at the same time, and in so doing contributes significantly to the larger debate on the causes and consequences of trade globalization.

The main challenge in answering these two questions is to deal in each case with an endogeneity problem. Start with the causes of the trade boom. In their attempts to determine whether the rise in international trade could be due to transportation costs, authors have often used freight rates as a proxy for these costs. The problem with this approach is that freight rates are the actual price of transportation. They may be affected by factors which are themselves related to the state of trade (such as demand for goods or economic activity). So causation may not actually run from freight rates to trade – but from other factors related to trade to freight rates.

A similar issue arises when looking at the causal relationship (if any) from trade to economic development. As economic activity may itself have a positive impact on trade – and not just the other way around – a researcher dealing with this question may find a positive correlation between the two but will eventually be faced with a potential endogeneity problem.

Pascali found a creative solution to these difficulties. He did so by making use of the fact that the steamship introduced asymmetric changes (ie. exogenous variation) in trade distances between countries.  Before the steamship, shipping times by sail were mainly determined by wind patterns. The steamship therefore introduced greater changes in shipping times between some countries than between others. Such changes were purely independent of other factors affecting trade, and only linked to such things as the direction of wind and water currents. It thus became possible for the author to examine the effect of a large change in shipping time on trade, independent of other factors linked to trade such as economic activity or market structure.

Clipper ship from the 1850s.

Clipper ship from the 1850s.

To compute such a variable, Pascali built an enormous dataset on sailing times (using such variables as velocity and direction of sea-surface winds) and calculated the likely effect of the adoption of the steamship on shipping times for 129 countries between 1850 and 1900. He also expanded available datasets to include more than 5,000 entries on imports and exports and data on urbanization for more than 5,000 different cities.

What he found was that the introduction of the steamship had a much larger (positive) impact on trade than was previously thought.

Pascali also found that he could use the steamship variable to search for causal links running from trade to greater income levels and development. As mentioned above he had isolated changes in shipping times including the influence of countries’ economic activity. But these changes were strongly related to trade itself. They were then used as instrumental variable in a two-stage least squares (2SLS). In other words, this variable effectively dealt with the endogeneity problem in the analysis of the effects of trade on development.

His results were somewhat surprising. Using this variable as an instrument, the regression of development (urbanization, population density and per-capita GDP) on trade yielded mostly significant but negative coefficients on the explanatory variable. It therefore appears that variation in the intensity of trade between two locations does not have a large impact on development – and may even have a negative one.

Even more interestingly, his findings suggest that whether an increase in trade has a positive impact on development depends on a country’s institutions:  only a few countries having a better established rule of law (as measured by “constraints on the executive” – taken from Acemoglu and Johnson (2005)) benefited from an increase in international trade in terms of development. This finding can be related to relatively recent literature (such as Krugman (1991) or Crafts and Venables (2007)) according to which a reduction in trade costs is only beneficial to a certain set of countries (in particular, those specializing in manufacturing).

A steamship from the 1900s.

A steamship from the 1900s.

Pascali’s paper thus contributes to questioning the positive effects of lowering trade barriers, which are too often taken for granted. He carefully suggests that trade may have a differential impact depending on countries’ institutions. Perhaps some elaboration and discussion on how exactly these relationships play out would have been welcome.  Nevertheless the author’s questions, creative methodology and findings all make for a fascinating read.

Additional References

Acemoglu, D. and S. Johnson (2005). “Unbundling institutions”. Journal of Political Economy 113(5): 949–995.

Crafts, N. and A. Venables (2007). Globalization in Historical Perspective. University of Chicago Press.

Krugman, P. (1991). “Increasing returns and economic geography”. Journal of Political Economy 99: 483-499.