Post WWII and Interwar Trade Regimes - Coursework Example

Post WWII and Interwar Trade Regimes: How did the trade regime that followed WWII differ from the regime that operated throughout the interwar period? Name Institutional Affiliation How did the trade regime that followed WWII differ from the regime that operated throughout the interwar period? Discuss ideas, interests and institutions that drove this change Introduction Following the end of the Second World War, few people could predict that the international economy would start a long period of intensifying international trade and investment. International trade expanded at the most rapid pace in the twentieth century during the two decades following World War II (WWII). Volume of merchandise exports from non-communist nations grew remarkably. This is despite strongly protectionist tendencies and trading blocs that prevailed during the interwar period. There were various structural, economic and military causes which worked alongside institutional and coalitional factors to transform the trade regime post WWII. This report will answer how the trade regime that followed WWII differed from the regime that operated throughout the interwar period. The ideas, interest and institutions that drove the change are discussed. I. Attempts to advance economic growth during interwar years There are many reasons that can be attributed to the failure of kick-starting the trade cooperation after the First World War. The war itself and the following peace settlement had resulted to drastic changes in the political and economic relations of the countries in the trade regime (Fouda, 2012). Politically, it resulted to the spirit of vengeful nationalism among the European nations and this oppressed the trade regime (Horowitz, 2004). Germany was humiliated by the Treaty of Versailles; French policy makers were still fearful of German revenge and focus shifted to national security measures; Britain wanted disarmament and was reluctant to agree with security commitments (Horowitz, 2004; Russian’s Bolsheviks resorted to self-sufficiency through the czarism regime (Booth, n.d); while the US refused entanglement with Europe’s affairs (Bernanke, 2000). Economically, the war drastically modified the external relations of countries as traders, lenders and borrowers. The economist Keynes rallied against punitive payback systems levied on Germany as well as America insisting for the weakened Europe to pay its debts (Morrison, 2010). Next, the emergence of a big, urban population brought a shift to the political power balance of Western countries through widespread labour organization and increased responsive orientation of governments. Pre-war economic policies that had performed well in an environment of self-regulating markets with goods, money and employment began encountering resistance, resulting to instability of exchange rates in the trade regime (Morrison, 2010). Next, the major blow to the trade regime was the Great depression which engulfed the world economy creating conditions brought down the fragile international economic order of established post WW1 (Bernanke, 2000). The pre-war trade regime came under attack immediately in the years following the end of WW1. Between 1926 and 1931, it seemed that nations may have returned to the gold standard of world trade by drifting from more nationalistic commercial policies or mercantilism (Morrison, 2010). However, national differences continued to widen, and the efforts were further weakened by hyperinflation, recession, and unemployment that prevailed during the Great Depression in the early 1930s almost entirely collapsing the liberal trading system (Bernanke, 2000). There was tension preceding WWI and the international trade and finance retreated for decades. The world economy collapsed leading to the rise of protectionism and formation of trading blocs during the 1930s (Chase, 2004). Protectionist forces became dominant in almost all the major economies (Eichengreen & Irwin, 2009). Ideas or realism stipulated that the EU’s hegemonic decline and the failure of US to act as a stabilizer were the reasons for the collapse of the world trade (Booth, n.d). Other ideas point to the macroeconomic turmoil of the Great Depression which led to the collapse of interwar trade regime (Bernanke, 2000). II. Protectionism and trading blocs Small scale and large scale economies began to differ on the basis of the concept of comparative advantage against the concept of unequal change. By the 1920s, many products of the second Industrial Revolution were most efficiently manufactured in large factories because of prevailing new technologies in the industrial revolution (Eichengreen & Irwin, 2009). During the interwar period, a systematic shift in the world economy on different nations differed in two different ways. First, firms with limited geographical access to world markets could not take advantage of economies of scales, such as new technologies in manufacturing and so produced for domestic markets alone (Chase, 2004). This caused a rise in domestic pressure for governments to secure external markets to allow mass production, thus the push for trading bloc formations. On the other hand, this need for a wider market to embrace economies of scale was not met with urgency by producers in larger markets, who were thus less interested in trading blocs (Eichengreen & Irwin, 2009). Second, nations manufacturing goods with large returns to scale in short production cycles began to face stiff competition from larger markets especially the US which began an export invasion after WW1 (Chase, 2004). Small scale producer were dissatisfied with this move and reacted by lobbying for trade protection to regain fair market shares as well as catch up to their foreign rivals. On the other hand, large scale economies refused protectionism and instead pushed for trade liberalisation (Eichengreen & Irwin, 2009). Thus, domestic pressure for protection and formation of trading blocs was a response to technological changes that increase the optimal scale for manufacturing. According to Chase (2004) the limited size of national markets made manufacturing firms unable to take advantage of the economies of scale and they imparted political pressure which led to protectionism and formation of trading blocs. Poor economies with small domestic markets in Japan, Germany and UK thoroughly advocated for the formation of the protectionist trading bloc institution (Terborgh, 2003). On the other hand, large scale firms in the rich nations and a vast continental market at their disposal advocated for trade liberalisation (Brown & Ainley, 2005; Fouda, 2012). Instead of seeking a trading bloc of their own, these large scale economies pushed to eliminate commercial discrimination in international trade empires (Fouda, 2012). Several developing countries were dissatisfied with the free trade model and preferred state management of their economic resources (Brown & Ainley, 2005). They rejected the principle of non-discrimination as it restricted political intervention in commercial relations. Societies that favoured protectionism argued that the structure offered protection in the form of tariffs and other import taxes (Krugman, 1987). Also, that protectionism was important because of uneven development and distribution of economic power. As is the case described above, the poor nations and regions did not have the capacity to compete. Next, that free trade imperialism causes more of economic destruction that comparative advantage, and thus it is not fair (Krugman, 1987). This is also because free trade imperialism caused over use of market power by the larger economies whose policies enabled predatory pricing and dumping to wipe out competitors (Krugman, 1987). Also, free trade does not enable undeveloped countries and regions to begin operations against unfair trade, yet they require capital assistance in their infantry stages (Krugman, 1987). Yet, despite all these hurdles, the trade policies in the interwar years started seeing initial changes that assumed importance in restoring the trade regime after WWII. Multilateral trade negotiations began targeting to supplement or even replace the more traditional bilateral negotiations. Multilateralism called for negotiating trade barriers among all members and not as a special deal or as part of blocs. III. Post WWII trade regime and ideas, interests and institutions that drove this change The end of WWII marked the beginning of a new era for the international economy. A series of political agreements to remove world trade barriers of the interwar period began in the General Agreement of Trade and Tariffs (GATT) in 1947 (Chase, 2004). The Geneva conference saw 23 nations agreeing on 123 negotiations covering about 50,000 tradable items. The US agreed to reduce its duties by more than fifty percent by mid 1950s. Still, world trade environment in the 1950s continued to face restrictions especially within Europe (Booth, n.d). Britain’s trade and exchange controls system remained in place until the mid 1950s. France’s dismantled its restrictions gradually, with imports competing for domestic foodstuffs and manufactured products being highly restricted. This was the same case for Japan. Nevertheless, international trade expanded in the most rapid pace ever in the twentieth century. According to Terborgh (2003) the total export volume of merchandise from non-communist countries grew by 290 percent between 1948 and 1968 while the expansion of the world trade during this period has exceeded the world output by far. This is a rise from $53 billion in 1948 to $112.3 billion in 1960 at an average annual growth rate of six percent. Although formation of GATT seemed to stimulate a rapid liberalization of world trade in the early 1950s, it was unable to solve Europe’s complex trading issues (Horowitz, 2004). This led to the formation of the European Economic Community (EEC) which established a common external tariff among six countries and tariffs were substantially reduced after the Kennedy Round negotiations between 1964 and 1967. Importantly, the world trade growth consistently outpaced the world output growth (Horowitz, 2004). Also, trade grew most rapidly among the industrialized countries and by 1974, intra-trade between developed nations accounted for more than 54 percent of the international trade (Terborgh, 2003). Also the growth of intra-trade went hand-in-hand with the overall shift toward manufactured goods. Industrial nations increasingly engaged in trade of similar finished products and traded components from different production phases. The post-war production institution increasingly focused on just-in-time vertical production across countries as transportation technologies improved and manufacturing supply chains became leaner. Whereas capital intensive manufacturing industries supported free trade, labour-intensive industries especially metals, textiles and agriculture favoured protectionism (Horowitz, 2004). Terborgh (2003) emphasizes that the Bretton Woods Systems deserves credit for contribution to the expansion and stability of this trade regime. Bretton Woods was attempted for the International Trade Organisation (ITO) in 1947 but failed. However, the concept resurfaced in the 1960s when the post WWWII trade regime experienced the greatest, most consistent economic growth in the decade. The world’s economy growth rate was higher than 8 percent per year. The exchange rate volatility was high during the 1960s but the Breton Wood System provided a stable environment for world trade, comparable to the classical gold standard. Breton Woods did not allow full convertibility of current accounts as current account restrictions discouraged bilateral trade during its early stages (Terborgh, 2003). According to Horowitz (2004) another factor that supported the expansion of world trade regime in the post WWII is the influential role of international institutions. International institutions such as GATT and the International Monetary Fund (IMF) can lower transaction costs and the risks associated with world trade. These institutions can also facilitate the international bargaining process by which domestic trade barriers are reduced which is conditional on the basis of foreign reductions. Both effects increase the gains from trade, hence expected to mobilize exporting sectors more strongly in favour of free trade. IMF did so by stabilizing the exchange rates which helped to reduce fluctuation in international relative prices. On the other hand, GATT achieved the same by establishing trade-friendly rules for international economic transactions and by centralizing negotiations on reciprocal trade barrier reduction. Nevertheless, the functioning of such institutions depends upon the favourable engagement by a critical mass of the large trading nations (Horowitz, 2004). Conclusion This has been an in-look into the differences between the trade regime that followed the Second World War and the trade regime that operated during the interwar period. Findings show that war, political, and economic circumstances greatly destroyed the efforts for a sound economic regime during the interwar period. The war led to suspicious dealing among countries that were once allied with trade, leading to re-regulation of tariffs. The period was also phased with global depression, hyperinflation, recession and unemployment. Protectionism was superimposed over trade liberalisation because small economies felt that they are being unequal treated in the free trade regime, which seemed to benefit the larger economies. National governments seemed to rely heavily on restricting international economic transactions in order to preserve economic stability and full employment. It was feared that the world economy would suffer its final blow after WWII but things took a remarkable turnaround and the trade regime post WWII experienced the largest, fastest growth of the century. Institutions that negotiated for fair trade and friendly relations among nations as well as helping in reducing economies of scales took an active role that helped with the growth and expansion of the post WWII trade regime. References: Bernanke, B.S. (2000). Essays on the Great Depression. Princeton: Princeton University Press. Booth, K., ‘Security in Anarchy: Utopian realism in theory and practice’, International Affairs 67(3), 527-545. Brown, C. and Ainley, K. (2005).Understanding international relations 3rd ed. Basingstoke: Palgrave Macmillan. Chase, K. (2004). Imperial protection and strategic trade policy in the interwar period. Review of International Political Economy, 11(1), 177-203. Eichengreen, B. & Irwin, D. (2009). The protectionist temptation: Lessons from the Great Depression for Today. Fouda, R. (2012). Protectionism and Free Trade: A Country‘s Glory or Doom?" International Journal of Trade, Economics and Finance, 5(3)351. Horowitz, S. (2004). Restarting globalization after World War II: Structure, coalitions, and the Cold War. Comparative Political Studies, 73(2), 127-151. Krugman, P. (1987). "Is free trade passe?" The Journal of Economic Perspectives, 1(2), 131– 144. Morrison, J. (2010). Keynessandra No More: The 1931 financial crisis, and the death of the Gold Standard in Britain. APSA 2010 Annual Meeting Paper Terborgh, A. (2003). The post-war rise of world trade: Does the Breton Wood system deserve credit? Working Paper, 78(3), 1-71. Read More