Trade Regime in the Second World War versus the Interwar Period - Coursework Example

Trade regime in the Second World War versus the Interwar Period Institution Name Introduction The Second World War was marked by numerous changes in the trade system. Beckman (2005) discloses that global economies were much more affected by the Second World War as opposed to the First World War. This therefore brought about more profound impacts on global trade. However, after the Second World War, the World was able to recover quickly. For instance, high income economies were able to record an average annual growth of 4.9% between 1950-1970, a rate that was above 2.6% that was recorded between 1913-1950. During the interwar –period, that is after the First World War towards the Second- World War (1921-1936), many countries experienced a quick post war boom, however they immediately fell into a depression and financial debts. This paper seeks to evaluate the difference in the trade regime that followed the WWII and the rеgimе that operated throughout the interwar period. The paper will further discuss the ideas, the interests and institutions that influenced this change. One of the differences in the trade regime that followed the WWII and the rеgimе that operated throughout the interwar period is that trade in the post-World World War 11 period was characterized by the adoption of international trade as opposed to the isolationist policies that took place during the interwar period. The isolationist ideology or policy involved non-involvement in the affairs of other countries by refusal to enter into external economic commitments, alliances and international trade agreements. The United Stated was at the frontline in the adopted the isolationist approach in order to avoid the effects of the First World War such as financial loses. The isolationist approach basically made the trade regime to lack cooperation essentially between the American block and the European block which was more involved in the war. After the Second World War however, production expand and many countries experienced a recovery from the war. This therefore resulted to the need for international trade. For instance, Inter-trading activities conducted between developed nations was approximately 54% of the global trade (Kenwood and Lougheed, 1992). Another difference in the trade regime that followed the WWII and the rеgimе that operated throughout the interwar period is the aspect of liberalization of policies of trade. During the inter war period trade policies were mainly characterized by the protectionism policy as a form of restriction. Chase, (2004) reveals that Japan was the first nation to adopt protectionism, which begun with an increase in tariffs in the year 1924. The UK on the other hand maintained free trade, however by 1931; she established the Imperial preference and the General Tariff. Germany also abandoned the open trade system and during the Nazi era, she embraced the exchange control system. The United States however moved to the opposite side by increasing duties in the Smooth Hawley Tariff and then withdrawing the Trade Agreements Acts of 1934. The shift towards the adoption of protectionism was influenced by various factors. One of the major reasons was the depression that was influenced by the agricultural crisis that took place in continental Europe. Also, the demand for grains in Europe had reduced demand and the emergence of highly competitive suppliers oversees. There was therefore need to develop higher protection tactics (Lewis, 1981). The period after the Second World War however was characterized by liberalization of polices of trade which further resulted to the post war boom in trade. Terborgh (2003) discloses that after the Second World War the barriers of trade that were established during the period of the inter war were gradually terminated through a sequence of trade agreements. One of the most celebrated trade agreements was the development of the General Agreement on Trade and Tariffs (GATT) that was initiated in 1947. The usefulness of GATT was apparent when the United States lowered its Tariffs in the mid-1950s by more than 50% (Irwin, 1995). The period after the Second War was also characterized by the adoption of a global monetary system known as the Bretton Woods system. Although the gold standard was accepted as a unit of exchange during the Interwar period, it however collapsed during the great depression period. Thus, during the interwar period there was no effective monitory system for conduction trade. After the Second World War, delegates from prominent industrial nations gathered at Bretton Woods in New Hampshire, United States in order to come up with a monetary system that would be used for trade globally. The main characteristics of the Bretton Woods System entailed the obligation that every country had a responsibility to adopt a monetary system that would preserve the exchange rate by linking its currency to that of the U S dollar in addition to IMF’s capability to terminate the momentary imbalance of payments (McKinnon, 1993). Also the system required the Central Bank of every country apart from that of the US, to uphold an exchange rate that was fixed between their respective currencies and the dollar. To ensure that every country complied with this requirement, each country was to arbitrate in foreign exchange markets. In the event that the currency was greater than that of the U.S dollar, then its central bank was obligated to sell its currency off in order to gain the U.S dollar. In contrast, if the value of the currency held by a certain nation was relatively lower than the U.S. dollar, then the nation would have to buy its own currency, thus shoveling up the price (Van, 1978). Another difference is that after the Second World War there were no trading entities that were developed on the basis of territorial changes. Due to the adoption of international trade, countries could now freely trade with each other without putting in the notion of territorial changes. During the interwar period, the existence of territorial changes essentially in Europe led to the development of nine new trading blocs or entities and states. These were largely agricultural economies that had the objective of consolidating their newly attained independence and also use the tariff policy in order to develop their own industries. For instance, the separation of Habsburg Austria in order to create six independent states resulted into the breakdown of one market into six different custom territories and also the separation of the pattern of production. Also due to the creation of the territorial changes, Germany lost some of its provinces to the East. The provinces previously provided a good supply of grain and industrial products. Alsace and Lorraine which were German’s western border were given to France, the two regions were significant steel and coal producers. What is evident is that the development of territorial changes lowered the role of external trade. This is because the newly developed territories developed a new trade regime where the developed territories were required to conduct trading activities within their specified regions. Despite the 1920 formation of the League of Nations and the many conferences that were supported by the League of Nations, the readiness to form an international trading regime during the interwar period were limited. Nations preferred to trade more on their territorial regions, this was partially due to the economic implications of the war (Frieden, 2006). On, the other hand the Second World War witnessed the termination of the trading blocks and creation of free trade in all regions. The period after the Second World War also differed from the interwar period due to specialization in manufacturing and exporting products that were more capital intensive. During the inter war period most nations had developed a dependence on the traditional labor demanding/ intensive sectors. These include; steel production, shipbuilding and textiles. However after the Second World War, the demand for goods from the labor intensive sector declined. Due to technological advancements, capital intensive sectors become more prominent. This included; the development of industries such as electric machinery, chemical and autos. Another difference was the capital intensive manufacturing sectors that existed after the Second World War supported free trade while the labor intensive industries essentially metals, agriculture and textiles favored the continued application of protectionism during the inter- war period (Horowitz, 2004). After the Second World war many counties begun to visualize a trading system that did not have any barriers and where each nation could participate without discrimination. In addition, the emergence of increased international trade also spearheaded a phenomena referred to as Foreign Direct Investment. Due to increased international cooperation between countries, a nation or even companies would conduct direct investment in another country either through business or production. Zimny, (2004) highlights that; much of FDI activities originated from developed countries. Four main countries that dominated Foreign Direct Investment activities include; the United Kingdom, France, Netherlands and the United States which controlled half of it. FDI after the Second World War focused much more in the manufacturing and primary sector. It was mainly motivated by the search for huge regional markets and import substitution (Zimny, 2004). During the interwar period it was difficult to implement FDI. This was due to the fact that most economies were still struggling with the effects of the initial war and also the depression. In addition the existence of numerous trade restrictions in the regime also discouraged Foreign Direct investment. The ideas, the interests and institutions that influenced this change The ideas that influenced the changes that took place after the Second World War include liberalism. Liberalism can be defined as a political ideology that is grounded on the view of developing equality and liberty. It supports the implementation all types of freedom and also the adoption of free trade. It can be argued that the liberalism ideology was actually behind the changes attained the after World War two (Ian, 2001). These include the removal of restrictions such as tariffs that limited free trade amongst nations. Another ideology that influenced the changes after the Second World War was the Keynesian economics that was advanced by John Keynes. According to Keynes, there was need to tackle the challenges that came about with the depression. Some of the key aspect that he proposed was the need to tackle the recession problem and also the issue of money (Kings, 2003). The formation of the Bretton Woods systems was basically one of the approaches adopted to handle the problems that involved monitory exchange. One of the interests that influenced the changes after the Second World War is the United Nations. The UN had an objective of seeing that international trading activities were conducted fairly and smoothly. For instance, the UN would assemble international conferences on trade and employment in order to negotiate technical agreements that govern the commercial policy. Change in hegemony or institutional control over the trading system also influenced many changes after World War two. The post Second World War trading regime was also characterized by a shift in the hegemony in terms of controlling trade. During the interwar period, Europe had greatly dominated World trade by two thirds. However, due to the economic loses attained during the interwar period; Europe lost its dominance of over trade. One of the significant areas where Europe lost its control over trade was in manufacturing goods. Its global share fell by two thirds by 1937. After the Second World War the dominance over World trade was taken over by the United States. The US emerged after the War as a new player in metal goods, manufactured goods and engineering product (Killick, 2000). The US greatly contributed to bringing about change in the trading system after the Second World War. For instance the US was in the frontline of the creation of the General Agreement on Tariffs and Trade (GATT), which was a commercial treaty aimed at implementing free and non- discriminatory trade (Irwin, 1992). Conclusion The above discussion has presented various differences between the trade regime that followed the WWII and the rеgimе that operated throughout the interwar period. Some of the differences discussed include; the adoption of international trade as opposed to the isolationist policies, liberalization of policies as opposed to protectionism, territorial changes, development of a global monetary system through the Bretton Woods Agreement, specialization in manufacturing and exporting products that were more capital intensive and the development of Foreign Direct Investment. The ideas, institutions and interests that influenced the change include; liberalism, Keynesian Economics the UN and the rise of the United States. In conclusion it can be stated that the trade regime after the Second World War was actually more beneficial. References Buckman , G.(2005). Global Trade: Past Mistakes, Future Choices. Business & Economics Chase, A. (2004). Imperial protection and strategic trade policy in the interwar period. Review of International Political Economy 11(1): 177–203. Frieden, J. (2006) . Global Capitalism. It Fall and Rise in the Twentieth Century. New York: Norton. Horowitz, S. (2004). Restarting globalization after World War II structure, coalitions, and the cold war. Comparative political studies, 37 ( 2). Ian, A. (2001). Political Ideology Today . Manchester: Kenwood, G and Lougheed ,A. (1992). The Growth of the International Economy, 1820-2000. London: Rutledge. Kings , E.(2003). A History of Post Keynesian Economics Since 1936. Edward Elgar Publishing Lewis, A. (1981). The Rate of Growth of World Trade, 1830-1973, in Grossmann and Lundberg (ed)TheWorld Economic Order. Past and Prospects. Irwin, D. (1995). The GATT’s Contribution to Economic Recovery in Post-War Western Europe. Cambridge: Cambridge University Press. Irwin, Douglas A. (1992), "Long-Run Trends in World Trade and World Output," unpublished manuscript. University of Chicago McKinnon, R. (1993). ‘The Rules of the Game: International Money in Historical Perspective’, Journal of Economic Literature, vol. 22, pp. 1-44. Terborgh, A. (2003). The Post-War Rise of World Trade: Does the Bretton Woods System Deserve Credit?. Department of Economic History London School of Economics. Van, D. (1978). Bretton Woods : birth of a monetary system. London: MacMillan Zimny, Z.(2004). Concepts, trends and economic aspects of foreign direct investment. International Investment Agreement . Killick, J,2000, The United States and European Reconstruction, 1945-1960, Taylor & Francis. Read More