The Trade Regime that Followed World War II - Coursework Example

The trade regime that followed World War II and that operational in the inter-war period Institution: Name: Contents Contents 2 Introduction 3 The Interwar Period 3 The Trade Regime after World War II 6 Conclusion 9 Introduction Just like the rise and fall of kingdoms, monarchies and nations have always intrigued historians, the growth and deterioration of free trade and its impact on the social economic and political fabric has always fascinated economists. Of special significance is the period between 1919 and 1939. This is the period between the end of the First World War and the commencement of the Second World War. This period is one of the most chaotic in human history. Economists have tried to understand the dimensions of trade during this period in relation to the political climate at the time. The trust and mistrust between countries, the trade agreements and treaties that were agreed upon and their subsequent collapse at the onset of the Second World War. This essay delves into the intricacies of the interwar period and how they differed with those that rose after World War II. It addresses the trade regime during these two important times in history, the ideas that shaped trade, the interests of the different nations and the institutions that caused this change. The Interwar Period It would be impractical to jump into this period without first having a look at the trade regime that existed before the First World War. The second half of the 19th century is often considered a golden age of trade. This period is credited with the growth of most of the world economies due to industrial development, advancements in technology in conjunction with increasing bilateral trade agreements. The first among several of the bilateral agreements include the Anglo French business treaty of 1860. This treaty championed the start of a period of free trade as it decreased the prevailing trade duties by over two thirds. The treaty benefited other countries as well as it roped in other countries that had a treaty with either Britain or France. The larger British Empire benefited greatly from this as they could easily import raw materials from countries like India while the previously stagnant economy of France became stimulated (Olson & Shadle, 1991, pg.21). The signing of the Cobden Chevalier treaty, as the Anglo French treaty is famously known, initiated a short period of free trade between the rest of Europe and the United Kingdom. The signing of this treaty was an important lesson to the rest of the world. It showed other countries that trade treaties could be the new method of eradicating the non-productive consequences of national regulations born out competition. It can be argued that pre-war trade was heavily influenced by Britain as it dominated the rest of Europe economically. All this owed to the ideas of Richard Cobden (1804-1865) who championed the idea of free trade in the United Kingdom and all of Europe (Ravenhill, 2014, pg. 111). However, the onset of the European depression hit liberalized trade hard causing its decline until it crumpled with the start of the First World War in 1914. The inter war period was a period of trade turmoil. The pre-existing trade relations that had been based on private business transactions were suspended and in its place taken by widespread government controls. Governments on each side put their national interests ahead therefore curtailing free trade. The output of the countries participating in the war was diverted to the support of war efforts. War activities like sea blockades by navies of warring nations and submarines restricted overseas trade to a bare minimum. The free trade that had existed before the war was conveniently forgotten as high tariffs came back into play, restrictions were placed on both imports and exports and controls on foreign exchange was a dominant scene during this period. Organizations that had been made during the war such as the inter allied supplies commission played a key role in centralizing trade to the allied nation such as great Britain, France and Russia. The commission made sure that manufactures exported, imported or transported goods only with the institutions approved by the government. This period was therefore one where protectionism and mercantilism was the order of the day (2007, Pg. 1). Another problem during the inter war period was the economic instability of many economies which lacked capital for trade. This was known as the payment problem and which was made worse by the gold standard of payment. During this period, efforts to re-discuss trade agreements and cooperation were abandoned as protectionism reigned. As countries raised tariffs, competing countries did the same in retaliation so as to create a balance of payment. The Smoot-Hawley tariff that came into existence in 1930 in the United State is among the best examples of these chaotic times. The tariff is even considered by some economists as one of the main causes of the great depression. The tariff increased import duty all in the name of protecting American farmers. This angered the League of Nations which had been fighting for a truce in the increasing of tariffs. Canada, which was the biggest trading partner to the USA, levied extra duty a select goods from America and eliminated tariffs on imports from the United Kingdom. Other countries that retaliated immediately include Switzerland, Spain and Italy (The Economist, 2008, p. 1; Milder, 2000, pg. 1-3). The great depression hit the world hard. The downward spirals of European economies as well as that of the USA signalled to the world that new measures were needed to improve trade. Most nations realized that protectionist trade tariffs and ideas were not working. Between 1935 to the start of the beginning of the Second World War countries started negotiating for bilateral trade agreements that included trading partners through Most-Favoured-Nation agreements. This was for the basis of creating an atmosphere suitable for trade and to eliminate disputes. All this efforts were halted rather unceremoniously by the onset of the Second World War in 1939. The Trade Regime after World War II The two decades after World War II had the most rapid expansion in cross-border trade than at any other period of the 20th century. This was particularly true for non-communist states as their volume of exports grew by as much as 290 percent between 1948 and 1968. Policymakers across the divide saw the significance of international trade to the economic growth of their nations. They saw the need to move away from the isolationist and protectionist policies and tariffs of the inter war period. The average growth rate of non-communist countries was 6% per annum. Trade among industrialized nations grew exponentially during this period as countries exchanged manufacture goods (Terborgh, 2003, pg. 1-3). Historians point out that the increased levels of trade during this period was due to the political/military relations at the time. They argue that countries modified their trade policies in line with the mantra of strengthening their allies or strengthening themselves in respect to their enemies (Horowitz, 2004, pg. 124). It can be argued that the United States of America was key to the growth of the post war liberalized worldwide economic order. Their emergency from the Second World War as the leading military power with the most dominant economy made them the leader in world trade affairs. Had the America returned to their inter war mindset highlighted so effectively by the Smoot-Hawley tariff, the new economic order may never have been born. The idea was to have a world where trade was open to all countries and free without any barriers or restrictions. Goldstein and Gowa (2002, pg. 1) argue that when the distribution of political and economic power is skewed, the growth of open markets is curtailed. This is so unless the most powerful nation commits itself to establishing an environment for free trade. Therefore the commitment of the United States of America at the time to establish free and open trade with the formation of trade institutions empowered member states. They felt that they had a voice and a means to punish any of the more powerful nations if they cheated. The political reasons notwithstanding, a major reason for the fast paced growth in international trade was the rise of institutions to regulate and promote trade. It can be argued that the reduction in trade tariffs, sanctions and other trade barriers was as a result of these institutions. The growth of liberalized trade policies and the resurgence of free trade can be attributed to these institutions too. One of the most important institutions that came out of the post war ashes to champion trade was the General Agreement on Tariffs and Trade (GATT). GATT came into being after the industrialized nations met and decided to set up an organization that would fix the rules and regulations that would determine how international trade was conducted. GATT was also given the in enviable task of minimising or getting rid of trade barriers among member states (Gwartney et al, 2010, pg. 405). The General Agreement on Tariffs and Trade was born in 1948 on 1st January after extensive talks between twenty three countries which were the initial signatories of the agreement. The agreement was divided into articles that tackled different issues pertaining trade. These articles include one on General Most Favoured Nation (MFN) treatment, the freedom of transportation of good, subsidies, fees that relate to the exportation and importation of goods and services in addition to others (GATT, 1986, Pg. 1). Another institution that had a positive impact on the liberalized trade regime after World War II was the International Bank for Reconstruction and Development which would later come to be known as the World Bank. It was a major establishment that stimulated the growth of the new economic order. The bank was formed for the sole intention of providing support or aid for the reconstruction of societies that had been destroyed by the war. This function was later replaced with one of providing aid to developing countries. It targeted the reduction of poverty in nations with poorer credit and middle income countries. This institution would develop into a major funding organization for development projects. Another organization that was formed to help in the formation of an international trade regime free of barriers was the international Monetary Fund. Both the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development were formed in 1944 following the Bretton Woods conference. The IMF established to support countries that were struggling with deficits in their balance of payments (Shimko, 2012, pg. 136). The Bretton Woods conference resolutions were therefore very different from the resolutions that had been passed during the inter-war period. It came up with the two institutions that arguably shaped the trade regime during the post war period. Mason and Asher (1973, pg. 3) point out that one of the intentions of the conference in forming the bank and the IMF was that they would play a part in getting rid of constraints of exchange controls. This would be necessary during the creation of an environment of free trade, constant exchange rates, and no tariffs and devoid of quotas. Conclusion It has been proven beyond reasonable doubt that the post-world war II trade regime provided incentives for the creation of a liberalized economic order. A trade regime can among other things be cooperative, non-cooperative or it can be based on agreements. The inter war period suffered from lack of trust and political friction hence most nations applied protectionism and mercantilism. This lead to a trade regime characterized by high tariffs, quotas and barriers to free trade. Even though the trade environment in the period leading up to the war was fairly negative, the post war period was very positive with the creation of institutions that evened the playfield among all member nations. The idea that led to the Bretton Woods conference in 1944 was therefore a priceless idea which the world should be grateful to up to today. The formation of institutions like the International Bank for Reconstruction and Development, the International Monetary Fund and The General Agreement on Tariffs and Trade provided the impetus for the creation of a new trade regime, which was a regime free of excessive tariffs, free of barriers of trade and free from bullying of the weaker nations. References GATT. (1986). General Agreement on Tariffs and Trade: Text of the General Agreement. Retrieved from < http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf > Goldstein, J. & Gowa, J. (2000). US national power and the post-war trading regime. DOI: http://dx.doi.org/10.1017/S1474745602001131. Gwartney, J., Stroupe, R., Sobel, R. & Macpherson, D. (2010). Macroeconomics: Private and Public Choice (13 ed). Mason: Cengage Learning Horowitz, S. (2004). Restarting globalization after World War II: Structure, Coalitions, and the Cold War.In comparative political studies, vol. 37 no. 2, 127-151. New York: Sage Publishers. DOI: 10.1177/0010414003260980. Milder, M. (2000). Parade of Protection: A Survey of the European Reaction to the Passage of the Smoot-Hawley Tariff Act of 1930. Retrieved from < http://business.uni.edu/economics/themes/milder.pdf>. Olson, J. S. (1991). Historical Dictionary of European Imperialism. London: Greenwood Publishing Group Ravenhill, J. (2014). Global political economy. 4th ed. Oxford: Oxford University Press. Shimko, K. (2012). International Relations: Perspectives, Controversies and Readings (4th ed.). Boston: Cengage Learning Terborgh, A. G. (2003). The Post-War Rise of World Trade: Does the Bretton Woods System Deserve Credit? London: London School of Economics. Retrieved from < http://eprints.lse.ac.uk/22351/1/wp78.pdf> The Economist. (2008).The battle of Smoot-Hawley: A cautionary tale about how a protectionist measure opposed by all right-thinking people was passed. Retrieved from Mason, E. S. & Asher, R. E. (1973). The World Bank Since Bretton Woods. Washington D. C.: Brookings Institution Press. (2007). Inter-Allied economic organizations in the course of the world war of 1914–1918. Annals of Public and Cooperative Economics. Vol 16: 8–20. doi: 10.1111/j.1467-8292.1940.tb00578.x Read More