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New Challenges in International Trade: 1914 - 1929

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GDP of major European countries 1870-1914, in 1990 dollars - Source: Maddison, 2007.

When we look at the size of the various economies up to the eve of the First World War, we see a change in the ranking of European economies from 1870 to 1914. We see that the United Kingdom began the period 1870 with overwhelming domination following its success in the first industrial revolution giving it the strongest economy in the world. The second wave of industrialization allowed Germany to increase the size of its economy and overtake the United Kingdom in absolute size.

Some specialists speak of a British decline even if it must be said that it is a relative decline. The British economy continues to grow, but compared to the growth rate of the German economy, there is a relative decline compared to the Germans.

Steel production - Source: Mitchell, International Historical Statistics.

One of the worrying aspects of this economic growth of Germany for the British is that with regard to certain sectors considered strategic as the steel industry, we see that the German success is particularly striking.

This graph shows steel production in thousands of tonnes. We see that the United Kingdom remains dominant as an iron and steel producer. We see a take-off on the part of Germany following the beginning of the second wave of industrialisation which offers the possibility of producing steel in mass which is a very important product in the second phase of industrialisation.

In the early 1890s, Germany surpassed Great Britain in its productive capacity. Steel is used in railway construction, in the construction of buildings, but also in the manufacture of armaments. There is a real obsession on the part of the British who are watching the development of the steel industry in Germany with great fear. On the eve of the First World War, the British were already very worried about this change in economic rankings.

Germany shows its capacity to develop its economy by confronting all the principles which are dear to the British during the 19th century. The high German customs tariffs opposing the free trade of the British and in terms of competition within the economy, German cartels oppose the free competition of the British.

Germany is an economy that is developing very quickly, faster than the British economy and on the basis of principles completely different from the principles that are dear to the British. Germany is becoming an ideological competitor, an economic competitor and a political competitor.

Consequences of war for international trade[edit | edit source]

The term First World War indicates the geographical coverage of the countries involved in this conflict. This enormous and unprecedented geographical coverage, involving 35 countries on 5 continents. This reflects a battle of empires that involves colonies and dominions. When we look at the sizes of the different armies, we see that Britain's Indian army is larger than Britain's own army. It's also an imperial war. In French we speak of the "Grande Guerre" and in English of the "Great War". We are talking about 60 million combatants, mobilizing important military and economic networks, this is a war that is leading to enormous destruction.

Destruction due to the Great War as % of pre-war stock - Source: Broadberry and Harrison, 2005; Hautcoeur, 2009.

The mobilization for war is leading to major efforts to increase the level of agricultural and industrial production in all the belligerent countries. There is an important economic mobilization for all the countries involved in this war. We need armaments, steel, increasing transport capacity, we need new rails, replacing existing rails, wagons, we need a lot of things to make the war economy work.

Even if increasing production is the objective of all the belligerents, namely industrial production and agricultural production in order to feed the population, the army and the industrial workforce, despite these objectives shared by everyone, there are obstacles to increasing production such as the extent of the labour shortage. There are bottlenecks in the economy because there is a shortage of labour needed to increase production.

There are shortages in terms of primary materials and therefore especially for economies that depend heavily on the outside. By analysing the evolution of international trade up to the eve of the First World War, trade in primary materials represents up to 60% of international trade on the eve of the First World War involving an economic dependence towards the outside for their primary materials. With a war, this dependence creates a significant risk for foreign dependent economies like Britain for wheat and Germany which is increasingly dependent on imports to feed its population.

There are difficulties, moreover, in countries like France where fighting is going on, there is major material destruction, destruction of infrastructure making it difficult to make the economy work. It can be said that the objective of the belligerent countries is to increase production.

Steel production in thousands of tonnes - Source: Mitchell, 2003.

If we look at steel production, which is a very good example because steel is important not only for the manufacture of armaments, but also for the manufacture of railway networks and motor vehicles.

A lot depends on steel giving a good idea of the capacity of these countries to develop their production. In the case of Great Britain, there is much success in increasing steel production, but this is a difficult challenge. For France, this is not possible because of the destruction, the shortage of coal making it difficult to manufacture enough steel to manufacture weapons and run the economy. For Germany, this is in between the two with less success than the British and more than the French.

Production sidérurgique tonnes (000) - Source: Mitchell, International Historical Statistics.

We can see a decrease in German production, an increase in British production. Even in 1918, we see that the British were not capable of producing at the same level as the Germans.

Production sidérurgique États-Unis, tonnes (000) - Source: Mitchell, International Historical Statistics.

Far from the battlefield, it is possible for the United States to significantly increase its steel production and to use and export it.

U.S. Merchandise Trade Balance, 1881 - 1914.png

In terms of merchandise balances, we see the surplus in the United States. Until 1913, it was a country that exported a lot. If we add the consequences of the First World War, the impact on the US economy is unprecedented.

This complexity explains why when we ask ourselves about the economic consequences of the First World War for the belligerents, the answer depends on which country we are talking about.

Produit intérieur brut réel, 1914-1918.

In the context of France, this is a bad thing. The real raw country falls. Compared to 1913, in 1918, there was a decrease in the size of the French economy meaning that the war weighed on the French economy. In contrast, there is the United States and the United Kingdom where war makes work, moreover there is no destruction related to war. In 1918, war was seen as something rather good for these economies. However, this situation will not be that good in the post-war period.

When we talk about the Napoleonic wars and the blockade, we are talking about technologies that are all different. During the First World War, the blockade was almost total for some countries. The aim is to block international trade, the supply of economies, but also the possibility of selling products on international markets. There are technological instruments to do this, but we also see that there are other measures that prevent normal merchant marine operations, making international trade much more difficult. There are significant obstacles to the normal functioning of international trade.

The arrival of merchant ships in Great Britain in millions of net tons.

We can see the consequences of these obstacles. There has been a decrease in the arrival of merchant vessels reflecting the blockade and other uses of vessels. There is no doubt when we talk about a difficult environment for international trade.

However, it is possible to see differences between countries. When we look at the exports of the belligerent countries except the United States, if we take Great Britain and measure the importance of exports as a percentage of GDP, we see a decrease in the importance of exports from 20% to 12%. For France the same can be observed with a fall in exports from 14% to 9% of GDP. For Germany, it is estimated that there is also a decrease.

However, as far as Allied imports are concerned, they remain very high despite the blockade. The Allies were more successful than the Germans in keeping international trade routes open to supply their economies. There is relative success on their part in terms of their access to imports. For Germany, the situation is much more different, because practically nothing happens in Germany with international trade almost completely blocked.

German food imports in tonnes.

If we look at German food imports, Germany is more and more dependent on the outside world to feed its population until the First World War. As Great Britain we see a trend towards an increasing external dependence on imports, especially wheat, from Germany.

The consequences of the blockade on imports are apparent. There was a very significant drop in imports in 1916 and until 1918.

The challenge of feeding its population pushed Germany to launch the submarine battle. It was in this situation that the Germans showed themselves ready to provoke a new battle in 1917 despite the fact that there was a fear that this action would provoke the entry of the United States into the war and that was indeed what was going to happen. The German elites are in an increasingly desperate position because the blockade makes it very difficult to feed the population.

There is a very difficult situation, but a more effective blockade for some than for others.

Source of French imports.

The French managed to import more in 1917 than in 1913, showing the success of the allies by keeping the trade routes open. If we look at the sources and origins of these imports, we see the increasingly important role not only of Great Britain but also of the United States. At the end of the war, 1/3 of French imports came from the United States.

This case shows that there is a difference between the Allies and Germany in their access to international trade during the war. There are various trends.

The United States is a special case, first a neutral country and then a belligerent country. The United States played both roles during the war. The war is rather favourable in terms of consequences for its merchandise balance reflecting the fact that the United States is very rich in natural resources, and it is a very important industrialized country.

For some neutral countries like Canada, there is a strong increase in exports, for Japan there is also a strong increase in exports. For Brazil, for example, which produces coffee that is not necessarily necessary to wage war, Brazil does not take advantage of the outbreak of war in Europe to increase its exports. The situation is different for Chile, which exports grains, meat and copper. Depending on the export structure of the various countries, we can predict what we will find if we look at the impact of the war on their international trade.

The growth in demand that war stimulates and leads to various changes. During the war, there was strong technological development in the aeronautics field and the possibility of applying the technology to new uses was found. After the war, a new dynamic settles down in the aeronautical field creating at the end of the 1920s more and more commercial transports based on the plane.

Other consequences are different for former industries such as the steel industry. War causes an increase in the level of production, but once the war ends, demand changes. In industry, a problem of overcapacity is emerging which is a challenge to be filled in developed countries such as Great Britain and the United States. There are other cases with the arms industry where there is a problem of overcapacity.

Such an analysis must be balanced with an analysis of material destruction. In France, we do not see the same one because there is not the problem of steel overcapacity because quite simply some factories are destroyed during the war. We must not only understand the dynamics of each industry, but also see what balance the country must find.

To summarize the economic consequences of the war for the First World War, when we look at the situation of manufacturing production shares at the global level. Between 1913 and 1929, there was a fairly significant change in Europe's role in global manufacturing output. We see a decrease in the importance of Europe and an increase in the importance of other countries. The war reinforced the industrial dominance of the United States already existing before the First World War. Europe is giving way. There is a very important change for the Japanese economy in full development at the time.

The importance of the United States as a new world hegemon must be emphasized, and we will see that its attitude towards Great Britain will have an important influence on its trade policy during the 1920s.

As far as world agriculture is concerned, we see that farmers outside Europe are also taking advantage of the war to increase their capacity. We are talking about the United States, which is both a major agricultural producer and a major industrial producer. We can also add Argentina, Australia and Canada, which benefit greatly from the war as an agricultural country. Immediately after the war there is a restructuring crisis, because with an increase in agricultural capacity during the war there is the risk of overproduction. After the war there is a crisis of restriction characterized by a very strong fall of the countries which is also found in other sectors of primary materials. In the United States, the price of wheat per tonne was $36 before the war, rising to $95.5 after the war, and then the price fell by half to $53.7 during the restructuring crisis.

This crisis did not move on a definitive solution to the problem of agricultural overproduction in the world economy and throughout the 1920s, agricultural overproduction weighed heavily on the price of wheat and other agricultural and primary commodities. This is becoming a sensitive point in the global economy. When there is a recovery in agricultural production in Europe, it adds to the problem because we are overproducing in 1920 following the increase in capacity in neutral countries. This increases the problem in the United States with the resumption of production in Europe once war-related destruction is resolved. This becomes a very important problem. We must remember that when we talk about agricultural and primary products, we are talking about 60% of international trade. It is a problem that weighs heavily on trade policies and on all trade policies around these debates.

A heterogeneous post-war period for trade policy[edit | edit source]

There were heated debates about trade policy during the 1920s. Immediately after the war, there was great interest in the establishment of a free trade regime, particularly by international organizations such as the League of Nations. There is a desire to establish a free trade regime. Tariffs between different countries being a source of conflict, a free trade regime was created. Yet there was an increasing trend for tariffs in the 1920s.

Customs tariffs, % product value, 1913 - 1925.

If we look at the situation for Europe, the situation is quite fluctuating and varied. Until the mid-1920s, there was considerable diversity in the post-war period, but by 1925 there was an increasingly clear upward trend. That is, we see a trend even before the Great Depression. It is mainly because of the perception of a crisis in the primary sector and especially in agriculture that we see pressure on politicians to increase customs tariffs.

We must understand the case of the United States, which is the hegemon of the world after the First World War. It is an interesting country because it has been a protectionist country for a very long time. Much has been said about the American trend. Following the Civil War, there was a desire to have high tariffs in the United States to protect the domestic market from foreign competitors.

When you look at the international trade policy trends of the United States and wonder why the United States is so protectionist for so long, the answer is interesting. Most of the advocates of high tariffs came from the north, where manufacturing industry was nascent in the 19th century. They are convinced by the ideology by Alexander Hamilton who proposes something very similar to the idea of protectionism educator Friedrich List. It is the idea that the internal market must be protected from foreign competitors and especially from British competitors who are too strong. Space must be created to encourage the development of national enterprises.

This idea is very convincing for the industrialists in the United States who are mainly in the North. In the South, opinion is much more free trade because it is a region that depends much more on exports, especially cotton and tobacco. The Civil War is a very important war in which the interests of the North prevail over the interests of the South, but also over international trade policy. If we look for the political party that represents the interests of the North, it is above all the Republican Party that is the voice of protectionist interests and, by contrast, the Democratic Party represents the interests of the South.

When asked why the United States is such a protectionist country, most of it has been a republican country since the 1980s. If we look at who controls the government system in the United States, the answer is mostly Republicans. We see that every time the Republicans come to power, they raise tariffs and every time the Democrats come to power, they lower tariffs, but since they are not there for very long, they do not have the opportunity to do much in terms of commitment to free trade.

During the 1920s, Republicans continued to dominate and interests pushed for greater protectionism from the agricultural sector for the first time. We see that there is a crisis for certain farmers in the United States linked to the global crisis in certain agricultural markets. There are two aspects to this crisis:

  • the problem of falling prices;
  • there is a much higher level of indebtedness on the part of some farmers in the United States after the war than before the war. Farmers in the United States are going into debt so they can increase their production levels during the war. To respond to this incentive, they go into debt to buy land and machinery. Following the war, they are in a difficult situation because they face falling prices and falling incomes while their debt level does not move.

There are problems that continue for some farmers. We see that bank seizures of agricultural land were 3% between 1913 and 1920, 11% between 1921 and 1925 and 18% between 1926 and 1929, i.e. before the outbreak of the Great Depression. This shows the weakness of this sector during the 1920s. It is therefore agricultural interests that push for greater protectionism in order to try to keep prices at a sufficient level to be able to live and pay their debts.

There was a sharp increase in tariffs in the United States immediately after the 1920-1921 crisis with the Fordney Mac Cumber tariff Act of 1922, but pressures continued to be exerted in the second half of the 1920s. In fact, it was these pressures that led to the passage of the Smoot-Hawley Tariff Act in 1930. This act is often referred to as being linked to the Great Depression and it is true that this act plays a role in triggering reactions on the part of the United States' trading partners. The origin of this act lies long before the Great Depression in the problems that American farmers faced during the 1920s.

This reveals something very important in relation to the new hegemon that is the United States. For Kindleberger, "At a minimum, the tariff sent the signal that the rising economic and military power of the United States was unwilling to be the unilateral guarantor of open markets that the United Kingdom had been before the war... The Pax Britannica was at an end, and the Americans were not yet ready to underwrite a Pax Americana; the Smoot-Hawley Tariff Act sends a very important message in relation to the characteristics of the United States in contrast to Britain. Great Britain was a free trade hegemon until 1914. The country and the empire remained free traders until the Great Depression burst.

In contrast, the United States was not a free trade hegemon at all during the 1920s, but it is a hegemon that continues to be a very protectionist country. For Kindleberger, this changes everything in terms of possibilities for advancing free trade internationally. The Pax Americana is completely different to the Pax Britannica.

When we look at the speeches of politicians in the United States, we see the importance of protectionism. For Senator William Borah, "The real fight here is between the agricultural interests and the industrial interests. We feel that we are fighting for equality; that the equality is constantly removed by the fact that duties are substantially increased upon the things we have to buy, even though they may be increased to some extent on the things we have to sell". This became in the United States during the 1920s a competition between industrial and agricultural interests in order to have an increasingly high level of protectionism. Farmers are first looking for another solution requiring a minimum wage to live as existing in Europe, but this is refused. So the only other possibility for them is to demand higher tariffs in the agricultural sector.

There is an ideological aspect to this position. For Irwin, "with the Republican establishment opposed to farm subsidies and unwilling to reduce protective tariffs on manufactured goods, the only solution seemed to be higher tariffs on agricultural goods, as imperfect a solution as that might be. This lay the groundwork for what would become the Smoot-Hawley tariff. There is the idea of a country becoming independent of an empire, it is not up to the British to tell them what to do, they have the right to be protectionists showing the vitality of the nation.

US Trade Legislation & Partisan Control, 1877 – 1934.

We see the importance of the Republicans who dominated the political situation in the United States until Roosevelt arrived.

To conclude, if we look at the period between 1870 and 1913, for Europe and Japan there is an increase in international trade in relation to GDP showing an increasing openness on the part of the major countries of the world. If we look at 1913 to 1929, we see a decline in the importance of international trade as a percentage of GDP for almost everyone except Japan. This was not a glorious period for international trade, becoming even worse during the 1930s.

Major Trends in International Trade: 1914 - 1929[edit | edit source]

Annexes[edit | edit source]

References[edit | edit source]