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Trade Policy Disaster

Trade Policy Disaster: Lessons from the 1930s

Douglas A. Irwin
Series: Ohlin Lectures
Copyright Date: 2012
Published by: MIT Press
Pages: 216
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  • Book Info
    Trade Policy Disaster
    Book Description:

    The recent economic crisis--with the plunge in the stock market, numerous bank failures and widespread financial distress, declining output and rising unemployment--has been reminiscent of the Great Depression. The Depression of the 1930s was marked by the spread of protectionist trade policies, which contributed to a collapse in world trade. Although policymakers today claim that they will resist the protectionist temptation, recessions are breeding grounds for economic nationalism, and countries may yet consider imposing higher trade barriers. In Trade Policy Disaster, Douglas Irwin examines what we know about trade policy during the traumatic decade of the 1930s and considers what we can learn from the policy missteps of the time. Irwin argues that the extreme protectionism of the 1930s emerged as a consequence of policymakers' reluctance to abandon the gold standard and allow their currencies to depreciate. By ruling out exchange rate changes as an adjustment mechanism, policymakers turned instead to higher tariffs and other means of restricting imports. He offers a clear and concise exposition of such topics as the effect of higher trade barriers on the implosion of world trade; the impact of the Smoot-Hawley tariff of 1930; the reasons some countries adopted draconian trade restrictions (including exchange controls and import quotas) but others did not; the effect of preferential trade arrangements and bilateral clearing agreements on the multilateral system of world trade; and lessons for avoiding future trade wars.

    eISBN: 978-0-262-29862-9
    Subjects: Economics, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xvi)
  4. 1 The Great Depression and the Rise of Protectionism
    (pp. 1-48)

    The proliferation of protectionist trade policies in the early 1930s had a lasting, adverse impact on international trade. The new barriers put a stranglehold on global commerce, contributing to a steep decline in world trade in the first half of the decade and then suppressing its growth in the second half. For these reasons, trade restrictions are commonly thought to have made the Great Depression worse and to have slowed the economic recovery. The detrimental impact of these trade barriers inspired the establishment of the General Agreement on Tariffs and Trade (GATT) after World War II.

    The outbreak of protectionism...

  5. 2 Resolving the Trilemma: Protection or Depreciation?
    (pp. 49-98)

    The previous chapter described how the protectionism of the 1930s was rooted in the macroeconomic policy choices that countries faced when confronted with a large deflationary shock under the gold standard. Countries had to decide whether to maintain the fixed exchange rate of their currency in terms of the gold parity or to abandon the gold standard and allow their currency to fall in value. This choice had enormous implications for trade policy. Countries that allowed their currencies to depreciate resolved their balance-of-payments problems and, according to the trilemma, should have been able to keep trade relatively open. Countries maintaining...

  6. 3 Trade Restrictions and Exchange Rate Adjustment: Choice and Consequences
    (pp. 99-142)

    This chapter presents economic data from the 1930s to address three issues. First, we examine the impact of protectionism on world trade in the 1930s based on a counterfactual assessment of how much trade would have fallen had there been no change in trade policy. Several different calculations suggest that about half of the 25 percent decline in world trade was due to higher trade barriers. Second, we analyze several measures of trade policy to see if the pattern is consistent with the trilemma interpretation. The trilemma leads us to expect that countries allowing their currencies to depreciate would not...

  7. 4 Conclusions
    (pp. 143-176)

    Throughout this book we have seen that the extreme protectionism of the 1930s grew out of the conflict between fixed exchange rates and open trade policies. Countries that maintained a fixed exchange rate ran into balance-of-payments difficulties. They sought to prop up overvalued currencies and stem gold outflows by using exchange controls and import restrictions to reduce spending on foreign goods. Other countries escaped their balance-of-payments difficulties by allowing their currencies to depreciate. They no longer had to worry about maintaining a fixed exchange rate and, consequently, did not have to adopt protectionist trade policies to the same extent as...

  8. References
    (pp. 177-190)
  9. Index
    (pp. 191-194)