from Microeconomic Insights: ‘When Britain turned inward: lessons from the impact of 1930s protectionism’

by Alan de Bromhead (Queens University Belfast), Alan Fernihough (Queens University Belfast), Markus Lampe (Vienna University of Economics and Business) and Kevin Hjortshøj O’Rourke (All Souls College, Oxford)

The full post and online access to the full article is available on the Microeconomic Insights website

With a protectionist president in the White House, the future of the multilateral, rules-based international trading system seems much less certain. So it is not surprising that politicians and commentators are turning to the 1930s for examples of what protectionism can imply for international trade flows.

World trade not only collapsed during the early 1930s: it also became much less multilateral. Countries like Britain and France, which already had empires, traded more with those empires. And countries like Germany and Japan, which were looking to acquire empires of their own, similarly traded more intensively with their respective spheres of influence.

This research focuses on the experience of Britain, which in 1931 broke decisively with a longstanding tradition of free trade. From November that year, substantial tariffs could be imposed on manufactured goods from outside the Empire. Similar duties on non-Empire fruit, flowers, and vegetables were possible soon after. And following the Ottawa conference of 1932, Britain’s trade policy explicitly served the interests of ‘the home producer first, Empire producers second, and foreign producers last’.

What was the impact of this dramatic policy shift? This study analyzes detailed data on British imports of 258 consistently defined commodities from 42 countries over the period 1924-38, as well as information on tariffs, quotas, voluntary export restraints, and other variables potentially influencing trade flows. To quantify the impact of the switch to protection, the authors compare actual trade flows from 1931 with counterfactual flows that would have taken place had tariffs and quotas remained unchanged.

The shift towards protection reduced the value of British imports by 9-10% on average, with the biggest impact being felt in 1933. Protection accounted for about a quarter of the total decline in British imports, which is consistent with results for the United States.

But in contrast with the findings of previous studies (which analyze aggregate data on trade and trade policies), the new research finds that the shift towards protection had a big effect on the geographical composition of British imports. For example, the Empire’s share of British imports rose from 27% to 39.2% between 1930 and 1935, while in the absence of protection it would only have increased to 31.4%.

Overall, the research shows that using disaggregated data does not significantly change the estimated impact of protection on the total value of trade. But it matters a great deal for the estimated impact of protection on the geographical composition of trade. Studies using aggregate data find that imperial trade blocs did not have a big influence on trade patterns during the 1930s. In contrast, this research finds that trade policy was crucial in increasing the share of the British Empire in British imports.

The clear ‘Balkanization’ of world trade shown in these results had wider effects, as several contemporary observers recognized. It reflected and probably also exacerbated the international tensions of the times, the later outcomes of which are well known.