Trade in the Shadow of Power: Japanese Industrial Exports in the Interwar years

By Alejandro Ayuso Díaz and Antonio Tena Junguito (Carlos III University of Madrid)

The history of international trade provides numerous examples of trade in the ‘shadow of power’ (Findlay and O´Rourke 2007). Here we argue that Japanese empire power was as important as factor endowments, preferences, and technology, to the expansion of trade during the interwar years. Following Gardfield et al 2010, the shadow of power that we discuss is based on the use or threat of violence or conquest which depend on the military capabilities of states.

Japan was a latecomer to 20th-century industrialization, but during the interwar years, and especially in the 1930s, it was able to activate a complex and aggressive industrialization policy to accelerate the modernization of its industry. This policy consisted of import substitution and exports of manufactures to its region of influence. This newly created empire was very efficient in developing a peculiar imperial trade in the shadow of power throughout East and Southeast Asia in conjunction with a more aggressive imperial regional policy through conquest.

The trade generation capacity of the Japanese empire during the interwar years was much higher than that suggested by Mitchener and Weidenmier (2008) for the preceding period (1870-1913). However, some caution needs to be exercised in making this comparison because it might indicate issues associated with the interpretation of the relevant statistics. Japanese empire trade membership increased by more than ten times that associated with the British, German and French Empires, during this period and was twice as great as that for the US and Spanish empires. Consequently, it might be argued that our coefficients are more prominent because they are capturing stronger intra-bloc bias that emerged after the Great Depression.

Employing a granular database consisting of Japanese exports towards 117 countries over 1,135 products at six different benchmarks (1912,1915,1925,1929,1932 and 1938) we are able to demonstrate that the expansion of Japanese exports during the interwar period was facilitated by the exploitation of formal and informal imperial links which exerted a bigger influence on export determination than productivity increases.

Figure 2: Japanese total manufacturing exports by skills and region. Source: Annual Returns of the Foreign Trade of the Empire of Japan.

The main characteristics of this trade expansion between 1932 and 1938 were high-skill exports directed towards Japanese colonies. Additional evidence indicates that Japan did not enjoy comparative advantage in products with limited export- market potential. Colonial infrastructure, building and urbanization were used as exclusive markets for high-skill exports and became one of the main drivers of Japanese export expansion and its modern industrialization process.

Trade blocs in the interwar years were used as instruments of imperial power to foster exports and as a substitute for productivity in encouraging industrial production. In that sense, Japan’s total exports in 1938 were between 28% and 47% higher than 1912 thanks to imperial mechanisms. The figure is much higher when we capture the imperial effect on high-skill exports (between 66% and 76% higher thanks to imperial connections). The quoted figures are based on a counterfactual comparing exports without the empire to those obtained via Imperial mechanisms.

We believe that our results demonstrate the colonial trade bias mechanism used by imperialist countries was inversely related to productivity. The implicit counterfactual hypothesis would be that without imperial intervention in the region Japan would not have expanded its high-skill exports and would not have exported such a variety of new products. In other words, Japan’s industrialisation process would have been much less pronounced.

References

Ayuso-Diaz, A. and Tena-Junguito, A. (2019): “Trade in the Shadow of Power: Japanese Industrial Exports in the Interwar years”. Economic History Review (forthcoming).

Findlay, R. and O’Rourke, K. (2007). Power and Plenty. Princeton, NJ: Princeton University Press.

Garfinkel, M, Skaperdas, S., and Syropoulos, C. (2012). ‘Trade in the Shadow of Power’. In Skaperdas, S., and Syropoulos, C. (eds.), Oxford Handbook on the Economics of Peace and Conflict. Oxford University Press.

Mitchener, K. J., & Weidenmier, M. (2008). Trade and empire. The Economic Journal, 118(533), 1805-1834.

Ritschl, A. & Wolf, N. (2003). “Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-war Period,” CEPR Discussion Papers 4112.

To contact the authors:

Alejandro Ayuso Díaz (aayuso@clio.uc3m.es)

Antonio Tena Junguito (antonio.tena@uc3m.es)