Showing posts with label free trade. Show all posts
Showing posts with label free trade. Show all posts

Monday, November 24, 2008

Command Capitalism

China remains a one party state, not unlike Alberta, and the command economy has transformed into command capitalism. China's model of capitalism is an alternative to American style capitalism, and to prove its model to the world it is expanding its own form of Free Trade agreements with newly emerging capitalist economies. Welcome to 21st Century Imperialism.

This is why Bush and Harper have spent the last few weeks in international meetings defending American Capitalsim, China and Europe offer other models of capitalism, with China coming to the aid of countries abandoned by the Americans or in some cases like Costa Rica directly competing for market share with the Americans. China has embraced Free Trade in direct competition with the U.S. including in its own backyard. And depsite Bush's claims that free markets creat free people, China proves that democracy and freedom are not inherent to capitalism.

Capitalism in the west developed out of the collapse of autarchic fuedalism, not much differnt than the autarchy of command economies in the East. In fact all of Asia's capitalist development has been by autarchic state capitalsm, some under right wing military dictatorships, such as Korea and Taiwan, or through the Japanese model of an integrated Military Banking Industrial State complex or through the Chinese model.

And all ot the real growth in Asia has come about with fordist manufaturing and the creation of a proletariat.And with the development of a Chinese proletariat based on fordist manufacturing model comes the inevitable, workers organizing to improve their standards of living. And being tied into the international capitalist market place means that China too suffers when capitalism melts down. Forcing it to expend its mass of capital in promoting trade for its products and to speed up production for its own consumption.

Governments need to move fast, because this crisis, which has taken several forms already, is about to change form again. In the past few months, we've moved from a seizing up of credit markets to the collapse of economic demand in the mainstream economy. Soon we could see a string of sovereign defaults of poor and emerging economies that can't meet their debt obligations.
Even worse, hundreds of millions of previously poor people from Hungary and Turkey to India and China - recent arrivals in the global middle class who've benefited from an economic boom fuelled by endless quantities of cheap credit - are about to see their standard of living fall of a cliff. Around the world, Western-style capitalism will be discredited, as it's perceived to have wiped out people's jobs and life savings.


The United States' superpower status will wane over the next two decades as power spreads among several countries and moves from the West to the East, a report by the country's intelligence agency says.
The National Intelligence Council's Global Trends report, issued every four years to document looming problems, predicts a new global system will emerge where no single state dominates.
"By 2025, the U.S. will find itself as one of a number of important actors on the world stage, albeit still the most powerful one," the report by U.S. intelligence agencies says.
China is poised to have more impact than any other country, but the report also foresees a rise by India and Russia.
If trends continue, the report predicts China will have the world's second-largest economy by 2025, be a leading military power, while becoming the world's largest importer of natural resources and also the biggest polluter.
What is striking, the report notes, is that none of the three rising stars adhere to a Western liberal model but rather a system of state capitalism, under which the government takes a key role in economic management.
The transition will leave a world system "almost unrecognizable" in comparison to today, the report says.


Hu visit marks China's growing interest in Latin America
Chinese President Hu Jintao begins a Latin America tour on Monday, taking in Costa Rica, Cuba and Peru, as China tightens economic ties and the region hopes for help in tougher times.
The Asian giant has increased diplomacy and investment in Latin America in recent years, with an eye on its natural resources and developing markets for manufactured goods and even arms.
Many in Latin America hope for an investment boost to help ride out the economic crisis.
Exports from the continent to China include soya and iron ore from Brazil, soya from Argentina, copper from Chile, tin from Bolivia, and oil from Venezuela.
The trade is still only a small percent of the continent's total, but it is growing.
China's state-run Xinhua news agency reported this month that exports to Latin America grew 52 percent in the first nine months of 2008 to 111.5 billion dollars.
Hu will visit San Jose and Havana between a G-20 meeting on the global crisis in Washington on November 15 and an Asian Pacific Economic Cooperation forum summit in Peru on November 22.

"It's more than just symbolic that Hu Jintao has decided to come, because it is clearly making the point that it is no longer a Taiwanese stronghold," said Costa Rican analyst Luis Guillermo Solis.
Both Taiwan and China have been accused of using so-called "dollar diplomacy" to get nations to ally with them.
But China's economic might is hard to compete with, especially in tough economic times.
Part of China's incentives to Costa Rica came from China's enormous foreign exchange reserves with an offer to buy 300 million dollars in bonds.

Costa Rica, a major exporter of computer components, is now prepared to negotiate a free trade deal with China, the foreign trade minister said here this week, dismissing fears of an invasion of Chinese products into the tiny Costa Rican market.
China has expanded its high level missions to the whole continent in recent years, making investments and agreements with such oil producers as Venezuela, Ecuador, Colombia, Argentina, Brazil and Mexico.
"The fact is that China has been locked out of a lot of countries for energy deals" in the past, Brown said. "It's going to be going into these areas more and more."
China has also advanced to economic assistance and direct investment, sometimes taking over from the region's main commercial partner and neighbor, the United States.
The teaching of Chinese in schools and universities and scholarships to China, as in Costa Rica's deal, add to a charm offensive.
And although Latin American economies are in a stronger position to withstand financial setbacks than in the past, a strong economic partner such as China is more attractive than ever.


China is Costa Rica's second-largest trading partner -- although the amount of trade between the two countries is subject to interpretation. China claims it imported $2.3 billion in goods from Costa Rica in 2007, and exported $570 million. Costa Rican officials have said exports to China were valued at $848 million and imports at $763 million. Either set of numbers seems like small potatoes compared to Costa Rica's trade with the U.S.: $3.9 billion in exports last year, and $4.6 billion in imports, according to the U.S. Commerce Department.

A free trade agreement to be signed by China and Peru in March will go into effect in the second half of 2009, if everything goes as planned, the Chinese Ministry of Commerce announced. The agreement will benefit China’s light machinery industry as well as those of its electronics, domestic appliances, heavy machinery, automobile engines, chemical items, vegetables and fruit. Peru's fishmeal and aquatic products industry, as well as its mining sector, among others, will be reaping benefits from the accord, Reuters reports.

Tacos, Ugly Betty gain Mexico a foothold in China
MEXICO CITY — Armed with tortillas and telenovelas, Mexican companies that have relied on trade ties to the United States are heading to China, challenging old images of a country that many Mexicans consider a rival for foreign investment and jobs.
Mexican exports to China have jumped nine-fold since 2000, soaring from $ 204 million to $ 1. 9 billion in 2007. It’s the fastest growing market for and seventh-largest buyer of Mexican goods, according to Mexico’s government.
Some of Mexico’s most prominent companies have opened operations in China since 2006, expanding beyond their traditional trading turf in the Americas and Europe to vie for a foothold in what is expected to become the world’s biggest market. Even amid the current economic slowdown, China’s 2009 growth rate is projected to hover around 8 percent.
“This is a great signal that commercial relations between Mexico and China are on a good path,” said Juan Jose Ling, director of GDEM, a business development group that promotes Chinese-Mexican ties.

But Mexico relies more than its neighbors on manufactured exports, and many Mexicans saw the Asian giant as an economic enemy that diverted jobs and foreign capital. Since 2000, hundreds of thousands of Mexican jobs have been lost as foreign-owned assembly plants moved to China — which displaced Mexico as the secondlargest supplier of goods to the United States after Canada in 2003, U. S. Census Bureau data show.
China also was accused of flooding markets with low-cost toys and textiles. Even ubiquitous statuettes of Mexico’s iconic Lady of Guadalupe now bear the stamp “Made in China.” Yet more than a dozen big Mexican companies no longer see China as a financial foe, and have joined the global race to capture a slice of its $ 1. 3 trillion retail market.


In Beijing, well-planned modern infrastructure sits comfortably alongside historic monuments. Massive ring roads and modern high-rise apartments seem to be perfectly synchronised to ensure perfect movement of traffic and human beings.
This city of more than 11 million people lacks the chaos that is the hallmark of so many Asian megacities such as Mumbai. It also lacks the stern rigidity of cities of state-controlled countries.
China was not always like this. Free markets and capitalism were allowed to flourish in this communist country 30 years ago when the Chinese leader, Deng Xiaoping, introduced economic reforms that sought to modernise agriculture, industry, science and technology.
Known as the architect of China’s emergence as an economic powerhouse, Deng managed to unleash what the Lonely Planet guide refers to as “the long-repressed capitalist instincts of the Chinese” by reforming the agricultural sector, creating special economic zones and “growth poles” in urban areas that served as boomtowns and factories for China’s exports.
In the 1990s, China began intensifying its pro-urban development strategy by investing heavily in cities to boost economic growth.
The results have been remarkable. China’s economic growth has soared to 9 per cent a year and the country has been able to lift nearly 500 million people out of extreme poverty within one generation.
THE QUALITY OF LIFE FOR URBAN residents has improved with cities such as Beijing having the lowest levels of income inequality in the world. Shanghai now stands alongside Singapore and New York as a city with the tallest buildings.
More than 300 million rural migrants have moved to cities since 1980 and 60 per cent of the country’s population is projected to be urban by 2030.
Urbanisation has been one of the key pillars upon which China’s economic success rests.
But unlike other countries, particularly in Africa, rapid urbanisation has not led to the proliferation of slums. This is because China is still a command-and-control economy that can mobilise resources quickly to respond to changing demands.
According to James Adams, the vice-president of the World Bank’s East Asia and Pacific region, “China recognised early on that urban development is not possible on the cheap and that building ahead of demand makes lots of sense.”
He notes that Beijing and Tianjin spend more than 10 per cent of their GDP on roads, water and sewerage services, housing construction and transport, and that “China’s phenomenal ability to mobilise financial resources for urban development through domestic credit and foreign direct investment is what keeps the funds for cities coming.”
National policies that give Chinese municipalities the authority to implement regulations governing land use and transport and decentralised urban planning have also played a part in helping China’s cities to cope with rapid urbanisation more effectively than other middle-income countries such as Brazil and South Africa.
The cracks, however, are beginning to show. Sit-ins and protests by workers in China’s booming industrial cities are on the rise.
Rural-urban disparities are widening, and a growing urban middle class is beginning to ask difficult questions about democracy, freedom of expression and human rights.
The global financial crisis is also having an impact on the economic growth rate, which is projected to slow down.
Nonetheless, as I sipped a glass of Chinese Cabernet Sauvignon wine in a bookshop-cum-cafĂ© in Beijing, I found it hard to make a case against China’s development model.
I mean, does it really matter if the CEO of your bank is an official of the Communist Party? And what use is democracy when it can’t help put dinner on the table?


Warning from China's premier
"We must be aware that this year would be the worst in recent times for our economic development," Chinese Premier Wen Jiabao warned in the Communist Party magazine Qiushi on November 1."It is very difficult to maintain high growth and a low inflation rate in the long run. These unfavourable factors have already affected our country, and will continue to. There are also many pronounced problems in domestic economic activity," he wrote.As Minqi Li explained in an article in the April 2008 Monthly Review, China's economic growth in the late 1990s and 2000s depended heavily on it being a net exporter. The US alone accounts for 20 per cent of China's total export market, so a US recession alone would have a major impact. In 2007, Europe replaced the US as China's largest export market but Europe too has gone into recession.China's rapid economic growth also relied on Chinese capitalists (state and private) and foreign capitalists operating in China exploiting labour at a rate of about "one-twentieth of that in the US, one-sixteenth that of South Korea, one-quarter of that in Eastern Europe and one-half of that in Mexico or Brazil".While, a large, productive, and cheap labour force allows Chinese capitalists and foreign capitalists in China to profit from intense and massive exploitation, this places a brake on domestic demand making up for collapsing Western export markets.

The initial phases of the Free Trade Agreement between China and the Association of Southeast Asian Nations have brought significant benefits for both parties, helping to absorb external pressures at a time of slowing global growth.
On Oct. 22, Chinese Vice Premier Wang Qishan told the fifth China-ASEAN Business and Investment Summit that it is paramount for the two partners to accelerate their economic cooperation in the face of weakening global demand. Association of Southeast Asian Nations (ASEAN) officials also stated their wish for deeper economic ties with China, stressing the need to reduce the bloc's exposure to slowing demand from the U.S., Europe and Japan.

Structural shift. China's economy is moving away from traditional processing and assembly operations, sourcing more components domestically as its industries move up the value chain. Southeast Asia lacks the technology and skills to provide many of the required high-end imports and raw materials. It thus risks the prospect of a shrinking trade surplus with China and greater vulnerability to currency fluctuations.

Reform of financial system
(China Daily)Updated: 2008-11-15 17:07
As leaders of the 20 largest economies gather in Washington DC to discuss a coordinated plan to deal with the global financial crisis, it is necessary to reassess the existing US dollar-dominated international financial system. It is a speculation-rife, supervision-lacking system.
After the collapse of the Bretton Woods System in the early 1970s, the US rushed to introduce the Jamaica System, which is still in effect, in an attempt to carry forward its financial dominance. The Jamaica System, strictly speaking, is not new, and it has elements of Bretton Woods.
Under this financial structure, the US has excessively indulged itself in the benefits, but has tried to shrink from its responsibility as the world's largest economy. The superpower's unrestrained issuance of dollars to bolster its unrestrained domestic credit consumption and its efforts to maximize its national interests by adopting policies, such as transferring financial risk and crisis to other countries, has added vulnerability to the international financial system.
An absolute authority always leads to corruption. The unchallenged hegemony of the US has contributed to its abuse of power and conduct.
Long ago the European Union proposed that the international community strengthen supervision over hedge funds, which mainly stem from the US, and serves as an important source of its financial capital.
The EU's recommendation has repeatedly been ignored by Washington. As an important prop of the Bretton Woods System, the International Monetary Fund (IMF), has long been utilized by the US as a tool to push for neo-liberalism worldwide.
While offering aid to some crisis-plagued emerging economies, the lame-duck organization has never given up its interference in the economic jurisdiction of recipients in contravention of the UN. This has plunged some of these countries into a worse economic situation, sometimes resulting in political and social upheaval.
Since the exposure of the US financial crisis, the IMF has remained idle and other international financial bodies, such as the World Bank and the Bank of International Settlement, due to serious defects, have also been unable to play their roles as creditors and effective monitors.
The current defective international financial system has been widely criticized, but no country can ignore the dominant role of the US in it.
However, the unprecedented international financial tsunami in a century we are experiencing, and the summit on the crisis, have offered a rare opportunity for some competing players to change the existing international financial establishment to their advantage.
The hegemonic status of the US is now under challenge from its friend on the other side of the Atlantic Ocean, the EU. For many years, the expanded EU has pushed for market integration among its members and accordingly consolidated its strength to rival the US. That can be seen by the rising status of the euro in international markets.
It has been elevated to a major international currency, but admittedly it still has a long way to go before dethroning the US dollar as the world's leading reserve currency.
Behind the euro there is no unified capital market, military or fiscal policy. European countries have different economic development levels and political preferences.
At the same time, the regional community is plagued by problems of immigration, and an aging population. All this present hurdles to snatching the world's No 1 financial status from the US.
The EU has also been a beneficiary of the US-manipulated international financial order. So it is not difficult to understand why up to now it has not proposed major reforms.
We look forward to some positive measures from the Washington summit but should not pin our hopes too high.
The author Jiang Yong is a researcher with the China Institute of Contemporary International Relations




Crisis puts brake on sales of cars


By Patti Waldmeir Financial Times


It had to happen sometime: after several years of stratospheric growth, the Chinese vehicle industry has come back to earth with a bump - and found itself facing a grim reality of weak demand and cut-throat competition that could persist well into the future.Even before the western financial world imploded - stoking fears of a global recession that has chilled the hearts of car buyers, even in faraway China - industry analysts were expecting a slowdown in Chinese car sales this year. But by that, they meant 15 or 20 per cent growth (down from 34 per cent in 2006 and 24 per cent last year) - not low single-digits this year, and flat sales next year, as predicted recently by JD Power, the auto consultancy.Chinese car industry growth had defied gravity for so long - rising from only 5,000 cars in 1980 to 5.8m forecast for 2008, making it the world's second largest auto market - that it was hard to imagine anything could cause such a hard landing. But that was before the credit crisis.In many ways, Chinese car buyers ought to have been well insulated from the crisis: according to Mike Dunne of JD Power in Shanghai, 93 per cent of car purchases are still made with cash. But Li Shufu, chairman of Geely, one of China's largest automakers, says the effect is predominantly psychological. "If consumers think the global economic situation is bad, they also think maybe prices will fall," and they stop buying cars, he told the Financial Times recently in an interview. In China, no one wants to buy a car until the price is as low as possible.But China's car industry was already highly competitive, even before the threat of further price declines. According to Dieter Seemann, commercial executive director of Shanghai Volkswagen, one of VW's two carmaking joint ventures, China has 81 automotive brands compared with 47 in the US - the world's largest car market - and 47 carmakers compared to 16 in the US. VW says prices fell by a staggering 37 per cent from 2001 to 2007, and forecasts further price erosion of 8 per cent from 2008 to 2010. In the short term, says Joseph Liu, General Motors' Asia-Pacific head of sales and marketing, "everyone will suffer".But the medium- to long-term forecast is more cheerful. Nick Reilly, head of Asia-Pacific operations for GM, says market fundamentals remain strong. GM is still forecasting 10 per cent growth for this year and as much or more for next. "I don't see this as the start of a significant decline," he says.Jeffrey Shen, president of Changan Ford Mazda, one of Ford's Chinese joint ventures, says: "We see this as a shortterm adjustment. Long term the [growth] trend in the Chinese automotive industry will continue." Ford believes that when per capita GDP reaches $6,000, the industry will boom and carbuying "will get into every family", Mr Shen says.Ford acknowledges that car sales in China's richer, more export-focused east and south have slowed, but says sales in the interior are beginning to take up the slack - as China has shifted manufacturing production to cheaper regions.In the longer term, one basic fact remains paramount: only 20 out of 1,000 people in China own a car (compared wi th roughly 500 per 1,000 in the US and EU). That fundamental fact will drive the industry for many years to come.Most industry forces expect the Chinese government to stimulate demand in the short term, as a way of propping up the economy in difficult times. "The car industry can serve as a cushion for the overall economy," a senior official of Changan Motors, a large state-owned automaker, said recently. But in the longer term, Beijing's ambitions are much grander.China knows it missed out on decades of automotive technology, because of its Communist past. Now Beijing plans to leapfrog that gap to a new greener future: One plug-in hybrid electric car is expected on the Chinese market within weeks, from BYD, the upstart Shenzhen battery manufacturer that recently rose from nothing to become the biggest-selling Chinese auto maker. And nearly all of China's other leading auto companies say they are working on alternative fuel vehicles. They are counting on backing from Beijing - which has said that 10 per cent of China's cars must run on alternative fuels by 2012 - for everything from tax breaks to the massive infrastructure of charging stations needed for electric cars.China's peculiar brand of authoritarian semi-capitalism could even give Beijing an advantage in the battle, says Paul Gao, author of a recent McKinsey report on electric cars: democracies need to consult on such things as electric vehicles; but Beijing could just decide to support the technology, and it would happen."In China things can happen very fast, or very slowly," says Mr Liu of GM. If the past is any guide, change in the Chinese car industry will be fast-forward

China’s economy losing steam, workers losing jobs and wages
Guangdong province faces millions of job losses in coming months
Vincent Kolo, chinaworker.info
The global capitalist crisis has struck southern China’s export powerhouse Guangdong with the force of a super-typhoon. It is “the worst economic environment of our lives” exclaimed the chief economist of Hong Kong’s Chamber of Commerce. A domino effect of factory closures is rippling through industries such as toys, footwear, textiles and light engineering in Dongguan, Shenzhen, and other heavily industrialised cities in the Pearl River Delta. The Federation of Hong Kong Industries (whose members run their production from the delta) warns of 2.5 million job losses in the coming three months – 27,000 every single day! The same source said 20,000 Hong Kong-owned small and medium-sized enterprises could close down by the Lunar New Year (January 2009).“Depression”For years the world has marvelled at China’s spectacular growth figures, now it should prepare for spectacular figures of another sort! City leaders in Dongguan speak of a “depression” in the city of seven million people, mostly migrant sweatshop workers. Wang Zhiguang, vice chairman of the Dongguan Toy Industry Association, told Guangzhou Daily: “Of some 3,800 toy factories in Dongguan, no more than 2,000 are likely to survive the next couple of years.”Skyrocketing costs for fuel and raw materials, the Chinese currency’s rise, and shrinking export markets, have squeezed already narrow profit margins. “After the EU and the US changed the market thresholds for China-made toys, and because of recalls in 2007, our testing fees have gone up by about 25%,” a toy industry spokesman said.Several Hong Kong-owned factories have gone bust in the last week, including three run by the world’s largest toymaker Smart Union Group, which makes toys for Mattel and Hasbro. “It’s scary,” engineer Zeng Yangwen, 26, who worked for Smart Union for three years, told Reuters. “The companies that folded before were small. This is the first big one to go under.”Daily protestsThousands of workers have lost their jobs and many have taken to the streets to demand unpaid wages. Their former bosses in many cases have spirited away valuable assets and disappeared. Street protests and demonstrations at local government offices have been a daily occurrence in many townships in the region. In at least one case in Shenzhen, at the Xixian factory linked to luxury watch retailer Peace Mark, also Hong Kong-owned, more than 600 workers staged a sit-in for two days to demand their wages. More such protests are on the cards in coming weeks and months.Exporting regions like the Pearl River Delta are the first to be hit by the crisis, as their export markets wither under the impact of the global recession, while input costs have risen, and bank credit has become tighter. This is just the first phase of what is clearly a significant industrial slowdown in China, exacerbated by the simultaneous bursting of gigantic financial bubbles in the Chinese stock market and property sector. Added to this there is of course the global capitalist crisis, which is hammering export markets and threatens new financial upheavals. Asian stock markets sank to four-year lows this week on fears that growing difficulties in China and other ‘emerging markets’ will prolong the global recession. From being a possible ray of hope, China’s faltering economy is becoming another source of despair for the global capitalists.All the above factors mean the current industrial downturn can be far more serious than China’s leaders and most commentators publicly recognise. The Beijing regime continues to reassure the public how ‘basically strong’ the economy is. But in part these statements are tailored to avoid further frightening capitalist ‘investors’ (speculators) – who are more inclined towards panic from the global meltdown than they are to be calmed by recent market-supporting measures from the Chinese regime and central bank.“The slowdown in the Chinese economy so far is unexpectedly serious,” Li Wei of Standard Chartered Bank told China Daily. All the main economic data now point downward. China’s gross domestic product (GDP) growth slowed to 9% in the third quarter, the slowest rate since during the SARS crisis of 2003, and the fifth consecutive quarter of reduced growth. All the forecasts for 2008 and 2009 are being scaled down, and several economists now warn of growth dipping below the crucial 8% level in 2009. Morgan Stanley’s latest forecast is 8.2%, while CICC predicts just 7.3%. Li Wei of Standard Chartered forecasts 7.9% in 2009 and only 7% in 2010. Anything below 8% is a recession in the Chinese context, meaning rocketing unemployment and falling living standards for broad layers of the population.Investment slowsInvestment too, a key motor of GDP growth since the start of the century, has seen a sharp slowdown. The Chinese Academy of Social Sciences warns that real fixed asset investment (after compensating for higher producer prices) could grow by 15% overall this year, compared to 20% growth in 2007. This poses big problems for the central government: even its monetary easing (interest rates have been cut twice in the last month) and lifting of earlier credit restrictions on banks, may not have the desired effect if companies are reluctant to invest due to a sluggish market and huge levels of existing surplus capacity. Industries such as steel, coal, and power generation, have grown far beyond the limits of the Chinese economy in the course of a frenetic seven to eight year investment bubble, and are dependent on the country’s XXXL-sized export machine to sustain demand. If this machine fails, so do they. Steel and coal firms have announced production cuts for the first time in years in order to put the brakes on sharply falling prices brought about by lower demand and excess capacity. Coal prices are down 14% and steel by 30% since the summer. 23 of the nations 71 largest steel firms reported losses last month, and Beijing may reintroduce tax incentives for steel exports, despite opposition from the US and EU. Clearly, the slowdown is not confined to export industries or regions, although these are being hit first and hardest.While China’s overall GDP growth still seems impressive by global comparisons, its complex and fragmented economy can experience widely divergent processes at the same time. Guangdong and other coastal provinces are, because of globalisation (they trade more with the US and Europe than with the rest of China), showing clearer signs of recession at this stage than most Western economies. There has been a spate of suicides by capitalists in these provinces. All told perhaps 20 million workers have lost their jobs in 2008 as a result of business collapses. But as the overall economy is still growing, many of these worker (most are migrants) can be absorbed elsewhere. At a certain point in the downward cycle, however, this ability to soak up the new unemployed will likely break down and open unemployment will soar and, with it, the threat of serious unrest.Government measuresProperty markets – pumped up to fantasy levels in the speculative wave of recent years – have deflated sharply, by 40% in some cities such as Shenzhen. The coastal exporting regions that are suffering most from the crisis and the property meltdown are also the main launch-pad for the much discussed but yet to be seen “rebalancing” of the economy towards domestic consumption. Per capita GDP in the wealthiest coastal provinces is roughly twice the level in the north-eastern provinces, three times the level in the central provinces and five or six times the level in the poorest western provinces. Much greater consumption – close to double today’s level – would be needed to break the economy’s huge dependence on exports and avert a serious downturn. If increased consumption does not come from the wealthier provinces, then where? But the combined blows of falling property prices, factory closures and recession, migrants moving elsewhere, will serve to weaken rather than strengthen consumption in these regions. For the first time in modern Chinese history, since the pro-capitalist reform and opening process began 30 years ago, the coastal provinces may be headed for slower growth and greater dislocation than their poor relations in the interior. Already, coastal companies are gearing up for an assault on the markets of other provinces. The stage is being set for a dramatic increase in inter-provincial rivalries and economic disputes. Beijing may find itself in the role of referee at a dogfight!The central government has responded to the current slowdown with a series of measures that include even more investment in infrastructure, restoration of tax rebates to labour intensive export industries (these were cut two years ago as Beijing moved to soften US protectionism) and special rules to ease loan terms for small and medium-sized companies. The pace of currency appreciation will surely slow, if not reverse, and US protests over this fact may be bought off for a time with a Chinese commitment to keep up its lending to the US government’s huge state bailouts. Other steps have been taken to shore up the sinking stock market, to prevent the main CSI 300 index slipping below the psychologically important 2,000 mark. The market has plummeted 70% this year, but the latest measures – using state companies and the sovereign wealth fund, CIC, to buy up shares – have not prevented further falls (the CSI 300 is down on 1,833 points at the time of writing). The government will soon in all probability announce a stimulus package containing tax cuts and extra funds for public investment. It is rumoured that this package will be worth 400bn yuan ($58bn). That the plan has been delayed may reflect deep divisions inside the regime’s economic management team over what ‘mix’ of policies to adopt. Many CCP bigwigs now favour tax cuts, accepting the liberal economists’ argument that this is the fastest way to stimulate consumption. Less than one-third of China’s wage earners would benefit from a tax cut as the remainder do not earn enough to pay any tax. Fear of protestsWhat is the role of local-level governments in the Pearl River Delta and other export hubs in the rising wave of factory closures? There is of course a big risk of instability and even riots and the authorities are keen to diffuse this. At the same time the CCP local administrations have created an environment that allows corrupt capitalists to run their businesses into the ground and then abscond, leaving workers, creditors, and suppliers, in the lurch. Many of today’s fugitive bosses were well integrated with local officials and paid well for their services. Today the factories are being sealed for “immediate auction”, with workers allowed to remain temporarily only in the dormitories and canteens.At the same time the local governments are using public budgets to pay out unpaid wages to redundant workers, a fact that is drawing increasing criticism on similar lines to anger at bank bail-outs in the West. In order to clear the streets and prevent the anger of workers crystallising into a wider struggle across factory or township borders, governments are using the ‘carrot’ of compensation rather than the ‘stick’ of police repression – at least for the time being. The local government in Zhangmutou township, Dongguan, paid out more than 24 million yuan ($3.5 million) to compensate the 7,000 former workers of Smart Union Group, China Daily reported (23 October). This was the township’s entire budget for the coming year! Yet workers are owed four times this amount and may never receive the full amount. Once paid off and dispersed, the authorities hope migrant workers will move onto other jobs or other areas. Rival factories have been sending recruitment agents into the demonstrations in Dongguan and Shenzhen to fill their quota of vacancies.The main focus of workers’ protests has been to get part if not all of the wages they are owed. This is the still basic level at which the struggle stands today, not seeking to challenge the bosses’ right to turn thousands out onto the streets. The perspective of many migrant workers is that 1) they hope and believe that by moving again if necessary they can get new work, and 2) It is not really possible to challenge the bosses and officialdom: “They will do as they want, what can we do?”

The Challenge Of The New Statism
The liberal democracies have experienced financial shocks and reacted, but not as free market advocates expected. Adam Smith’s name is not being loudly heard in the world’s central banks. Instead we have western governments recommending federal interference in their poorly regulated economies and incorporating methods similar to those that guide New Statist nations, such as China and Russia. This phenomenon reveals that Francis Fukayama, who received commendation for his 1989 philosophical tract: The End of History, might have spoken too fast."What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government."Fukayama repeated a thesis of often maligned Karl Marx that liberal democracy is an integral part of the capitalist system but refuted Marx's assertion that “capitalism would inevitably lead to increasing class polarization and class conflict,” and “through its own inherent processes of development it is destined to give rise ultimately to its own dissolution." It now seems that both of these scholars have erred and the more prescient is Azar Gat, Professor of National Security at Tel Aviv University. In a Foreign Affairs article: The Return of Authoritarian Great Powers, July/Aug 2007, Professor Gat argues that Fukuyama has not considered the emergence of imposing authoritarian nations, "which could 'end the end of history'." Gat proposes a challenge: “These authoritarian capitalist regimes could inspire other states to follow their model.”The New StatismIn a previous article, The New Statism, The Rise of Corporate States, Alternative Insight, Oct. 2007, the writer independently outlined a similar concept: "A new statism, in various prescriptions, exercises control over the political, moral, economic and social fabric of several nations and has the potential to control the destiny of the world."An earlier article, The Socialization of America, Alternative Insight, April 2005, stated: “The global economy has been pioneered by the United States but has not been a perfect fit for new pioneering nations. In order to provide prosperity for its people, the United States must implement policies that offset the deleterious effects of globalization. American history shows that private industry has never been the sole source of solutions to recurrent economic problems.”The former article described several nations that can be described as "authoritarian capitalist” regimes. China and Russia are the most prominent, but India, Israel, Venezuela, Bolivia and Vietnam, and several autocratic Arab nations can also be considered New Statist. Their institutions include significant New Statist characteristics:The government allows free enterprise but might invest in some industries (mixed economy) and control industries related to national defense, natural resources, communications and media. In some cases it also has extensive land ownership.The government, by direct or indirect mechanisms, partially regulates international money transfers, international trade, wages, prices, internal investment and segments of the labor market.The government promotes nationalism, reinforces chauvinism and allies the education system with these efforts.The government exercises powers that lessen opposition and prevent excessive dissent.With the liberal political and economic world suffering from an economic downfall, emerging nations might be less likely to adopt the free market model and more likely to consideration the autocratic Statist paradigm as an attractive alternative to liberal democracy. Even the free marketers are shelving their concepts and applying Statist solutions for private problems. Rather than an end to history, the liberal democracy movement has become only a stage in history. As predicted by rejected and non-conventional economists, a new stage of history is unfolding.




SEE:
The New Imperial Age
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Sunday, November 23, 2008

His Masters Voice


Two Lame Ducks. Harper and Bush. One has a minority government the other a lame duck administration. Bush will be leaving in less than sixty days. Harper will continue to listen to his masters voice and be the ventriliquists dummy for Bush. It is a strange case of political seance, Harper continues to channel his inner Bush promoting free trade as the solution to the capitalist crisis. In a unabashed and unashamed bit of historical revisionism he claims that protectionism caused the Great Depression, failing to mention that while this exasperated the capitalism melt down the real solution was state intervention rather after the so called free market failed to self correct.

"Removing protectionist barriers and easing trade restrictions was a big factor in ushering in this extraordinary era," said Harper, referring to recent years of unparalleled economic growth. "We cannot allow ourselves to turn back." Harper said the Great Depression was prolonged by poor managerial choices on the part of governments that included shrinking the existing banking systems, raising interest rates and building barriers in a failed attempt to save jobs. These are the kinds of practices that need to be avoided in the present economic climate, he said, and Harper also urged other countries to take a look at their pasts when making decisions on how to move forward. "As we enter a period we have not seen in the memory of virtually anyone alive today, we must be good students of history -- and not just recent history," he said.

Harpers decision to push for a Free Trade deal with Colombia is another example of continuing on the Bush agenda, despite his masters own failure to succeed in pushing a similar American deal through congress. And Harper will have a fight when he brings it to parliment for approval. Colombia's record of human rights violations, state attacks and murder of political and trade union activists, their support for right wing death squads cannot be reformed by bi-lateral trade deals. Colombia's largest export is cocaine, the irony of a free trade deal with the Law and Order Harpocrites is delicious.

"In a time of global economic instability free trade is more important than ever," Harper said in a statement.
"By expanding our trading relationship with Colombia, we are not only opening up new opportunities for Canadian businesses in a foreign market, we are also helping one of South America's most historic democracies improve the human rights and security situation in their country."
U.S. President George Bush, arriving in Lima Friday, has made a free trade agreement with Colombia a priority for his last two months in office.
Harper acknowledged that Colombia faces many challenges, particularly in security. Colombia is the world's biggest supplier of cocaine according to the CIA, despite efforts from both their government and the United States.

Colombia's ties with the US could be severely damaged if Congress does not approve a planned free trade deal, the country's vice-president has warned. Francisco Santos Calderon told the BBC that a US failure to sign the pact would be a "slap in the face" to a strong ally.
The trade deal was signed two years ago by leaders of the two nations.
But US Democrats oppose the deal and have used their Congressional majority to block its passage. Mr Santos told the BBC that he did not believe that the deal would be passed during the remaining days of the Bush administration - and that he was not optimistic for its future under President-elect Barack Obama.
He said it was critical that the incoming administration saw US-Colombia relations "not in the context of what special interest groups want but in the light of our long-term relationship".
"Not approving the free trade agreement would be certainly a slap in the face to the strongest strategic ally that the US has in the continent," he said.
But Mr Santos played down the significance of the "Plan Colombia" US military aid package - worth more than half a billion dollars annually - aimed at fighting drug production

And China too has signed a Free Trade agreement with Colombia, which simply proves bireds of a feather and all that, both regimes are autarchic, militarist. In China's case it is her imperialist objective to act as a trading partner with whomever the U.S. fails to or takes exception too.

China, Colombia agree to strengthen cooperation

And let us not forget that we have been through all this before. Free Trade exasperates the crisis of capitalism it is not a solution to that crisis as Herr Doctor Professor Marx explained 160 years ago.

ON THE QUESTION OF FREE TRADE

Public Speech Delivered by Karl Marx

before the Democratic Association of Brussels January 9, 1848

We have shown what sort of brotherhood free trade begets between the different classes of one and the same nation. The brotherhood which free trade would establish between the nations of the Earth would hardly be more fraternal. To call cosmopolitan exploitation universal brotherhood is an idea that could only be engendered in the brain of the bourgeoisie. All the destructive phenomena which unlimited competition gives rise to within one country are reproduced in more gigantic proportions on the world market. We need not dwell any longer upon free trade sophisms on this subject, which are worth just as much as the arguments of our prize-winners Messrs. Hope, Morse, and Greg. For instance, we are told that free trade would create an international division of labor, and thereby give to each country the production which is most in harmony with its natural advantage. You believe, perhaps, gentlemen, that the production of coffee and sugar is the natural destiny of the West Indies. Two centuries ago, nature, which does not trouble herself about commerce, had planted neither sugar-cane nor coffee trees there. And it may be that in less than half a century you will find there neither coffee nor sugar, for the East Indies, by means of cheaper production, have already successfully combated his alleged natural destiny of the West Indies. And the West Indies, with their natural wealth, are already as heavy a burden for England as the weavers of Dacca, who also were destined from the beginning of time to weave by hand. One other thing must never be forgotten, namely, that, just as everything has become a monopoly, there are also nowadays some branches of industry which dominate all others, and secure to the nations which most largely cultivate them the command of the world market. Thus in international commerce cotton alone has much greater commercial than all the other raw materials used in the manufacture of clothing put together. It is truly ridiculous to see the free-traders stress the few specialties in each branch of industry, throwing them into the balance against the products used in everyday consumption and produced most cheaply in those countries in which manufacture is most highly developed. If the free-traders cannot understand how one nation can grow rich at the expense of another, we need not wonder, since these same gentlemen also refuse to understand how within one country one class can enrich itself at the expense of another.”

SEE:

Colombia Deal Dead

Armes sans frontières

The New Market States

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Monday, November 05, 2007

The Return Of Hawley—Smoot


During the Republican Presidential debate on economics last month Senator John McCain warned of the dangers of the Hawley—Smoot Tariff Act.

For his part, Senator John McCain mentioned Adam Smith's Wealth of Nations and blamed 1930s Smoot-Hawley tariffs for making the Great Depression worse.
Which he like so many other's refer to as the Smoot-Hawley Act. The ghost of Smoot Hawley stalks the world

Now I thought, why would he be referring to characters who sound like they came out of a Lil Abner comic strip.

Well of course he was referring to the Tariff Act which some say resulted in the Great Depression and World War II. Though some divergent thinkers on the right including libertarian historian Murray Rothbard and populist nativist conservative Pat Buchanan disagree with that assumption.

Both Hawley and Smoot were Republican's under a Republican President. And the specter of Hawley-Smoot haunts the minds of Republicans ever since. Not because they take the blame for the Great Depression rather because it led to the New Deal and the three term presidency of FDR.

During the Roaring 20s, the world economy benefited from that great era of globalization and free trade. Then, as now, global trade made a lot of people uncomfortable. And in both cases, politicians responded to public sentiment in exactly the wrong way, by attempting to kill, and successfully killing in the late 1920s, what had become a major source of growth and productivity. There is some danger that they could do it again.

On the eve of the Great Depression, Congress passed the Smoot-Hawley Tariff Act to “protect” American business from “unfair” foreign competition. Other countries retaliated in kind, levying tariffs of their own on American products. As a result, the Great Depression got greater as global trade shriveled and died. Considering this glaring example of what not to do when it comes to trade, you would think policy-makers would not repeat such a mistake. They have.

Tariffs are no longer fashionable, but Congress has managed to find a few new ways to stifle global trade. A good example is the blocking of the Dubai ports deal last year. This happened less than a year after Congress killed the Chinese purchase of a small U.S. oil company, Unocal. In the last year, several bills have been introduced in Congress to place trade restrictions on China.

The bottom line is this: The recent surge in protectionist sentiment is just one more parallel to the Roaring 20s. The implications for the next decade, just as the decisions in the 1920s affected the 1930s, are equally negative. We have all the ingredients in place to make the same mistakes we made then. Let’s hope we learned our lessons and are smarter about it this time.

"If you analyze it I believe the very heart and soul of conservatism is libertarianism. … The basis of conservatism is a desire for less government interference or less centralized authority or more individual freedom, and this is a pretty general description also of what libertarianism is. … I think that libertarianism and conservatism are traveling the same path."

– President Ronald Reagan

That quotation was appropriately reprinted on the first page of the official program for the Conservative Leadership Conference in Reno last weekend, an event that sought to rebuild the largely frayed conservative/libertarian Reagan coalition in time to spare the country from a Hillary Clinton presidency. I spoke to the group about my exit from the Republican Party, but after listening to other speakers and attendees gathered for the three-day event, I must conclude that Reagan's words no longer ring true.

Conservatives and libertarians are marching to different drummers, going on different paths going in opposite directions. The libertarians still are committed to "less government interference" and "less centralized authority," but conservatives these days are more interested in building an all-powerful central government to wage war on real and perceived enemies at home and abroad. Conservatives use the word "freedom" while they wax poetic about American military might. But the policies they promote show no sign of trusting individual Americans to live their lives as they please and every sign of trusting the government to do what is best.

That contrast was nothing compared with what attendees witnessed Saturday morning. Grover Norquist, a prominent conservative activist from Americans for Tax Reform, called on the reconstitution of Reagan's "leave us alone" coalition. The members of that group – gun lovers, home-schoolers, small-business owners, taxpayer advocates – didn't necessarily like each other, he said, but they united in their desire to pursue their lives without excessive meddling from the government. We don't have to "agree on secondary and tertiary issues," he said. "Ours is a low-maintenance coalition that wants to be left alone in the zone that matters to them." By contrast, the Democratic coalition is what he calls the "takings coalition" – the unions, trial lawyers, the dependency movement, coercive utopians and radical environmentalists" who are promoting "a list of things slightly longer and more tedious than Leviticus." These groups can work together as long "as there is more money coming into the center of the table." His solution: Starve the beast through tax cuts and expand the coalition of Americans whose primary goal is to be left alone.

That's my thinking. But immediately after Norquist's talk came Duncan Hunter, a San Diego-area congressman and GOP presidential candidate. While Norquist championed a coalition of people who want government to leave them alone, Hunter championed a government that was about bossing everybody around. "It is in the interests of the United States to expand freedom," he said. "If you don't change the world, the world is going to change you." And, boy, did Hunter offer plans to change the world. He vowed to take on China and Iran, to continue what he viewed as a successful war in Iraq, to crack down on illegal immigration and to expand government spending on the military. He talked about "duty, honor, country" but not about liberty. The crowd – at least the conservative faction – roared its approval.

"That was the scariest s--- I've heard in a long time," I whispered to libertarian writer Doug Bandow, who apparently agreed. Writing in his blog, Bandow contrasted Hunter with Norquist: "Very different was … Hunter, who wants to slap tariffs on Chinese imports, expand the military, close the border and go to war to do good around the world. His trade critique sounds like something out of communist central planning … . With his import limits he would follow the example of the disastrous Smoot-Hawley tariff, which wrecked international markets and helped bring on the Great Depression. Worse, though, he wants to use the U.S. military to 'expand freedom around the world,' when Washington's principal responsibility is to defend America's national security. Undertaking glorious international crusades with other people's lives is Wilsonian liberalism, not responsible conservatism."

Hence the divide. We also saw it the night before when religious conservative Alan Keyes gave a dinner address. He was greeted by a standing ovation by conservatives as he entered the room, while a few of us in the libertarian faction rolled our eyes, grabbed our cigars and quietly headed to the bar.

Libertarian GOP presidential candidate Ron Paul actually won the conference straw poll with 32 percent of the vote, but his nearly one-third support conforms to my sense of the gathering's two-to-one conservative vs. libertarian breakdown.

As I cleared my head on the gorgeous southward drive east of the Sierras along U.S. 395, I was left with only one conclusion: All the king's horses and all the king's men won't put this Humpty Dumpty coalition together again.

Hawley-Smoot was not about industrial production but protectionism for America's farmers. It's impact on Canada was horrendous leading to our own farm crisis which then created the need for the Wheat Board.

Today those farmers as a class are gone, replaced by big agribusiness interests who rely upon subsidies and protectionism. As do their European counterparts. Thus the crisis in global trade talks around agriculture in the WTO. Which for all the talk of free trade remains mired in fights over subsidies to agribusiness versus support for real farmers in the developing world.

Here is a history of Hawley-Smoot and its impacts, which changed the world forever.

It's lessons are hauntingly familiar today as America declines in economic power due to the Iraq war, housing crunch and reliance on domestic credit and consumption by its worker/consumers.

Internationally we have even seen a return of Bank runs which has not happened since the Great Depression and the Canadian economy booms with the loonie at a record high.

Dollar Hits Record Low Vs. Loonie, Euro


cover

Historical Economics

Art or Science?

Charles P. Kindleberger
Professor of Economics Emeritus, Massachusetts
Institute of Technology

UNIVERSITY OF CALIFORNIA PRESS
Berkeley · Los Angeles · Oxford
© 1990 The Regents of the Univ


The Disintegration of World Trade

The Hawley—Smoot Tariff

The origins of the Hawley—Smoot tariff, as already noted, reach back to the autumn of 1928 when Herbert Hoover, campaigning for the presidency, promised to do something to help farmers suffering under the weight of declining agricultural prices. A special session of Congress was called in January 1929, long in advance of the stock-market crash of


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October of that year, and began to prepare a tariff bill. Its scope was widened from agriculture to include industry; Democrats joined Republicans in their support for tariffs for all who sought them; and both Republicans and Democrats were ultimately pushed from the committee room as lobbyists took over the task of setting the rates (Schattschneider, 1935). A groundswell of resentment spread around the world and quickly led to retaliation. Italy objected to duties on hats and bonnets of straw, wool-felt hats, and olive oil; Spain reacted sharply to increases on cork and onions; Canada took umbrage at increases on maple sugar and syrup, potatoes, cream, butter, buttermilk, and skimmed milk. Switzerland was moved to boycott American typewriters, fountain pens, motor cars, and films because of increased duties on watches, clocks, embroidery, cheese, and shoes (Jones, 1934). Retaliation was begun long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against United States products, even though rates could be moved up or down in the Senate or by the conference committee. In all, 34 formal protests were lodged with the Department of State from foreign countries. One thousand and twenty-eight economists in the United States, organized by Paul Douglas, Irving Fisher, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox, and representing the "Who's Who" of the profession, asked President Hoover to veto the legislation (New York Times , 5 May 1930). A weak defence was offered contemporaneously by President Hoover as he signed the bill, saying "No tariff act is perfect" (Hoover, 1952, p. 291), and another 45 years later by Joseph S. Davis, who claimed that the Senate got out of hand, but that Hoover had won two key points: inclusion of the flexible provisions permitting the Tariff Commission to consider complaints and recommend to the president higher or lower rates, and exclusion of an export-debenture plan along the lines of the McNary—Haugen bill (Davis, 1975, p. 239). Both views were in the minority.

The high tariffs of 1921, 1922, and a fortiori 1930 were generally attacked on the grounds that the United States was a creditor nation, and that creditor nations were required to maintain low tariffs or free trade in order that their debtors might earn the foreign exchange to pay their debt service. This view is now regarded as fallacious since the macroeconomic impacts effects of tariffs on the balance of payments are typically reversed, wholly or in large part, by the income changes which they generate. Under the post-Second World War General Agreement on Tariffs and Trade, balance-of-payments considerations are ignored in settling on tariff reductions in bilateral or multilateral bargaining. In addition, a careful study for the Department of Commerce


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by Hal. B. Lary states that the effect of the tariff increases of 1922 and 1930, and those of the reductions after 1930, cannot be detected in the import statistics. This was partly perhaps because tariffs were already close to prohibitive and early reductions were minimal, but mainly for the reason that wide fluctuations in world economic activity and prices overwhelmed any lasting impact of tariffs on trade (Lary, 1943, pp. 53–4).

The significance of the Hawley—Smoot tariff goes far beyond its effect on American imports and the balance of payments to the core of the question of the stability of the world economy. President Hoover let Congress get out of hand and failed to govern (Schattschneider, 1935, p. 293); by taking national action and continuing on its own course through the early stages of the depression, the United States served notice on the world that it was unwilling to take responsibility for world economic stability. Sir Arthur Salter's (1932, pp. 172–3) view that Hawley—Smoot marked a turning point in world history is excessive if it was meant in causal terms, apposite if taken symbolically.

Retaliation and business decline wound down the volume and value of world trade. The earliest retaliations were taken by France and Italy in 1929. In Canada the Liberal government kept parliament in session during the final days when the conference committee was completing the bill, and then put through increases in tariff rates affecting one-quarter of Canadian imports from the United States. Despite this resistance to its neighbour, the government lost the August 1930 election to the Conservatives, who then raised tariffs in September 1930, June 1931, and again in connection with the 1932 Ottawa agreements (McDiarmid, 1946, p. 273). The action in May under the Liberal, W.L. Mackenzie King, involved both increases and decreases in duties, with Empire preference extended through raising and lowering about one-half each of general and intermediate rates, but lowering the bulk of those applicable to Empire goods. Subsequent measures typically raised Empire rates, but general and intermediate rates more. In September 1930, anti-dumping rates were increased from 15 to 50 percent.

Deepening Depression

The Hawley—Smoot tariff began as a response to the decline in agricultural prices and was signed into law as the decline in business picked up speed. For a time during the second quarter of 1930, it looked as though the world economy might recover from the deflationary shock of the New York stock-market crash in October 1929, which had come on the heels of the failure in London of the Clarence Hatry conglomerate


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after the discovery of fraudulent collateral used to support bank loans in September and the failure of the Frankfurt Insurance Company in Germany in August. This is not the place to set forth the causes of the depression in agricultural overproduction, the halt to foreign lending by the United States in 1928, the end of the housing boom, the stock-market crash, frightened short-term capital movements, United States monetary policy and the like. It is sufficient to observe that the chance of recovery was seen to fade at the end of June 1930 with the signing of the Hawley—Smoot tariff, the outbreak of retaliatory cuts in international trade, and the near-failure of the Young loan (to reprime German reparations) in international capital markets. Events thereafter were uniformly depressing, from Nazi gains in German elections in September 1930, the collapse of the Creditanstalt in Vienna in May 1931, the run on German banks in June and July, until the Standstill Agreement that blocked repayment of all German bank credits shifted the attack to sterling, which went off the gold standard in September 1931, followed by the yen in December.

One item of commercial policy contributed to the spreading deflation. In the autumn of 1930, Austria and Germany announced the intention to form a customs union. The proposal had its proximate origin in a working paper prepared by the German Foreign Ministry for the World Economic Conference in 1927. It was discussed on the side by Austrian and German Foreign Ministers at the August 1929 meeting on the Young Plan at The Hague. Germany took it up seriously, however, only after the September 1930 elections which recorded alarming gains for the National Socialists, and Chancellor BrĂĽning felt a strong need for a foreign-policy success. The French immediately objected on the grounds that customs union between Austria and Germany violated the provision of the treaty of Trianon which required Austria to uphold her political independence. France took the case to the International Court of Justice at The Hague for an interpretation of the treaty. Other French and British and Czechoslovak objections on the grounds of violation of the most-favoured-nation clause were laid before the League of Nations Council (Viner, 1950, p. 10). The International Court ultimately ruled in favour of the French position in the summer of 1931. By this time, however, the Austrian Creditanstalt had collapsed — barely possibly because of French action in pulling credits out of Austria, though the evidence is scanty — the Austrian government responsible for the proposal of customs union had long since fallen, and the run against banks and currencies had moved on from Austria to Germany and Britain.

In the autumn of 1931, appreciation of the mark, the dollar and the gold-bloc currencies as a consequence of the depreciation of sterling


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and the currencies associated with it, applied strenuous deflation to Germany, the United States and to Western Europe from September 1931 to June 1932. Depreciation of the yen in December 1931 marked the start of a drive of Japanese exports into British and Dutch colonies in Asia and Africa, and of colonial and metropolitan steps to hold them down. June 1932 was the bottom of the depression for most of the world. The United States economy registered a double bottom, in June 1932 and again in March 1933, when spreading collapse of the system of many small separate banks climaxed in the closing of all banks for a time, and recovery thereafter. German recovery started in 1932 after the resignation of BrĂĽning, who had hoped to throw off reparations by deflation to demonstrate the impossibility of paying them, the succession of von Papen as chancellor, the finally the takeover of the chancellorship by Hitler in February 1933. The gold-bloc countries remained depressed until they abandoned the gold parities of the 1920s — first Belgium in 1935, and the remaining countries in September 1936.

In these circumstances, there was little if any room for expansive commercial policy. Virtually every step taken was restrictive.

Ottawa

The Hawley—Smoot Tariff Act occupied most of the time of Congress for a year and a half (Smith, 1936, p. 177). Empire preference was the major issue in Canadian politics for more than half a century (Drummond, 1975, p. 378). The Imperial Economic Policy Cabinet worried more about tariffs than about any other issue (ibid., p. 426), though much of it dealt with objectively insignificant goods (Drummond, 1972, p. 25). Drummond several times expresses the opinion that the Ottawa discussions in the summer of 1932 should have abandoned the question of tariff preferences and focused on monetary policy, and especially exchange-rate policy. In fact Prime Minister Bennett of Canada sought to raise the issue of the sterling exchange rate prior to Ottawa only to be rebuffed by Neville Chamberlain with the statement that the Treasury could not admit the Dominions to the management of sterling. Canada did succeed in getting exchange rates put on the Ottawa agenda, but the Treasury insisted that the question was minor and nothing came of it (Drummond, 1975, pp. 214–16).

Monetary policy and tariff policy were occasionally complements, occasionally substitutes. The Macmillan Committee report contained an addendum, no. 1, by Ernest Bevin, J.M. Keynes, R. McKenna and three others recommending import duties, and, in so far as existing treaties permitted, a bounty on exports, the combination being put


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forward as a substitute for devaluation of sterling (Committee on Finance and Industry, 1931). In the event, the United Kingdom undertook both depreciation of sterling and the imposition of import duties.

Sterling left the gold standard on September 21, 1931 and depreciated rapidly from $4.86 to a low of $3.25 in December, a depreciation of 30 percent. Canada and South Africa adopted anti-dumping duties against British goods. On its side, the United Kingdom enacted an Abnormal Importations Act on November 20, 1931 that gave the Board of Trade the right to impose duties of up to 100 percent as a means of stopping a short-run scramble to ship goods to the United Kingdom before the exchange rate depreciated further. While 100 percent tariffs were authorized, tariffs of only 50 percent were imposed. This Act was followed in a few weeks by a similar Horticultural Products Act. Both the Abnormal Importations Act and the Horticultural Products Act exempted the Empire from their provisions (Kreider, 1943, p. 20).

In the Christmas recess of Parliament, Lord Runciman, President of the Board of Trade, persuaded Chamberlain to take up protection as a long-run policy, as had been recommended by Keynes and the Macmillan Committee, prior to the September depreciation, and opposed by Beveridge (1931), since without tariffs, the United Kingdom had nothing to exchange with the Dominions for preferences in their markets. The resultant Import Duties Act of February 1932 established a 10 percent duty on a wide number of imported products — but not copper, wheat, or meat — and created an Import Duties Advisory board, charged with recommending increases in particular duties above the flat 10 percent level. At the last minute a concession was made to the Dominions and colonies. The latter were entirely exempted from the increase, and the former were granted exemption until November 1932, by which time it was expected that mutually satisfactory arrangements for preferences would have been reached. Eighteen countries responded to the Import Duties Act by asking the United Kingdom to undertake negotiations for mutual reductions. The reply was universally negative on the grounds that it was first necessary to arrive at understandings with the Empire (Condliffe, 1940, pp. 300–8). In the spring of 1932, the Import Duties Advisory Board was hard at work raising duties above the 10 percent level, with the notable increase in iron and steel products to 33 1/3 percent. Three years later in March 1935 the iron and steel duties were increased to 50 percent in order to assist the British industry in negotiating a satisfactory basis with the European iron and steel cartel (Hexner, 1946, p. 118).

Imperial economic conferences held in 1923, 1926, and 1930 had all broken down on the failure of the United Kingdom to raise tariffs which


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would have put her in a position to extend preferences to the Empire. Substitute assistance in the form of arrangements for Empire settlement or Empire marketing boards failed to produce significant effects on either migration or trade. British bulk-purchase schemes sought especially by Australia had been halted as early as 1922 and had not been resumed. Hopes were high for the Imperial Economic Conference of 1932 in Ottawa which now had British tariffs to work with.

Canada cared about wheat, butter, cheese, bacon, lamb, and apples; Australia about wheat, chilled meat, butter, cheese, currants, dried fruits, and canned fruits; South Africa about wine and dried and canned fruits; New Zealand about butter and mutton. The position differed in those commodities that the Dominions produced in greater amounts than the United Kingdom could absorb, like wheat, in which diversion of Dominion supplies to the United Kingdom from third markets would produce an offsetting increase in non-Dominion sales in non-British markets and leave Dominion export prices overall unchanged, from those in which the United Kingdom depended upon both Dominion and foreign sources of supply, among the latter notably Argentina in meat, Denmark in butter, Greece in dried currants and raisins, and, it would like to think, the United States in apples. Trade diversion from foreign to Dominion sources was possible in this latter group, but only at some cost in British goodwill in the indicated import markets. On this score, the United Kingdom was obliged to negotiate at Ottawa with an uneasy glance over its shoulder.

A significant Dominion manufacture, as opposed to agricultural product, which had earlier received preference in the British market, in 1919 under the McKenna duties, was motor cars. This preference had led to the establishment of tariff factories in Canada, owned and operated by United States manufacturers. Its extension in the Ottawa agreement led to the unhappy necessity of defining more precisely what a Canadian manufactured motor car consisted of, and whether United States-made motor parts merely assembled in Canada qualified as Canadian motor cars.

In exchange for concessions in primary products in the British market, the United Kingdom expected to get reductions in Dominion duties on her manufactures. But it proved impossible at Ottawa to fix levels of Dominion tariffs on British goods. Instead, the Dominions undertook to instruct their respective tariff boards to adjust the British preference tariff to that level which would make British producers competitive with domestic industry. Resting on the notion of horizontal supply curves, rather than the more usually hypothesized and far more realistic upward-sloping curves, the concept was clearly unworkable and gave rise to unending contention. It was abandoned in 1936.


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Argentina, Denmark, Greece, Norway, and Sweden were not content to yield their positions in the British market without a struggle. Even before the Import Duties Act had taken effect, Denmark in January 1932 legislated preferences favouring Britain, and on raw materials used in manufactured exports. By June 1932, total imports had been reduced 30 to 40 percent, but import permits issued for British goods allowed for a 15 percent increase (Gordon, 1941, p.80). In similar fashion, Uruguay undertook to discriminate in the allocation of import licences in favour of countries that bought from her. The threat to discriminate against the United Kingdom was clear. Quickly after Ottawa, British customers pressed to take up negotiations postponed from early 1932 and to settle the extent to which Ottawa would be allowed to squeeze them out of the British market.

In the Roca—Runciman Agreement of May 1, 1933, the United Kingdom agreed not to cut back imports of chilled beef from Argentina by more than 10 percent of the volume imported in the year ended June 30, 1932, unless at the same time it reduced imports from the Dominions below 90 percent of the same base year. This was disagreeable to Australia, which was seeking through the Ottawa agreements to break into the chilled-beef market in the United Kingdom, in which it had previously not been strong (Drummond, 1975, p. 310). Three-year agreements with Denmark, Norway, and Sweden, running from various dates of ratification about mid-1933, provided minimum butter quotas to Denmark and (much smaller) to Sweden, a minimum bacon quota to Denmark amounting to 62 percent of the market, and agreement not to regulate the small and irregular shipments of bacon, ham, butter, and cheese by Norway. But guarantees to these producers left it necessary, if domestic British producers of, say, butter were to be protected, to go back on the Ottawa agreements which guaranteed unlimited free entry into the British market. The position was complicated by New Zealand's backward-bending supply curve which increased butter production and shipments as the price declined, and Australian policy, which evoked the most profound distrust from New Zealand, of subsidizing the export of butter to solve a domestic disposal problem (Drummond, 1975, pp. 320ff., 475). The problems of the Dominions and of the major foreign suppliers of the British markets for foodstuffs compounded the difficulties of British agriculture. In defence of the lost interest, the British agricultural authorities developed a levy-subsidy scheme under which tariffs imposed on imports were segregated to create a fund to be used to provide subsidies to domestic producers. The levy-subsidy scheme was first applied in the United Kingdom on wheat in 1932; strong voices inside the British cabinet urged its application to beef, dairy products, and bacon and ham. Wrangling over these proposals went on between


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British and Commonwealth negotiators for the next several years as the United Kingdom tried to modify the Ottawa agreements, with Dominion and foreign-supplier consent, in order to limit imports. In the background, dispute deepened within the British cabinet between the agriculture minister, Walter Elliott, who wanted subsidies, and the chancellor of the exchequer, Neville Chamberlain, who feared their effect on the budget and consistently favoured raising prices and farm incomes, in the United Kingdom and abroad, by cutting production and limiting imports.

In its agreements in Scandinavia, the United Kingdom sought to bind its trading partners to give preferences to British exports, and especially to guarantee a percentage share of the market to British suppliers in that sorely afflicted export industry, coal. In eight trade agreements, British coal exporters were guaranteed generally the major share of import volume, with quotas as follows: Denmark, 90 percent; Estonia, 85 percent; Lithuania, 80 percent; Iceland, 77 percent; Finland, 75 percent; Norway, 70 percent; Sweden, 47 percent. In addition, Denmark agreed that all bacon and ham exported to the United Kingdom should be wrapped in jute cloth woven in the United Kingdom from jute yarn spun in the United Kingdom (Kreider, 1943, pp. 61–2). The Danish government gave British firms a 10 percent preference for government purchases, and undertook to urge private Danish firms to buy their iron and steel in the United Kingdom wherever possible. Kreider notes that these agreements constrained British trade into a bilateral mode: British agreements with Finland lifted the unfavourable import balance from 1 to 5 against the United Kingdom in 1931 to 1 to 2 in 1935. The agreement with the Soviet Union called for the import/export ratio to go from 1 to 1.7 against the United Kingdom in 1934 to 1 to 1.5 in 1935, 1 to 1.4 in 1936 and 1 to 1.2 in 1937 and thereafter. Argentina agreed to allocate the sterling earned by its exports to the United Kingdom to purchases from the United Kingdom.

The Ottawa agreement dominated British commercial policy from 1932 to the Anglo-American Commercial Agreement of 1938, and to a lesser extent thereafter. It was continuously under attack from foreign suppliers other than the United States that entered into trade and financial agreements with the United Kingdom, and from the United States which undertook to attack it as early as the World Economic Conference of 1933. But at no time could the agreement have been regarded as a great success for the Empire. It produced endless discussion, frequently bitter in character, and dissatisfaction on both sides that each felt they had given too much and gained too little. By 1936 and 1937, there was a general disposition to give up the attempt, or at least to downgrade its priority.

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The Netherlands

The United Kingdom embraced free trade, broadly speaking, with the repeal of the Corn Laws in 1846, and gave it up with the McKenna duties in 1916. The Netherlands' support goes back at least to the sixteenth century, and lasted until 1931. A faithful supporter of attempts to spread freer trade throughout the world from the World Economic Conference in 1927 until the Convention for the Abolition of Import and Export Prohibitions and Restrictions and the Conference with a View to Concerted Economic Action, the Netherlands ultimately turned to the smaller arena of the Oslo agreement of Scandinavia and the Low Countries. The pressure from declining wheat prices, however, proved too severe. In 1931 the Netherlands undertook to regulate farm prices and marketing. The Wheat Act of 1931 set the domestic price at 12 florins per 100 kilograms at a time when the world price had fallen to 5 florins, necessitating the first major break with the policy of free trade in nearly three centuries. There followed in 1932 as a response to the depreciation of sterling, first an emergency fiscal measure establishing 25 percent duties generally, and then in agriculture the Dairy Crisis Act and the Hog Crisis Act, which were generalized in the following year as the Agricultural Crisis Act of 1933 (Gordon, 1941, p. 307). The freer-trade tradition of the Oslo group continued, however. At the depth of the depression in June 1932, the Oslo group concluded an agreement to reduce tariffs among themselves on a mutual basis by 10 percent per annum for five years. Though it was already blocking out the discrimination to be achieved at Ottawa two months later, the United Kingdom objected on the grounds that the arrangement would violate the most-favoured-nation clause. After dissolution of the gold bloc in 1936, the Oslo group resumed its example-setting work in reducing trade barriers, agreeing first to impose no new tariffs and then to eliminate quotas applied to one another's trade on a mutual basis. Since the most-favoured-nation clause applied only to tariffs and not to quotas, there was no basis for an objection or to claim extension of the concession.

During the period of restricted trade, the Netherlands licensed not only imports, but in some cases exports. The latter practice was followed where quotas in foreign import markets left open the question whether the difference between the domestic price and the world price would go to importers or exporters. A law of December 24, 1931 established a system of licensing exports in instances of foreign import quotas, with permits distributed among exporters in accordance with the volumes of some historical base period. Licence fees were then imposed, in the amount of 70–100 percent of the difference between the


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world price and the domestic price in the import market, with the collected proceeds distributed to Dutch producers. The purpose of the fees was to divert the scarcity rents available from import restriction, first to the exporting country as a whole, and then, within the exporting country, from exporting firms to agricultural producers (Gordon, 1941, p. 356).

France

The French are often given the credit in commercial policy between the wars for the invention of the quota, a protective device which was to flourish until well into the 1950s, and even then to experience revival in various forms in the 1970s. While its origins go well back in time, the proximate causes of the quota in 1930 were the limitation on France's freedom of action imposed by the network of trade treaties it had fashioned, beginning with that with Germany in 1927, and the difficulty of ensuring a restriction of imports sufficient to raise domestic prices — the object of the exercise — in the face of inelastic excess supplies abroad. Like the Hawley—Smoot tariff increases in committee, quotas spread from agricultural produce to goods in general.

Under an old law of December 1897 — the so-called loi de cadenas — the French government had authority in emergency to change the rate of duty on any one of 46 agricultural items. The emergency of falling agricultural prices after 1928 caused the laws of 1929 and 1931 which extended the list. With especially wheat in excess supply overseas in regions of recent settlement like Australia and Canada, the French decided that raising the tariff under their authority would not only pose questions about their obligations under trade treaties, but might well not limit imports, serving only to reduce world prices and improve the terms of trade. Australia, in particular, lacked adequate storage capacity for its wheat and had no choice but to sell, no matter how high the price obstacles erected abroad. The decision was accordingly taken to restrict quantity rather than to levy a customs duty (Haight, 1941, p. 145). The device was effective. As the depression deepened, and as imports grew with the overvaluation of the franc, it was extended to industrial goods. Other countries followed suit, especially Germany with its foreign-exchange control. In 1931, BrĂĽning and Pierre Laval, the then French premier, reached an agreement establishing industrial understandings to coordinate production and trade between German and French industries. One such understanding in electrical materials developed into a cartel. The rest were concerned primarily with restricting German exports to France. When they failed to do so, they


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were replaced by French quotas (Hexner, 1946, pp. 119, 136). After a while, the French undertook bilateral bargaining over quotas, which led in time to reducing quotas below desired limits in order to have room to make concessions during negotiations.

Germany

Less by design than by a series of evolutionary steps, Germany developed the most elaborate and thoroughgoing system of control of foreign trade and payments. Foreign claims on Germany were blocked on July 15, 1931, when Germany could no longer pay out gold and foreign exchange to meet the demands of foreign lenders withdrawing funds. This default was followed by a negotiated Standstill Agreement between creditors and Germany, involving a six-month moratorium on withdrawals, subsequently renewed. The decision not to adjust the value of the Reichsmark after the depreciation of sterling in September 1931 made it necessary to establish foreign-exchange control, and to prevent the free purchase and sale of foreign currencies in the private market. The proceeds of exports were collected and allocated to claimants of foreign exchange seeking to purchase imports. Clearing agreements developed under which German importers paid Reichsmarks into special accounts at the Reichsbank in favour of foreign central banks, which then allocated them to their national importers of German goods. The foreign central bank faced a particular problem whether or not to pay out local currency to the exporter in advance of its receipts of local currency from national importers of German goods. Some central banks did pay off local exporters against claims on the German clearing, following what was later called the "payments principle," and experienced inflation through the resultant credit expansion. Other central banks made their exporters wait for payment which both avoided monetary expansion and held down the incentive to export to Germany (Andersen, 1946).

A number of countries with large financial claims on Germany, such as Switzerland, insisted that the proceeds of German exports be used in part to pay off creditors abroad, thus converting "clearing" into "payments" agreements. These payments agreements were also used in a few cases to require Germany to continue spending on non-essential imports of importance to the exporter, such as tourism in Austria.

Germany set limits on the use of foreign-owned Reichsmarks within Germany as well as against their conversion into foreign exchange. They were not permitted to be used for many classes of exports, capable of earning new foreign exchange, but only for incremental exports


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which could be sold only at implicit depreciated exchange rates, for travel within Germany — the so-called Reisemark — and under certain limitations for investment in Germany. Foreshadowing some postwar limitations on foreign direct investment, permission was granted for investment by foreigners in Germany with outstanding mark balances only when the investment was considered generally beneficial to the German economy, was made for at least five years, did not involve a foreign controlling interest in a German enterprise, and did not exceed a stipulated rate of interest (Gordon, 1941, pp. 92–3).

In August 1934, the New Plan was adopted under the leadership of the German minister for economics, Hjalmar Schacht. In the words of Emil Puhl, an associate of Dr Schacht's at the Reichsbank, it provided totalitarian control over commodities and foreign exchange, with stringent controls on imports and on foreign travel, administered through supervisory boards for a long list of commodities and foreign exchange boards in the Reichsbank (Office of the Chief Counsel for Prosecution of Nazi Criminality, 1946, VII, p. 496). Along with trade and clearing agreements, designed especially to ensure German access to food and raw materials, and to promote exports, the Reichsbank developed a series of special marks for particular purposes. In addition to the Reisemarks for travel, there were special-account (Auslands-Sonder-Konto , or "Aski") marks which came into existence through imports of raw materials, especially from Latin America, and which were sold by the recipients at a discount and used by the buyers on a bilateral basis for purchases of incremental German goods. The incremental aspect of the exports was, of course, difficult to police. Because Aski-marks would be sold only at a discount, the raw-material supplies against them tended to raise their prices in the bilateral trade (Gordon, 1941, p. 180). On the German side, Schacht established a price-control agency in 1935 in each export group — amounting to 25 in all — to prevent German exporters from competing with one another for export orders and to assure that all exporters sold at the highest possible price (Office of the Chief Counsel, 1946, VII, p. 383).

Beginning in 1934, German foreign-trade plans were intended particularly to ensure access to imported food and raw materials. The New Plan, and especially the Four Year Plan which succeeded it in the fall of 1936, were designed to produce synthetic materials, especially Buna-S (synthetic rubber) and gasoline from coal, where foreign supplies for wartime needs could not be assured. Particular problems were encountered in non-ferrous metals, in iron ore, for which the low-grade Salzgitter project was developed in the Four Year Plan, and in synthetic fertilizer required for self-sufficiency in food. Schacht at the Reichsbank, Goering as Schacht's successor in the Economics Ministry and


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as the head of the Four Year Plan, and the War and Food Ministries wrangled among themselves over policies, including especially whether to export wheat against foreign exchange following the bumper crops of 1933 and 1934 or to conserve it as a war reserve; whether to hoard Germany's meagre free foreign-exchange reserves or to spend them for crucially short raw materials; the mobilization of privately owned foreign securities and their conversion to cash for buying materials; the pricing of exports; the purchase of unnecessary imports like frozen meat from Argentina, for lack of which Schacht was unable to conclude a favourable trade treaty, etc. (Office of the Chief Counsel, 1946, vol. VII). The documents published by the prosecution at the Nuremberg postwar trials reveal considerable internal dissension, especially in the exchanges between Schacht and Goering that lasted through 1937 and ended in Schacht's defeat and resignation.

German sentiment had continuously decried the loss of the country's African colonies in the Versailles treaty. Schacht continuously referred to the loss in Young Plan discussions of the late 1920s and was still harping on the issue in an article in Foreign Affairs in 1937. In a conversation with the American ambassador, Bullitt, in the fall of 1937, Goering noted that Germany's demand for a return of the German colonies which had been taken away by the Versailles treaty was just, adding immediately that Germany had no right to demand anything but these colonies. Particularly sought were the Cameroons which could be developed by German energy (Office of the Chief Counsel, 1946, vol. VII, pp. 890, 898). Three weeks earlier, however, in a private conference, Hitler had stated that it made more sense for Germany to seek material-producing territory adjoining the Reich and not overseas (ibid., vol. I, p. 380). And at a final war-preparatory briefing in May 1939, he went further to explain the need for living space in the East to secure Germany's food supplies. It was necessary to beware of gifts of colonial territory which did not solve the food problem: "Remember blockade" (ibid., vol. I, p. 392). The directive to the Economic Staff Group on May 23, 1941 just before the attack on the Soviet Union stated that the offensive was designed to produce food in the East on a permanent basis.

It was widely claimed that Germany squeezed the countries of southeast Europe through charging high prices for non-essential exports, while not permitting them to purchase the goods they needed, at the same time delaying payment for imports through piling up large debit balances in clearing arrangements. In a speech at Königsberg in August 1935, Schacht expressed regret that Germany had defaulted on debts to numerous pro-German peoples abroad, indicated confidence that Germany could obtain the raw materials it needed, acknowledged


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that the trade relations of Germany with different countries had changed a great deal, but insisted that these new relations had created for a number of countries new possibilities of exporting to Germany which had helped relieve them from the rigours of the world depression (Office of the Chief Counsel, 1946, vol. VII, p. 486). In a polemical exchange in 1941, Einzig insisted that Benham was in error in holding that southeast European countries had improved their terms of trade in dealing with Germany, which paid higher prices than Western Europe was able to pay, and sold German goods competitively in the area. A postwar analysis of the matter tended to show that Benham and Schacht had been right (Kindleberger, 1956, pp. 120ff.).

An intellectual defence of the Benham—Schacht position had been offered in a somewhat different context as early as 1931 by Manoilesco, who expressed the view that the theory of comparative advantage had to be qualified if the alternative to tariff protection for an industry were either unemployment, or employment at a wage below the going rate. His statement of this position in The Theory of Protection and International Trade (1931) was strongly attacked on analytical grounds by the leading international-trade theorists of the day — Haberler, Ohlin, and Viner, each in extended treatment — but was resurrected after the war by Hagen, and then generalized into a second-best argument for interference with free trade, e.g. by tariffs. When the conditions for a first-best solution under free trade do not exist, protection may be superior in welfare for a country to free trade. By the same token, export sales at less than optimal terms of trade may be superior to no exports and unemployment.

The Union of Soviet Socialist Republics

During the 1920s, commercial policy in the Soviet Union had been the subject of a great debate under the New Economic Plan, between the Right that advocated expansion of agriculture, and of other traditional exports, plus domestic production of manufactured consumer goods to provide incentives for farmers, and the Left that favoured development of domestic heavy industry and the relative neglect of agriculture. Under the proposals of the Right, exports of agricultural products would be expanded to obtain imports of machinery, metals, raw materials, and exotic foodstuffs such as coffee and tea. This was the trade-dependent strategy. The Left, on the other hand, sought to increase trade in order to achieve autarky as rapidly as possible, as it feared dependence on a hostile capitalist world. With Stalin's achievement of power, the Left strategy was adopted in the First and subsequent Five Year Plans.


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Strong efforts were made to reduce dependence on imports to a minimum. Territorial losses during the First World War, land reform which divided large estates, and the inherent bias of planning which favoured domestic users over foreign markets helped reduce the ratio of exports to national income, which fell from a figure variously estimated within the range of 7–12 percent in 1913 to 3.5 at the interwar low in 1931. Estimates of the volume of Soviet exports vary, depending upon the weights chosen, but on the basis of 1927–8 weights, exports fell from 242 in 1913 to 53 in 1924–5 before recovering to 100 in 1929. Thereafter they rose sharply to 150 in 1930 and 164 in 1931 with disastrous consequences for the Soviet peoples (Dohan and Hewett, 1973, p. 24).

In 1930 and 1931, Soviet exports conformed to the model of the backward-bending supply curve in which volume increases, rather than decreases, as price falls. Declines in the prices of grain, timber and oil, starting as early as 1925, had threatened the Soviet Union's capacity to pay for the machinery and materials necessary to complete its Five Year Plans, and threatened as well its capacity to service a small amount of foreign debt contracted in the 1920s. To counter this threat, the Soviet authorities diverted supplies of foodgrains from domestic consumption to export markets, shipping it from grain-surplus areas to export ports and leaving internal grain-deficit areas unsupplied. The result was starvation and death for an unknown number of the Soviet people numbering in millions. The world price of wheat fell by half between June 1929 and December 1930, and more than half again by December 1932. So hard did the Soviet Union push exports that supplies of pulp wood, woodpulp, timber, lumber, and even coal, asbestos, and furs threatened to enter the Canadian market, a notable exporter of these products in ordinary times, and led the Canadian government in February 1932 to prohibit the import of these commodities from the Soviet Union (Drummond, 1975, p. 205). Similar discriminatory restrictions were taken in many other markets. The dysfunctional character of forcing exports on the world market became clear and the volume of Soviet exports levelled off and started downward in 1932. As primary-product prices rose after 1936, moreover, the export volume declined sharply below the 1929 level.

Japan

Japan had not participated fully in the boom of the 1920s, but the fact that it had restored the yen to par after the First World War as late as January 1930 made it highly vulnerable to the liquidity crisis of 1930 and 1931. It was vulnerable, too, because of heavy dependence on silk, a


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luxury product, about to experience both a sharp decline in its income-elastic demand and severe competition from rayon and later from nylon. In 1929 silk was responsible for 36 percent of Japanese exports by value, and produced 20 percent of Japanese farm income. The price of silk fell by about half from September 1929 to December 1930. With the help of the depreciation of the yen after December 1931, it reached a level of $1.25 a pound in March 1933, compared with $5.20 in September 1929.

The combination of sharp exchange depreciation and the collapse of the American market in silk produced a drastic reorientation in Japanese export trade, away from North America and Europe and toward Asia, Africa, and Latin America. Export drives were especially intense in British and Dutch colonies, and in the so-called "yen bloc" of Korea, Formosa, Kwantung, and Manchuria. The Japanese share of the Netherlands East Indies market, for example, rose from 10 percent in the 1920s to 32 percent in 1934 before restrictive measures were applied under the Crisis Act of 1933 (Furnival, 1939, p. 431; Van Gelderen, 1939, p. 24). Japanese exports to the yen bloc rose from 24 percent in 1929 to 55 percent in 1938, with imports rising from 20 to 41 percent over the same period (Gordon, 1941, p. 473). Within Asia, Japan developed sugar production in Formosa and stopped buying it in Java in the Netherlands East Indies. The British and Dutch Empires imposed quantitative restrictions on Japanese imports, especially in textiles. Foreshadowing a technique extensively used by the United States after the war, at one stage the British asked the Japanese to impose export controls on shipments to India or face abrogation of the Indo-Japanese Commercial Convention of 1904 (Drummond, 1972, p. 133). By 1938 Netherlands East Indies imports from Japan were down to 14 percent of the total from a high of 30 percent in 1935 (Van Gelderen, 1939, p. 17). Japanese fear of reprisals led them to amend the Export Association Act of 1925, which had been enacted to promote exports, so as to control exports in accordance with restrictions imposed by importing countries (Gordon, 1941, p. 360).

The World Economic Conference of 1933

Sir Arthur Salter termed the Hawley—Smoot tariff a turning-point in world history. Lewis Douglas thought the Thomas amendment under which the dollar was devalued in March 1933 marked "the end of Western civilization as we know it" (Kindleberger, 1986, p. 200). W. Arthur Lewis regarded the failure of the World Economic Conference of 1933 as "the end of an era" (Lewis, 1950, p. 68). Each characterization contained an element of hyperbole. The World Economic Con-


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ference offered only the slightest of chances to reverse the avalanche of restrictions on world trade and to stabilize exchange rates. The reversal in tariffs came the next year with the June 1934 Reciprocal Trade Agreements Act in the United States. More stability in exchange rates took root with the Tripartite Monetary Agreement of September 1936 among, initially, the United Kingdom, France, and the United States.

The inspiration for a new world economic conference after 1927 went back to the early years of deflation and to a suggestion of Chancellor BrĂĽning of Germany to treat disarmament, reparations, war debts and loans as a single package to be settled on a political basis, rather than separately in each case by economic experts. A preparatory commission of economic experts under the auspices of the League of Nations fashioned a package of somewhat different ingredients, in which the United States would lower the Hawley—Smoot tariff, France would reduce quota restrictions, Germany relax foreign-exchange control and the United Kingdom would stabilize the pound. War debts were excluded from the agenda by the United States, and consequently reparations by France and the United Kingdom. Pending the convening of the conference, delayed first by the November 1932 elections in the United States and then by domestic preoccupations of the newly elected President Roosevelt, Secretary of State Cordell Hull tried to work out a new tariff truce, but ran into blocks. The United States desired new tariffs on farm products subject to processing taxes under the new Agricultural Adjustment Act; the United Kingdom had some pending obligations under the Ottawa agreements; France reserved her position until she could see what would happen to US prices as a response to the depreciation of the dollar initiated in April 1933. Only eight countries in all finally agreed to a truce on May 12, 1933, many with explicit reservations. In the final preparations for the conference, commercial-policy measures seemed secondary to all but Cordell Hull, as contrasted with the problem of raising international commodity prices and international public-works schemes, for neither of which could general solutions be found. In the end the United States broke up the conference by refusing to stabilize the exchange rate of the dollar (only to reverse its position seven months later in February 1934), the British felt moderately comfortable with their Empire solution in trade with the vast volume of wrangles still to come, and the gold bloc battened down to ride out the storm. The only positive results were an agreement on silver negotiated by Senator Key Pitman of the US delegation, and bases laid for subsequent international agreements in sugar and wheat. Perhaps a negative result was the de facto constitution of the sterling bloc with most of the Commonwealth, save Canada and the subsequent withdrawal of the Union of South Africa, plus foreign adherents such as Sweden, Argentina, and a number of countries in the Middle East.


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Commodity Agreements

From the decline in commodity prices in the mid-1920s, one after another attempt had been made to devise schemes for raising prices. Some were private, like aluminum, copper, mercury, diamonds, nickel, iron and steel; some were governmental. Of the governmental, some were under the control of a single government — Brazil in coffee, Chile in nitrates, the United States in cotton, the Netherlands East Indies in cinchona bark; others, especially in sugar and wheat, were worldwide. Some of the private/government agreements in iron and steel, petroleum, and aluminum were regional, especially European (Gordon, 1941, pp. 430ff.).

The Chadbourne Plan in sugar was reached in May 1931 among leading export countries — Belgium, Cuba, Czechoslovakia, Germany, Hungary, Java, Peru, and Poland — later joined by Yugoslavia. But British India, France, the United Kingdom, and the United States — important consumers that also maintained substantial production — remained outside the agreement. The United States formulated its own legislation, the Jones—Costigan Act of 1934, which assigned rigid quotas to imports from abroad and discriminated in favour of Cuba. Under the Chadbourne Plan, production declined among the signatories but rose almost as much outside. Particularly hard hit was Java, which lost both the Japanese and the Indian markets, the former to Formosan production, the latter to domestic production. Unsold stocks in Java reached 2 1/2 million tons in 1932, and the government took over in January 1933 as the single seller. The failure of the Chadbourne scheme led the World Economic Conference to push for a new agreement, which was finally reached under League of Nations auspices only in May 1937 at the height of the recovery of primary-product prices.

The World Economic Conference was the twentieth international meeting on the subject of wheat after 1928 when the price of wheat started to plummet — two of the meetings dealt with imperial preference, seven were limited to Eastern Europe as already mentioned, and eleven were general. The agreement that emerged after the World Economic Conference achieved a system of export quotas for major producers, but no agreement on acreage controls to limit production (Malenbaum, 1953).

Tea was regulated in this period by an international committee which met in London. In March 1931 the four leading producers of tin—Malaya, Bolivia, Nigeria, and the Netherlands East Indies—cooperated in the Joint Tin Committee. In May 1934 nine countries in Southeast Asia producing 95 percent of the world's rubber supply undertook to impose export quotas to reconstitute the Stevenson rubber plan which had broken down in 1928 (Van Gelderen, 1939, pp. 51ff.). Their


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problem was complicated by sharply differing supply elasticities in the plantation and the native sectors, the latter characterized in many countries by backward-bending responses. As rubber prices rose in the 1936–7 inventory boom, a number of governments sought to tax away the price increase from the producers, but until the price collapse of September 1937 succeeded mainly in raising the price to buyers in a sellers' market. With the eventual decline in prices, the incidence of the export taxes shifted back from the foreign consumer to the domestic producer and in most instances they were quickly removed.

Sanctions

In December 1934 a border incident occurred between Italian Somalia and Ethiopia. Italy demand an apology; Ethiopia refused. With tension rising, the League of Nations sought to arbitrate but received no help from Italy. After further border clashes, Italian troops invaded Ethiopia on October 3, 1935 without a declaration of war. Later in the month, the League of Nations declared Italy the aggressor and voted sanctions to be applied to her in arms supply, finance, and export-import restrictions. The League did not, however, decree sanctions in the critical item, oil. Germany refused to comply with the League vote; the United States, though not a member of the League of Nations, was strongly sympathetic. Oil sanctions were discussed again in March 1936. At this time an attempt was made to apply them informally through major world oil companies. These companies stopped selling to Italy, but the increase in oil prices thereby brought about encouraged a vast number of small shippers to enter the business for the first time and to deliver oil to Italian troops at Red Sea ports in the full quantities required. With the fall of Addis Ababa, the Italians proclaimed empire over Ethiopia and withdrew from the League. League members continued to apply sanctions with increasing resolution until July 15, 1936, when sanctions were abandoned (Feis, 1946, vol. III).

The Disintegration of the World Economy

In a few countries — notably France and the United States — foreign trade fell by the same proportion as national income from 1929 to 1938. In others trade fell more than output. Thus the ratio of imports to industrial production declined by 10 percent in the United Kingdom, nearly 20 percent in Canada, 30 percent in Germany, and 40 percent in Italy. Crop failures in the United States in 1934 and 1936, and in Germany in 1937 and 1938, prevented the decline in the proportion of


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imports from being wider (Meade, 1939, pp. 107–8). Buy-British and Buy-American campaigns, involving government discrimination against foreign as against domestic suppliers with margins of initially 10 percent, increased to 25 percent, in the United States, and 100 percent for items under $100, were often supported by programs affecting state governments, and campaigns to persuade the general public to discriminate as well (Bidwell, 1939, pp. 70–1 and Appendix A). The major influences, to be sure, were higher tariffs, quotas, clearing and payments agreements, and preferential trade agreements.

What trade remained was distorted, as compared with the freer market system of the 1920s, both in commodity and in country terms. The index of German imports for 1937, with a base of 100 in 1929, strongly reflected Wehrwirtschaft , and especially rearmament: "other ores" 153, manganese ore 142, iron ore 122, iron and steel 121, copper 100, cotton 73, wool 62, coal 59, oil seeds 57, timber 28 (Meade, 1938, p. 128). The share of Germany in Turkish, Greek, and Italian imports rose between 1928 and 1939 respectively from 13 to 43 percent, 8 to 29 percent, and 10 to 24 percent; the same percentages of national exports to Germany rose from 13 to 43 percent, 27 to 39 percent and 13 to 17 percent for the same countries in the same order (Thorbecke, 1960, p. 100). By 1937, bilateral clearings amounted to 12 percent of total world trade and 50 percent of the trade of Bulgaria, Germany, Greece, Hungary, Romania, Turkey, and Yugoslavia (League of Nations, 1942, p. 70). Pioneering estimates of the shrinkage of multilaterally as opposed to bilaterally balanced trade were made for the League of Nations Economic and Financial Department by Folke Hilgerdt. In 1928, bilateral balancing of export and import values between pairs of countries on the average covered 70 percent of merchandise trade, with about 5 percent more covered by exports or imports of services or capital movements, and 25 percent balanced multilaterally (Hilgerdt, 1941). Hilgerdt's two studies emphasized the shrinkage of the proportion of the trade balanced multilaterally during the depression years, without furnishing a precise estimate for the end of the 1930s (Hilgerdt, 1941; 1942). A postwar study on a somewhat different basis furnished a comparison for 1938 with 1928, shown in Table 6.1.

Major changes occurred both world-wide and within Europe. On a world basis, the largest change shown in the Hilgerdt analysis derived from the fact that the developing countries of the tropics no longer earned large surpluses in merchandise trade with the United States to pay their interest on debts owned to Europe, and especially to the United Kingdom. Regionally, within Europe, the most important change was the failure of Germany to earn an export surplus in Europe, largely the United Kingdom, to enable her to pay for her net imports of raw materials from overseas. Another striking feature was the shift by the


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Table 6.1 Proportions of world trade balanced bilaterally and multilaterally, 1928 and 1938 (as percentage of total)


By non-merchandise

Multilaterally

Bilaterally

1928

11.1

21.2

67.7

1938

14.3

16.9

68.8

Source: Thorbecke (1960, p. 82).

United Kingdom of procurement from Europe to the sterling area. France, the Netherlands, and especially the United Kingdom diverted trade from the rest of Europe to their colonial empires, a trend which would be reversed after the Second World War, and especially after the formation of the European Economic Community in 1957 and the United Kingdom's accession to it in 1973. In 1913 22 percent of British exports went to the Empire. By 1938 the figure had more than doubled to 47 percent. In imports, the proportion rose over the same period from 22.3 to close to 40 percent. As noted earlier, the figures might have risen further had it not been for what has been called "Imperial Insufficiency" (Hancock, 1940, p. 232; see also Drummond, 1972).

World Trading Systems

Recovery of raw-material prices from 1933 to 1937 was followed by some considerable reduction in tariffs, and relaxation of quota restrictions. The renewed, though less far-reaching, decline of these prices in September 1937, outside the fields dominated by European rearmament, set back the movement towards freer trade. The last five years of the interwar period were most clearly characterized by what have been called disparate "world trading systems" (Tasca, 1938). At the limits were the system of German trade, locked into a network of bilateral clearing and payments agreements, and practising autarky for the sake of war economy (Petzina, 1968), and at the other extreme, the United States, which stood aloof from all payments and clearing agreements, with few quota restrictions, largely in agriculture, some subsidies to export in agricultural commodities, plus government credit through the Export-Import Bank for export promotion. Within Europe, the Balkan countries were nearer to the German model, the Oslo group to the American. Midway between was the Empire preference scheme of the United Kingdom, the Dominions, India, and the dependent colonies. Latin America had been hard hit by declines in raw-material prices and the decline in foreign lending, but was hopeful of trade expansion under


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the Roosevelt "good neighbor" policy. The Soviet Union went its own way. Anxious to join a system, but largely orphaned outside them, were the Middle East and Japan, the latter of which carved out its own Greater East Asia Co-Prosperity Sphere.

There were limited attempts at achieving a single unified world trading system. The League of Nations Committee for the Study of the Problem of Raw Materials reported in September 1937 at a time when payments difficulties had eased but the position was on the point of reversal (Meade, 1938, p. 162). It found few problems of supply or access to materials, and argued in favour of valorization schemes to raise prices provided that consumers' interests were safeguarded. The report went to the League of Nations Assembly where it was pigeonholed as a consequence of the sharp check to commodity prices and deterioration in payment balances.

Before that time, the British and French governments had asked Paul Van Zeeland, a former Belgian prime minister, to prepare a program for world action in the commercial-policy field. In January 1938, the Van Zeeland report was presented to the public, equally an inopportune time. It called for reciprocal reductions of tariffs, generalized by the most-favoured-nation clause, replacement of industrial quotas by tariffs or by tariff quotas, removal of foreign-exchange control, clearing agreements, and the ban on new lending in London; and, as a final step when all else was in operation, six-month agreements on foreign-exchange rates leading ultimately to the establishment of fixed rates under the gold standard (Meade, 1938, p. 159). The report was received with universal agreement that the restoration of trade was needed, but equally universal reluctance on the part of all governments to take any decisive initiative in the matter (Condliffe, 1940, p. 47).

The 1937–9 recession in fact led to increases in tariffs in Belgium, France, Greece, Italy, the Netherlands East Indies, Norway, Sweden, Switzerland, and Yugoslavia in 1938, and in that stronghold of free-trade sentiment, the Netherlands, in March 1939. Rubber and copper quotas, which had been freed in 1937 under their commodity schemes, were tightened down again. Brazil, Colombia, and Japan extended their foreign-exchange restrictions. Germany and Italy introduced the death penalty for violations of foreign-exchange regulations in December 1936 and June 1939, respectively. Italy also constituted a Supreme Autarky Commission in October 1937 (Meade, 1939, p. 197). In all, the number of clearing and payments agreements rose from 131 on June 1, 1936 to 171 by January 1, 1939 (Gordon, 1941, p. 131).

Meanwhile some considerable relaxation of commercial policy was underway in the United States, led by Cordell Hull, whom Herbert Feis, his economic adviser in the Department of State, called a monomaniac


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on the subject of tariff reductions (Feis, 1966, p. 262). Hull had long been a Congressman from eastern Tennessee, which specialized in tobacco for export, before becoming Secretary of State, and had been in opposition to the Fordney–McCumber and Hawley–Smoot tariff increases in 1922 and 1930 as a member of the House of Representatives Committee on Ways and Means. As early as the World Economic Conference of 1927, as a Congressman, he had been thought to believe that the tariff of the United States was the key to the entire world situation (US Department of State, Foreign Relations of the United States , 1928, vol. I, p. 239). As Secretary of State and leader of the United States delegation to the World Economic Conference of 1933, he had been frustrated in his attempts to get world tariffs reduced by the repudiation of President Roosevelt which prevented him from encountering the profound disinterest of the other countries. The tariff truce of May 1933 lapsed when the conference failed, but Secretary Hull persevered. At the Seventh Conference of American States at Montevideo in November 1933 – the first having been held in 1889 – he had tariffs put on the agenda for the first time and induced President Roosevelt to offer the Latin American republics tariff reductions (Gordon, 1941, p. 464). The main business accomplished at Montevideo was the strengthening of the most-favoured-nation clause, as Hull had tried to do at London, by government agreement not to invoke the clause in order to prevent the consummation of multilateral tariff reductions in agreements to which a government was not a party. The full agreement provided for no tariff reductions, and was signed by eight countries, though ratified only by the United States and Cuba (Viner, 1950, p. 37).

Upon his return from Montevideo, Secretary Hull found that the President had established an Executive Committee on Commercial Policy under the chairmanship of George Peek, agricultural expert and opponent of trade liberalization, and that the committee had already drafted a bill providing for trade treaties to be subject to Senate ratification. This was unsatisfactory to Hull. The Department of State had already been negotiating with Argentina, Brazil, Colombia, Portugal, and Sweden in the summer of 1933, had signed an agreement only with Colombia, but had not submitted it to the Senate for ratification. In early 1934 new legislation was drawn up that delegated authority from Congress to the Executive branch of government to conclude reciprocal trade agreements on its own authority. The draft legislation was completed on February 24, approved by President Roosevelt on February 28, passed the House of Representatives on March 20, the Senate on June 4, and was signed into law on June 13, 1934 as the Reciprocal Trade Agreements Act. The initial delegation of authority was for a


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period of three years. The legislation was renewed in 1937 and 1940. It provided for mutual bilateral reductions in tariff duties, generalized by the most-favoured-nation clause, limited to 50 percent of the existing (largely Hawley–Smoot) tariff levels.

Even before the legislation had been drafted, further talks were going forward to reduce tariffs, with Belgium and Denmark in January 1934, and with Canada. Canada and the United States each made official public statements on the subject in February 1934, emphasizing the importance of their mutual trade relations. A request for negotiations was made by the Canadian government in November 1934 and an agreement was achieved a year later to the effect on January 1, 1936. Canada received concessions on 88 items, largely primary products, including, along with Hawley–Smoot items, the lumber and copper affected by the US Revenue Act of 1932. United States concessions obtained from Canada were largely in manufactured goods.

The first agreement under the Reciprocal Trade Agreements Act, however, was that concluded with Cuba in August 1934. By November 1939, agreements had been reached with 20 countries, 11 of them in Latin America. A second agreement was concluded with Canada in November 1938, but the most important was the British agreement concluded simultaneously with the revision of the Canadian agreement.

In the British and Canadian agreements, the United States hoped to break down Empire preference. This was beginning to happen of its own accord. In a British–Canadian trade agreement of 1937, five years after the Ottawa agreements of 1932, the British persuaded the Canadians to abolish the doctrine of equalizing competition and to substitute fixed tariff rates and fixed preferential margins in the agreements (McDiarmid, 1946, p. 295). New Zealand was ready to abandon the Ottawa agreements, and started to conclude agreements outside them with Sweden (1935), Greece (1936), and Germany (1937), and was negotiating a dozen others (Hancock, 1940, p. 278). Britain, meanwhile, was highly critical of Australian performance under Ottawa, on the ground that Australia had persistently violated its commitments. Australian Tariff Board studies were limited, and even when the Tariff Board recommended reductions on British goods, the government often failed to introduce them in Parliament (Drummond, 1975, pp. 392ff.). British and Australian interests were only partly complementary. Accordingly the United Kingdom, Canada, and the other Dominions as well were ready in their agreements with the United States to sacrifice advantages in each other's markets in return for significant compensation in the market in the United States (Hancock, 1940, p. 265).

To an extent, the Anglo-American trade agreement was more symbolic than effective. Two years of hard bargaining went into it, and


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it lasted only eight months, from January 1, 1939 until British wartime controls were imposed on the outbreak of war with Germany in September 1939. Reductions were agreed on nine items in which trade amounted to no more than $350 per annum. Important concessions, as in cotton textiles, were prevented from being generalized to Japan and other competitors through reclassification. Full 50 percent reductions in the United States were made on 96 items but the total trade involved was worth only $14 million. Under all 20 agreements, the unweighted (equal weights) United States ad valorem duties were reduced from 57 percent on products subject to the tariff to 35 percent, a reduction of 39 percent, whereas the reduction under the British agreement, from 42 to 30 percent on the same basis, amounted only to a reduction of 29 percent. The 35 percent level achieved on January 1, 1939 was somewhat lower than the Fordney–McCumber average of 38.5 percent and the Payne–Aldrich tariff (1909) of 40.8 percent, and well below the Hawley–Smoot average of 51.5 percent. It was nevertheless still well above the 1913 Underwood level of 27 percent (Kreider, 1943, pp. 170ff.).

Moreover, the trade agreements applied largely to industrial products and materials. United States opposition to Empire preference had export concerns in view, especially in competition with Canada in pork and apples. The reductions in tariffs under the agreements, however, went side by side with continued US protection against agricultural imports and subsidies on agricultural exports. Protection was required under those domestic programs which raised prices in the United States and would, without new restrictions, have attracted further supplies from abroad; and subsidies were deemed necessary to offset the price disadvantage this imposed on American producers in their traditional markets. The trade agreements reduced tariffs on a few items, such as maple sugar from Canada, which had been a particular irritant under the Hawley–Smoot Act, and altered the arbitrary valuations on fresh fruits and vegetables early in the season that had hitherto been kept out of Canada by this device. A sanitary agreement between the United States and Argentina on the regulation of foot-and-mouth disease was not ratified by Congress (Bidwell, 1939, pp. 217–18); and independence for the Philippines was accelerated to push its sugar production outside the tariff borders of the United States. On the whole, the trade agreements marked the beginning of regarding liberal commercial policies as appropriate only for manufactures, and their inputs, and leaving agricultural trade largely to special arrangements.

A small beginning was made by the United States on what was to be a major postwar issue, East–West trade. The United States was unwilling to recognize the government of the Soviet Union all through the


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1920s. With President Roosevelt's New Deal, this was changed and recognition was accorded in 1933. In the mid-1930s, the United States and the Soviet Union undertook a series of trade agreements. In 1935, the Soviet Union contracted to purchase at least $30 million worth of US goods in the following year; in return, the United States accorded the Soviet Union most-favoured-nation treatment. In August 1937, under a new pact, the Soviet Union agreed to step up its purchases from the United States to $40 million (Gordon, 1941, p. 407).

British adherence to the more liberal trade policies pursued by Cordell Hull was highly ambiguous. Kreider claims that the British concessions were not spectacular but represented a reversal of policy (1943, p. 240). At the same time, the British government was unwilling to repudiate the principle of Ottawa, despite its effects, as Mackenzie King claimed, in destroying the principle of imperial harmony (Drummond, 1975, p. 316).

Moreover, British ministers were experimenting with a new technique quite at variance with the American professed principle of increased reliance on the international market. Mention was made above of the special tariff assistance given to the iron and steel industry to assist in its negotiations with the International Steel Cartel. At the depth of the depression, in October 1933, the British had encouraged negotiations between Lancashire and Indian cotton textile mill owners. The resultant Less–Mody pact of October 1933 provided that India would lower her tariffs on British textiles to 20 percent while holding those against other (i.e. Japanese) goods at 75, to which they had been raised from 31 1/2 percent in August 1932 in several steps. As part of the negotiation, involving governments and business groups on both sides, the British agreed to take 1 1/2 million bales of cotton that had piled up as a result of a Japanese retaliatory boycott. At the time Lord Runciman stated: "The work of the Delegation has gone some way in justifying the Government in their belief that the best approach to the problem of international industrial cooperation is by the method of discussion between industrialists" (Drummond, 1972, p. 316).

In early 1939, immediately after signing the Anglo-American Reciprocal Trade Agreement in November 1938, and as part of an export drive, the British Board of Trade encouraged the visit to DĂĽsseldorf of a delegation of the Federation of British Industry to meet with the Reichsgruppe Industrie, its institutional counterpart, and to fix quantitative relationships between the exports of the two countries in each commodity and market. In prospect, The Economist , after some qualifications, expressed itself as approving (CXXXIV, no. 4585 (February 25, 1939), p. 383). The agreement was concluded on March 16, 1939, one day after the German invasion of Czechoslovakia (text in Hexner, 1946,


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Appendix III, pp. 402–4). The British government repudiated the agreement on political grounds, but not before The Economist had denounced it on the grounds that it involved cartelization of domestic industry as well as of trade, that it would extend Anglo-German subsidies to exports, and that it might involve joint action against competitors who refused to join the arrangement, including possible American firms (CXXXIV, no. 4589 (March 25, 1939), p. 607).

In Eastern Europe the German bloc was strengthened in ways to guarantee German access to raw materials and foodstuffs in short supply. An agreement with Hungary in 1934 provided for a shift of Hungarian agriculture from wheat to oilseeds with an assured outlet in Germany. German treaties with Romania in March 1935 and again four years later fostered the expansion of Romanian agriculture in oilseeds, feedgrains, and vegetable fibers, as well as industrial and financial cooperation, including the development of Romanian transport and petroleum under German–Romanian companies supervised by joint government commissions (Gordon, 1941, pp. 425–6). In 1937, the proportion of German exports sold through clearing agreements amounted to 57 percent, while 53 percent of her imports came through clearings. The comparable figures for Turkey were 74 and 72 percent respectively, for Romania 67 and 75 percent, for Switzerland 28 and 36 percent, for Sweden 17 and 24 percent, and for the United Kingdom 2 and 2 percent (Gordon, 1941, Table 7, p. 133).

The disintegration of world trade thus proceeded, despite the attempts of the United States, the Oslo group, Premier Van Zeeland under Anglo-French auspices and the economists of the Economic and Financial Department of the League of Nations. With some prescience Condliffe (1940, p. 394) concluded his book written at the outbreak of the Second World War: "If an international system is to be restored, it must be an American-dominated system, based on Pax Americana ."



SEE:

Canadian Banks and The Great Depression

Capitalism and Islam

At Least It's Not Dubai Ports

P&O

Dubai Got Special Deal

Neo-Liberal State Capitalism In Asia


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