Trade Policy Disaster by Douglas A. Irwin

Author:Douglas A. Irwin [Irwin, Douglas A.]
Language: eng
Format: epub
ISBN: 9780262297745
Published: 2012-07-14T16:00:00+00:00

3

Trade Restrictions and Exchange Rate Adjustment: Choice and Consequences

This chapter presents economic data from the 1930s to address three issues. First, we examine the impact of protectionism on world trade in the 1930s based on a counterfactual assessment of how much trade would have fallen had there been no change in trade policy. Several different calculations suggest that about half of the 25 percent decline in world trade was due to higher trade barriers. Second, we analyze several measures of trade policy to see if the pattern is consistent with the trilemma interpretation. The trilemma leads us to expect that countries allowing their currencies to depreciate would not adopt protectionist measures to the same extent as countries maintaining their currency at the gold parity. Empirical measures of trade policy in the 1930s—tariffs, import quotas, and exchange controls—generally support this prediction. Third, we examine the broad macroeconomic ramifications of the exchange rate choices made during the Great Depression. Exchange rate changes and import restrictions are similar in the sense that a devaluation is equivalent to an import tariff and an export subsidy. In practice, however, the two policies are quite different in their effects on macroeconomic performance and international trade.

The Impact of Protectionism on World Trade

World trade declined precipitously during the Great Depression. Between 1929 and 1933, the value of world trade fell by an astounding 65 percent in gold-dollar terms. The famous downward spiral of world trade, shown in figure 3.1, is a striking graphical depiction of this contraction. As the world slid into the depths of the Depression, the year-over-year value of world trade fell every month for more than four years.

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