Normalization of World Trade

The end of the reconstruction period about the middle of the decade was marked by the opening up of capital markets, following the success of the Dawes Loan in 1924 that primed the resumption of German reparations after the hyperinflation of 1923, by the restoration of the pound sterling to par on the gold standard in 1925, or perhaps by the expiration of the Versailles restriction on Germany's right to conclude commercial treaties, and with it the rapid extension of trade agreements in Europe. Whatever the event, it marked the initiation of increased efforts for trade normalization. A minor effort was represented by the International Convention for the Protection of Industrial Property of 1925 (Brown, 1950, p. 34). Of greater weight were the Convention for the Abolition of Import and Export Prohibitions and Restrictions, with which was associated a special agreement on hides, skins and bones, and a World Economic Conference on trade expansion, all in 1927. In 1929 a special conference produced a convention calling for national treatment

for foreign nationals and enterprises. A modernized tariff nomenclature to replace the 1913 Hague list was started in the 1920s; a first draft was produced in 1931, and a final one in 1937 (League of Nations, 1942, p. 45).

A number of these conventions failed to be ratified. That on the treatment of foreign nationals fell through because some states were unwilling to liberalize, and the liberal states were unwilling to sign an agreement which would have weakened the force of the principle of national treatment (League of Nations, 1942, p. 27). The Convention for the Abolition of Import and Export Prohibitions and Restrictions finally lapsed when the Poles refused to sign, because of an exception made for Germany, which reduced the value of the treaty in their eyes. Agreement on a tariff truce and subsequent reductions in rates was reached at the 1927 World Economic Conference, but this meeting was attended by delegations in their individual capacities and did not bind governments. Governments agreed on the necessity of reducing tariffs but did nothing about it. The League of Nations review of commercial policies in the interwar period called it a striking paradox that conferences unanimously adopted recommendations, and governments proclaimed their intentions to lower tariffs, but did nothing (League of Nations, 1942, p. 101), asking why governments made such recommendations if they did not propose to carry them out (ibid., p. 109). The answer furnished by one economist who had served on the economic secretariat of the League was that "the pseudo-internationalism of the nineteenth century was clearly an outgrowth of British financial leadership and trading enterprise, backed by the economic supremacy of London and by the British Navy" (Condliffe 1940, p. 118). With British hegemony lost and nothing to take its place, international relations lapsed into anarchy. The United Kingdom lost the will and lacked the power to enforce international cooperation as she had done in the nineteenth century (ibid., p. 145).

Discouragement over the failure of tariffs to come down despite agreement to lower them led to an attempt at a commodity-by-commodity approach, foreshadowing the free trade for iron and steel undertaken in the European Coal and Steel Community on Robert Schuman's initiative in May 1950. The Economic Committee of the League of Nations reported in March 1928 that there was no prospect of a general tariff reduction by means of standard cuts or the setting of a maximum scale of duties. Cement and aluminium were chosen for a case-by-case approach. A year of negotiation, however, produced no result. The League's account of the attempt cites as reasons, first, that reductions in duties in single products would upset national industrial structures; second, that it would increase the protection of finished goods — implying the so-called effective-rate-of-protection argument which was

more fully developed in the 1960s; and third, that among the limited groups of commodities and countries concerned, compensatory reductions were hard to find (League of Nations, 1942, p. 128–9).

While governments were agreeing to the necessity to lower tariffs but doing nothing about it, action was taken directly on a number of commodity fronts. Most conspicuous was the Stevenson rubber plan of 1923–4 which raised the price of rubber by 1926 to almost four times its 1923 level. To American protests, the British replied that it was

impossible to argue that the present high price is attributable solely or even mainly to the operation of the rubber restriction scheme. It is due to the great expansion of the demand for rubber. Only one half of the supply comes from the restricted area. (US Department of State, Foreign Relations of the United States , 1926, II, p. 359)

The fact that the other half — the Netherlands East Indies — had been left out of the scheme contributed to its early breakdown (Knorr, 1946).

More cartels were formed in a variety of commodities, that Mason divides into three groups: industrial raw materials and foodstuffs, like tin, oil, wheat, sugar, etc.; standardized processed and semi-fabricated goods such as steel rails, cement, tinplate, plate glass, dyes, etc.; and highly fabricated, specialized, and frequently patented items such as electrical equipment, pharmaceuticals, glass, etc. (1946, p. 16). Mason notes that the Soviet Union was a party to at least three international control schemes and eight cartel arrangements, despite its hostility to capitalism (ibid., p. 14 n.). Most of the commodity agreements begun in the 1920s broke down in the depression of the 1930s. The rubber scheme collapsed in 1928. Prices of agricultural commodities leveled off in 1925 and declined thereafter, faster after 1928, as European reconstruction crowded the extra-European supplies expanded to fill the gap left by war and postwar shortages, and demand shrank with such changes as the replacement of oats for horses by gasoline for motor cars.

Two of the most durable agreements were in oil: the As Is Agreement concluded at Achnacarry, Scotland, in 1928 between Sir Henry Detering of the Shell Oil Company and Walter Teagle of the Standard Oil Company of New Jersey, that provided that no oil company would seek to penetrate into markets where it was not already distributing, so that everything would stay "as is"; and in the same year the Red Line Agreement, among members of the Turkish Petroleum Company, that drew a line across the Middle East (through what is now Kuwait) and limited exploration by partners below that line, thereby ultimately making it possible for the Standard Oil Company of California, which was not a partner, to discover oil in Saudi Arabia (Federal Trade Commission 1952, pp. 199ff., 63).

National programmes further affected world markets in wheat and

sugar. The Italian "battle for grain" begun by Mussolini in 1925 was of limited economic significance, since Italy could not escape dependence on foreign supplies, but provided a disturbing symptom of the troubles of the 1930s. The United Kingdom expanded production of beet sugar through a bounty; Japan undertook sugar production in Formosa (Taiwan) and ceased to buy from Java. As the price of wheat declined, Germany raised tariffs in 1928 to slow down the movement of labour off the farm. From 1927 to 1931, German tariffs on foodstuffs were broadly doubled. France raised tariffs in 1928 and 1929 before resorting to quotas. Mixing provisions, under which foreign grain had to be mixed with domestic, were undertaken from 1929 on, patterned after the practice in motion pictures which allowed exhibitors to show foreign films only in fixed proportions to those domestically produced. In the United States, help for agriculture took the form of proposals for export subsidies, but President Coolidge's veto of the McNary—Haugen bill in 1928 led presidential candidate Herbert Hoover to seek other means of agricultural relief, and to promise help for farmers in his campaign speeches in the summer and autumn of that year. The League of Nations commented in 1942 that "before the end of 1928 it was evident that the United States tariff was going to be raised above the formidable level of 1922" (League of Nations, 1942, p. 126).

Grain exporters of Eastern Europe were especially affected by the world decline in price and sought solutions in meetings at Warsaw in August 1930, Bucharest in October 1930, Belgrade in November 1930, and Warsaw again in the same month. They tried, on the one hand, to limit exports of grain to improve the terms of trade, and, on the other, to obtain preferences in the import markets of Western Europe. The first proposal was never adopted. After the 1932 Stresa meeting, some reciprocal preferences were worked out between Austria and Hungary, on one side, and Italy, on the other, but with poor results.

A strenuous effort was made to halt tariff increases. The World Economic Conference of 1927 recognized that general demobilization of tariffs would be slow, and the Economic Committee of the League of Nations in March 1928 saw no prospect of general reduction. The September 1929 General Assembly of the League moved from attempts at reduction to an effort to halt increases. It called for a conference to stabilize rates for two or three years and then to lower them. The Preliminary Conference with a View to Concerted Action met in February 1930, but too late. It proposed extending existing agreements to April 1, 1931 and to provide opportunities for negotiation before tariffs were raised. By this time, however, retaliation against the forthcoming Hawley—Smoot tariff bill was far along. A second Conference with a View to Concerted Economic Action in November 1930

failed equally. The Netherlands, which, along with the United Kingdom, had pressed for the tariff truce, turned to a smaller group and organized the Oslo group. On 22 December, Norway, Sweden, the Netherlands, and Belgium signed an agreement undertaking not to raise tariffs without giving notice to other members. It was a brave example without much impact.

Quite unrelated to the fortunes of world incomes, prices, or trade, a highly original argument for tariffs emerged in Australia at the end of the prosperity of the 1920s. It bore resemblance to an earlier argument put forward by Alvin S. Johnson in 1908 that tariffs could add to capital formation by reallocating income from spenders to savers —an argument which went unnoticed until Harvey Leibenstein introduced similar notions into the discussion of economic growth in the 1960s. J.B. Brigden published an article in the Economic Record of November 1925 on "The Australian Tariff and the Standard of Living". He concluded that whereas the tariff on wheat in the United Kingdom favoured the landed classes, that on manufactured goods in Australia would redound to the standard of living of wage-earners, and increase the population of the country. Subsequently the Australian government appointed a committee of experts, including Brigden, D.B. Copland, E.C. Dyason, L.F. Giblin, and Wickens, which in 1929 produced The Australian Tariff: An Economic Enquiry (Australia 1929) that supported Brigden's conclusion. The analysis remained to be worked out by W.F. Stolper and P.A. Samuelson in their classic article of 1941. "Protection and Real Wages", and was to be rediscovered for Canada in the postwar period by C.L. Barber. It was heatedly debated during the 1930s both in Australia and in Anglo-Saxon economic literature. What was clear, however, was that Australia chose not to be guided by the neo-classical static maximizing calculus of foreign-trade theory, but to introduce into the discussion dynamic considerations of economic growth, migration, as well as income redistribution.