Jourdd
INTEiBtAMMlAL
ECOWOMICS
Journalof InternationalEconomics
38 (1995)l-24
ELSEVIER
Trade blocs, currency blocs and the reorientation of
world trade in the 1930s
Barry Eichengreen”,
aDepartment
bGraduate
Douglas A. Irwinb’*
of Economics,
University
of California,
School of Business, University
of Chicago,
Berkeley,
Chicago,
CA 94720,
IL 60637,
USA
USA
ReceivedJuly 1993,revised versionreceivedJuly 1994
Abstract
We analyze the impact of commercialand financial policieson the reorientation of
trade in the 1930s.We report evidence that commercial policies attenuated prior
connections between income growth and trade, and that exchange rate instability
marginally discouragedinternational trade. In contrast, the tendency toward regionalization commonly ascribedto the formation of trade and currency blocs was
already evident to a considerableextent prior to the regional policy initiatives of the
1930s.This reorientation is more properly attributed to ongoinghistoricalforces such
as commercial and financial links between countries forged over many years.
Trade blocs; Currency blocs; Regional Trade Arrangements
Key
words:
JEL
classification:
F13; F33; N70
‘We may characterize the change that occurred as a disintegration of
world trade: while previously international settlement took place within a
world-wide network of multilateral transactions, there was in the ‘thirties a
tendency to achieve settlement either in bilateral exchange between two
countries, or within the limited range of countries attached to each other by
political or other ties (Folke Hilgerdt, 1942, pp. 90-91).’
* Corresponding
author.
0022-1996/95/$09.50 0 1995 Elsevier Science B.V. All rightsreserved
SSDI
0022-1996(94)001350-O
2
B. Eichengreen,
D.A.
Irwin
/ .I. Int.
Econ.
38 (1995)
l-24
1. Introduction
The early 1930s witnessed an astonishing implosion of world trade.
Between 1929 and 1932 its value in current U.S. dollars fell by 50 percent.
Though deflation contributed to the collapse, even at constant prices the
volume of trade in 1932 was nearly 30 percent below 1929 levels. As late as
1938, trade volume was still barely 90 percent of 1929 despite the complete
recovery of global production of primary products and manufactured goods.]
Superimposed on this decline in volume was a distinct shift in direction.
The traditional pattern of multilateral settlements was supplanted by a set of
increasingly compartmentalized
trade flows, Trade was channelled into
self-contained regional, colonial and commercial blocs such as the British
Commonwealth,
a group of European gold standard countries centered on
France, and a Central European trade bloc linked to Germany.
The causes of this unprecedented transformation
remain incompletely
understood. Most attempts at explanation start with two factors. The first is
commercial
policies. The post-1929 slump in output and employment
intensified protectionism world wide. Dozens of countries raised their tariffs
after 1929, the Smoot-Hawley
Tariff of 1930 in the United States being only
the most prominent
of the newly imposed restrictions on commerce.
Discriminatory
measures were also used to favor trade with certain countries, as tariffs were supplemented by import quotas and licenses to favor
particular sources of imports. The Ottawa Agreements of 1932 strengthened
tariff preferences within the British Commonwealth.
Germany used discriminatory trade policies to create a sphere of economic influence. The
Reciprocal Trade Agreements Act of 1934 in the United States prompted
the negotiation
of non-MFN
bilateral tariff agreements with selected
countries. Thus, commercial policies and trade discrimination
may explain
not just the contraction of trade but also its compartmentalization.
A second factor affecting trade in the 1930s was international
exchange
rate policies. The international gold standard splintered into currency blocs:
a residual gold bloc, the sterling area, a group of inconvertible currencies
tied to the German Reichsmark,
and currencies mainly in the Western
Hemisphere
linked to the dollar. In each bloc, members pegged to an
anchor currency and held reserves in the corresponding financial center.
Exchange rate stability within the bloc could have encouraged intra-bloc
trade while inter-bloc exchange rate variability discouraged trade with the
’ World primary production and industrial production were 7 percent and 11 percent above
1929 levels, respectively. Lamartine Yates (1959, ch. 2) analyzes the implications of different
deflators for intertemporal comparisons of trade volumes. Statistics in this paragraph are
computed from League of Nations (1939) as are other figures in the remainder of this
introduction for which no references are provided.
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
l-24
3
rest of the world. Foreign currency reserves that allowed countries to
finance payments imbalances and collateralize borrowing from foreign banks
could have further stimulated intra-bloc trade, insofar as these resources
could be used more readily to finance trade within the bloc than trade
outside it. And countries holding balances in a reserve center could have
received favorable market access as a quid pro quo from the reservecurrency country. Whether participation in a currency bloc stimulated intrabloc trade or discouraged trade with the rest of the world also depended on
whether countries used exchange controls and clearing arrangements to
stabilize intra-bloc rates (as in the case of the Reichsmark bloc) or supported
their currencies through the imposition of ‘exchange-dumping’
duties against
nonmembers (as in the case of the Continental gold bloc).*
Because the existing literature only speculates about how trade and
currency blocs contributed to the reorientation
of trade, we seek in this
paper to bring empirical evidence to the analysis of their effects on trade.
We estimate gravity models of the pattern of interwar trade, relating the
value of bilateral trade flows on indicators of trade and currency blocs along
with the standard arguments of the gravity model. We find evidence of
significant impacts of both trade and currency policies on the pattern of
trade. The standard determinants of bilateral trade flows-incomes,
proximity and contiguity-had
a diminished
influence in the 1930s as if
commercial policies increasingly overrode their effects. In addition, we find
a consistent negative impact of exchange rate instability on the volume of
trade.
In comparison with these effects of external trade barriers and exchange
rate instability, evidence of regionalization
due to the formation of trade
and currency blocs is less compelling. Analysis for 1935 and 1938 suggests
that members of the British Commonwealth and the Central European trade
bloc traded more with one another-and,
depending on which estimates are
preferred, less with the rest of the world-than
would be predicted by their
economic characteristics and the average behavior of countries in the
sample. But these tendencies are already evident in 1928 before the
Commonwealth
countries signed the Ottawa Agreements and the German
bloc was formed. This suggests that commercial and financial linkages that
had developed over previous years contributed importantly
to the prevalence of intra-bloc trade in the 1930s. Still, there is some evidence that the
formation of formal trade blocs diverted the members’ trade away from the
rest of the world and toward fellow bloc members.
We find that the different currency blocs of the 1930s had different
’ On exchange control and clearing arrangements, see Ellis (1941) and Neal (1979),
respectively. Eichengreen (1992) discusses the exchange dumping duties of the gold bloc
countries.
4
B. Eichengreen,
D.A.
Irwin
I J. Znt. Econ.
38 (1995)
l-24
implications
for trade. Members of the sterling area traded unusually
extensively among themselves, due to the trade-promoting
effects of intrabloc exchange rate stability, but also traded unusually extensively with the
rest of the world, since the export-promoting
effects of their policies of
currency depreciation swamped the trade-dampening
effects of inter-bloc
exchange rate instability. Members of the gold bloc, in contrast, did not
trade disproportionately
with one another, as if their increasing use of tariffs
and quotas neutralized the impact on trade of intra-bloc exchange rate
stability, while exchange control countries traded less with one another than
their other economic characteristics would predict.
Section 2 of the paper reviews the changes in trading patterns we seek to
explain and the associated policy initiatives. Sections 3 and 4 describe our
data, methodology and results. Section 5 summarizes the implications.
2. Policy and the pattern of trade
Fig. 1 is one of the most widely reprinted diagrams in all of economics.
The ‘Contracting Spiral of World Trade’, first published by the Gsterreichisthen Institutes fiir Konjunkturforschung
in 1933 and quickly reproduced by
the League of Nations in its Economic Survey for 1932-33, shows the dollar
value of world trade spiralling downward from 1929 through 1933. The
contraction of trade far exceeded the contemporaneous
decline in production. Real GNP in major industrialized economies fell by 18 percent over
this period in which export volume declined 35 percent and import volume
dropped 24 percent.3 The contrast grew more pronounced with recovery
from the Depression. From 1932 to 1938, GNP rose 29 percent in the
industrialized
countries, while export volume increased 24 percent and
import volume rose a mere 14 percent.
Superimposed on the downward spiral and anemic recovery of trade was a
tendency toward regionalization.
Between 1928 and 1938 the share of
British exports destined for the Commonwealth
rose from 44 percent to 50
percent, while the share of British imports from those countries jumped
from 30 percent to 42 percent. France’s trade with its colonies and
protectorates rose from 12 percent to 27 percent of its imports and from 19
percent to 28 percent of its exports. Germany’s trade with six Southeastern
3 The difference on the import and export sides reflects the improvement in the terms of
trade of the industrial countries. Figures in this paragraph are taken from Maddison (1989b, p.
57). Calculations by the Economic Intelligence Service of the League of Nations indicate that
the volume of trade fell by 27 percent between 1929 and 1932, a period over which industrial
production fell by 30 percent, primary production by a relatively modest 8 percent. This
estimate of the change in trade volumes is from League of Nations (1933, p. 212).
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
t-24
OCTOBER
Fig. 1. The contracting spiral of world trade, month by month, January 1929-June 1933 (in
millions of U.S. (gold) dollars).
European states (Bulgaria,
Greece, Hungary, Romania,
Yugoslavia) and Latin America increased from 17 percent to
its imports, and from 13 percent to 25 percent of its exports4
with Korea, Formosa, and Manchuria rose from 14 percent to
imports and from 18 percent to 41 percent of exports.
Turkey, and
28 percent of
Japan’s trade
39 percent of
4 The figures in this paragraph are from League of Nations (1939, pp. 34-35). German
imports from Balkan and Mediterranean countries alone rose from 11 percent to 20 percent of
total German imports between 1929 and 1938. Basch (1941, p. 38).
6
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
l-24
Commercial policies and exchange rate arrangements were the obvious
sources of these adaptations. The Ottawa Agreements negotiated between
Britain and the Dominions in 1932 aimed to stimulate Commonwealth trade
by exchanging tariff preferences. Britain’s goal at Ottawa was to secure
market access for her exports. In return for preferential treatment by the
Dominions
and India, Britain agreed to admit many of their exports
duty-free. Gordon (1941, p. 221) reports calculations suggesting that the
share of British imports from foreign countries entering duty-free declined
from 30 percent prior to Ottawa to 25 percent immediately
thereafter.
McDougall
and Hutt (1954) estimate that the average rate of tariff preference on Commonwealth
imports from the United Kingdom rose from 6
percent in 1929 to lo-11 percent in 1937, and on U.K. imports from the
Commonwealth
from 2-3 percent to lo-12 percent. Yet authors such as
Schlote (1952) and Thorbecke (1960) are skeptical that imperial preference
was primarily responsible for the growth of intra-Commonwealth
trade; they
suggest that the trend was evident earlier, reflecting growing complementarities between the British economy and the Empire as well as diplomatic
and political interdependencies developed over the years.
The pattern of Continental
European regionalism was more complex.
One bloc was comprised of countries of Central and South-Eastern Europe
with trade ties to Germany. Austria, Hungary, Poland and Yugoslavia were
tied to Germany and to one another by the so-called Schacht Agreements.
Germany exchanged access to its market in return for these countries
sending it an increasing share of their exports of foodstuffs and raw
materials. Germany similarly used its market power and political leverage to
induce Greece and Turkey to shift a growing share of their exports toward
its bloc.5
Trade among Scandinavia and the Benelux countries increased as they
sought to reduce their dependence on Germany. The 01~0 Convention,
concluded in December 1930, liberalized these countries’ trade with one
another. But the members soon found themselves split between two
currency area-the
gold bloc and the sterling area-which undermined the
effectiveness of their agreement (Condliffe, 1940, p. 307). In June 1932,
Holland, Belgium and Luxembourg adopted the Ouchy Convention, lowering tariffs and quotas on one another’s exports. This agreement was
abandoned, however, in the course of the World Economic Conference of
1933. Italy negotiated bilateral preference agreements with Austria and
Hungary (the so-called Brocchi Agreements of 1931-32 and Rome Agreements of 1934).
Whether U.S. policies led to growing regionalism is difficult to say.
5 How
1992).
much
market
power
Germany
possessed
is disputed
(see Milward,
1981;
Kitson,
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (199.5)
l-24
7
Although the Smoot-Hawley
tariff was largely nondiscriminatory,
it was
rolled back not by a general reduction in import duties but by bilateral
agreements reached under the provisions of the Reciprocal Trade Agreements Act of 1934. During the following three years the United States
concluded trade liberalization
agreements with 17 countries, most of which
were in the Western HemisphereP
In the next three years, six agreements
were concluded,
half of which involved countries in the Western
Hemisphere.7 Although it is tempting to characterize this as leading to the
emergence of a U.S.-centered trade bloc, Thorbecke (1960) shows that the
share of the trade of Western Hemisphere countries remaining within the
region rose significantly only after World War II.
Changes in international
monetary and exchange rate arrangements may
have also encouraged regionalization.
Following Britain’s devaluation in
September 1931, countries that had traditionally borrowed and held international reserves in London pegged their currencies to sterling. Some, like
India, were compelled to do so, but others participated voluntarily.
This
gave rise to the sterling area, a zone of exchange rate stability thought to
have encouraged trade among participants (see Meyer, 1952). The sterling
area and the British Commonwealth
were not the same: Canada, Newfoundland, and British Honduras belonged to the Commonwealth
but not
the sterling area, while Denmark, Norway, Sweden, Portugal, and other
non-Commonwealth
countries joined the sterling area.
Other countries restricted credit as necessary to defend their gold
standard parities and suffered a prolonged slump in production and trade. A
few gold standard countries, namely France, Belgium, Switzerland, and the
Netherlands, maintained exchange rate stability vis-a-vis one another until
the second half of the 1930s which may have also worked to stimulate trade
among them. They strengthened their tariffs and import quotas to defend
their increasingly overvalued exchange rates, and gold bloc countries
applied surtaxes (‘exchange-dumping
duties’) against countries devaluing
their currencies.’ France and the Netherlands employed quotas as well as
bThe countries were Canada, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica,
Cuba, Haiti, Colombia, Brazil, France, Belgium/Luxembourg,
the Netherlands, Sweden,
Finland, and Switzerland.
7The agreement with Canada was expanded, while new agreements were concluded with
Ecuador, Venezuela, the United Kingdom, Czechoslovakia, and Turkey.
‘As the League of Nations put the point, “Countries with overvalued currencies and
consequently high price-levels.. .resorted to increasingly stringent measures aimed at restricting
imports and encouraging exports. In the ‘gold bloc’ recourse was mainly had to an extensive
system of import quotas and export bounties...” (cited in Woytinsky and Woytinsky, 1955, p.
294). Once these countries abandoned gold convertibility in 1935-36 and allowed their
overvalued exchange rates to depreciate, their more draconian trade restrictions could be
relaxed. But one gold bloc member, France, suffered continued balance of payments problems
and by 1938 had restored tariffs and quotas to t!ie lrv:+: prevailing before 1936.
8
B. Eichengreen,
D.A.
Irwin
1 .I. Int.
Econ.
38 (1995)
1-24
tariffs, extending quota rights differentially to foreign suppliers as a way of
securing market access for their exports.
A third group of countries in Central and Southeastern Europe also
maintained their gold standard parities but supported them with exchange
controls, not tariffs and quotas. Controls were imposed unilaterally in the
summer and fall of 1931, but in November of that year a conference of
Danubian countries convened in Prague to consider the negotiation of a
multilateral
clearing agreement designed to facilitate trade among them.
Ultimately,
this proposal was not adopted, and the exchange control
countries relied on bilateral agreements for clearing (see Anderson, 1946).
Few countries linked their currencies to the dollar as tightly as the
members of the sterling area pegged to the pound and the gold bloc
currencies were linked to one another. The formal dollar bloc included only
the United States, the Philippines, Cuba, and Central America, although
countries such as Canada and Argentina followed the dollar at a distance.
Accompanying these changes was a reorientation of trade: the pattern of
multilateral
settlements was submerged beneath a web of bilateral and
regional commercial and monetary arrangements. No consensus exists about
the relative importance of trade blocs and currency areas in bringing about
these changes. Did discriminatory trade blocs cause the shifts in the pattern
of world trade, or can they be dismissed as unimportant?
Did the sterling
area and other currency arrangements have only a minor impact on the
pattern of trade, or were payments arrangements, as others argue, highly
influential? We now seek to determine the extent to which trade blocs and
currency arrangements were responsible for the changing pattern of trade.
3. Data and specification
Starting with Linneman (1966), a standard framework for investigating the
pattern of trade is the gravity model, which relates the value of bilateral
flows to national income, population,
distance, and contiguityP
Most
applications specify the model in double-log form, expressing the dependent
variable (bilateral trade) and all independent variables in logs, and estimate
it by ordinary least squares (OLS). The double-log specification permits
coefficients to be interpreted as elasticities but omits country pairs for which
trade is zero. This is undesirable insofar as the omitted observations convey
information about why low levels of trade are observed.
9 Anderson (1979) and Bergstrand (1985) have shown that the gravity equation can be
derived as a reduced form of a broad class of structural models. In applications to contemporary data, such equations have proven useful in predicting the pattern of trade and assessing the
effects of commercial policies.
B. Eichengreen,
D.A.
Irwin
I I. Int.
Con.
38 (1995)
9
l-24
One solution is to forgo the double-log specification for a semi-log form in
which the dependent variable (bilateral trade) is expressed in levels, and
independent variables in logs. While this allows us to utilize the information
contained in the observations for which the observed value of trade is zero,
OLS is no longer appropriate since the dependent variable is truncated at
zero. The obvious estimator is Tobit (as in Havrylyshyn and Pritchett, 1991),
since the analogy between the gravity equation and the standard Tobit
model is direct: countries first determine whether to trade, and if they do
the value of trade is determined by their characteristics. The semi-log
specification is difficult to interpret, however, because the constant elasticity
relationship between the independent variables and bilateral trade is lost.”
A third strategy, which we utilize here, preserves the double-log form and
yields results similar to Tobit. ‘The dependent variable is expressed as
ln(1 + TRADE), where TRADE is the value of bilateral exports and
imports. For large values of TRADE, ln(1 + TRADE) = ln(TRADE) and
the constant elasticity relationship is preserved; for small values, ln(1 +
TRADE) = TRADE, approximating
the semi-log Tobit relationship.
The
equation can be estimated by scaled OLS (or an analogous systems
estimator),
in which the least squares estimates are multiplied
by the
reciprocal of the proportion of observations in which TRADE does not
equal zero.”
We adopt a specification similar to that used by Frankel et al. (1994):
ln(1 + TRADE,,) = PO+ PI ln(GNP,
. GNPj)
+ & ln([GNP,IPOP,]
+ &CONT
. [GNPjIPOPj])
+ &DZST,,
+ uij,
where TRADE, is the nominal value of bilateral trade between countries i
and j, GNP,. GNPi is the product of the two countries’ nominal national
incomes, [GNP,IPOP,] . [GNPjIPOPj] is the product of the two countries’
per capita national incomes (also in nominal terms), DZST, is the distance
between the economic centers of gravity of the two countries (measured in
miles or kilometers), and CONT is a dummy variable for whether the two
countries are contiguous.
A problem with this specification is that the disturbance may be correlated
I” One can solve for the local elasticity around the mean by dividing the coefficients by the
mean value of the dependent variable, but then the elasticity is necessarily declining with
respect to the dependent variable.
” According to Greene (1993, p. 697), “a striking empirical regularity is that the maximum
likelihood estimates can often be approximated by dividing the OLS estimates by the
proportion of nonlimit observations in the sample.” This is the case in the results we report
below.
B. Eichengreen, D.A. Irwin I J. Int. Econ. 38 (1995) l-24
10
with one of the regressors, thereby biasing the estimates. If a large ujj is
drawn, for instance, trade is higher and, by accounting identity, GNP is
higher as well (unless trade is always perfectly balanced). Instrumental
variables estimation
is therefore required, as in Harrigan (1992) and
Hummels and Levinsohn (1993), using instruments likely to be correlated
with national income but independent of the value of international
trade.
Harrigan and Hummels and Levinsohn use factor endowments (such as
capital stock and labor) as instruments; for reasons of data availability we
use arable land and economically active labor force, as described in the data
appendix.
The source for trade flows is Folke Hilgerdt’s study The Network of World
Trade. The sum of a country’s exports and imports with another country is
expressed in millions of U.S. dollars. Distance is the straightline distance (in
kilometers)
between the economic center of gravity of the respective
countries.‘* Nominal national income, sources of which are described in the
data appendix, was converted to millions of U.S. dollars using the exchange
rates in the Network. We assembled data for 34 countries (561 bilateral
flows).
Hilgerdt
provides data on bilateral trade for 1928, 1935, and 1938.
Estimating equations for the 1920s as well as the 1930s allows us to address
the possibility that effects we attribute to the commercial and financial
initiatives of the latter decade are in fact long-standing features attributable
to other sources. We can test Schlote and Thorbecke’s hypothesis that
unusually high levels of intra-Commonwealth
trade were already evident
before the 1930s for example.
The availability
of three cross-sections suggests estimating the three
equations as a system using seemingly unrelated regressions (SUR). To the
extent that errors are trading-partner-specific
(reflecting, for example,
characteristics of particular pairs of trading partners that are difficult to
capture by their observable economic characteristics), SUR will result in
more efficient estimates.
4. Econometric results and interpretation
Table 1 presents estimates of the basic model using various estimation
techniques for purposes of comparison. Together, the independent variables
explain 50-60 percent of the variation in the value of trade. All the variables
display their expected signs. The sum of the coefficients on income and
income per capita is larger in 1928 than in 1935-38 regardless of the
I* This
available
follows
to us.
Linneman
(1966).
We are indebted
to Lant
Pritchett
for making
this
data
3.201
S.E
1.057
0.65
561
0.75
(2.65)
--0.73
(11.26)
1.18
(20.66)
1 .Ol
(24.78)
-4.85
(5.98)
2.01
561
1.088
0.63
0.75
(2.68)
0.75
(11.80)
0.85
(17.74)
1.01
(23.28)
-4.28
(5.36)
2.01
3.081
0.59
419
0.47
(2.02)
-0.51
(8.67)
0.89
(16.30)
0.90
(20.50)
4.93
(6.85)
2.49
Doublelog
OLS
1.812
0.33
561
1.38
(3.75)
-0.56
(6.34)
1.30
(15.96)
1.14
(17.62)
-8.71
(7.93)
42.34
Tobit
IV
of trade
and
currency
2.542
0.63
561
0.41
(2.09)
-0.40
(8.46)
0.16
(3.19)
0.73
(23.34)
-3.12
(5.83)
1.75
561
1.026
0.58
0.51
(1.83)
-0.52
(7.75)
0.81
(15.95)
0.83
(20.44)
-3.50
(4.52)
1.75
Scaled
IV-OLS
blocs
1.038
0.57
561
0.48
(1.73)
-0.58
WV
0.62
(14.9il)
0.80
(20.02)
-3.20
(4.21)
1.75
Scaled
IV-SUR
2.529
0.52
418
0.46
(1.98)
-0.35
(5.89)
0.66
(13.14)
0.69
(17.04)
-3.82
(5.50)
2.12
Doublelog
OLS
1.692
0.29
561
1.14
(3.30)
--0.37
(4.31)
1.03
(14.45)
0.97
(17.00)
-8.09
(7.99)
23.52
Tobit
IV
2.611
0.62
561
0.45
(1.69)
-0.53
(8.64)
0.16
(3.62)
0.77
(23.65)
(6.W
-4.86
1.85
Scaled
OLS
1938
1.034
0.59
561
0.42
(1.51)
(7.82)
-0.51
0.89
(18.67)
1.01
(21.84)
-6.39
(7.64)
1.85
Scaled
IV-OLS
1.062
0.57
561
0.38
(1.42)
-0.57
(9.07)
0.63
(15.72)
0.91
(20.37)
-5.31
(6.49)
1.85
Scaled
IV-SUR
2.582
0.58
426
0.30
(1.37)
-0.37
(6.79)
0.73
(16.59)
0.86
(19.73)
-6.24
(8.53)
2.22
Doublelog
OLS
561
1.642
0.31
1.19
(3.55)
-0.33
(4.08)
1.04
(16.65)
1.11
(17.42)
-10.79
(9.91)
27.27
Tobit
IV
Notes:
The 34 sample
countries
are the United
States, Canada,
Cuba,
Guatemala,
Mexico,
Brazil,
India,
the Netherlands
Indies
(Indonesia),
Japan/Taiwan/Korea,
Austria;
Belgium,
Czechoslovakia,
France,
Germany,
Italy,
the Netherlands,
Sweden,
Switzerland,
Bulgaria,
Denmark,
Finland,
Greece.
Hungary,
Norway,
Poland,
Portugal.
Romania,
Spain, the Soviet
Union,
Ireland,
the United
Kingdom,
Australia,
New Zealand,
and South Africa.
All trade and income
variables
are expressed
in
millions
of U.S. dollars,
using the conversion
factor described
in the text.
The dependent
variable
for scaled OLS and scaled SUR is ln( 1 + trade),
where trade = exports
t imports.
The double-log
OLS dependent
variable
is In(trade),
dropping
observations
for which trade is zero. The dependent
variable
for Tobit estimation
is trade = exports
+ imports.
r-statistics
arc in parentheses.
R’ of Tobit is the squared
correlation
between
the actual and fitted value of the dependent
variable.
0.69
561
R2
n
0.79
(2.94)
0.33
(6.28)
Per capita
incomes
Contiguity
0.91
(27.58)
National
incomes
--0.78
(12.63)
-4.19
(5.76)
Constant
Distance
2.01
Scaled
IV-SUK
exclusive
Scaled
OLS
Scaled
IV-OLS
period.
Scaled
OLS
in the interwar
193s
of trade
1928
Mean of
trade
Table 1
Determinants
12
B. Eichengreen,
D.A.
Irwin
I .I. Int.
Econ.
38 (1995)
l-24
estimator used, consistent with the fact that trade, after falling along with
output and employment during the Depression, failed to rebound fully with
the recovery of incomes. This pattern is consistent with the arguments of
Woytinsky and Woytinsky (1955), who attribute the reorientation of trade in
the 1930s in part to changes in marginal propensities to import. The obvious
explanation for these declining marginal propensities is quotas and other
binding trade restrictions, the tightening of which prevented imports from
rising with incomes in the recovery as quickly as they had fallen in the
slump. The effects of distance and contiguity are larger in 1928 than
subsequently. This effect seems too large to reflect declining transportation
and information
costs. Again, our preferred interpretation
is that commercial and financial policies increasingly dominated the effects of geography.
In Table 1, in the first column for each year we present the scaled OLS
results produced by estimation without instrumental
variables. There is
evidence of structural change between 1928 and 1935 (the Chow test
Fc5,,1111)= 11.87) but not between 1935 and 1938 (Fc5, 1111)= 0.42). This
finding is robust to the inclusion of dummy variables for trade and currency
blocs. The second column of each year presents results from scaled OLS
when we instrument the product of national incomes. This raises the
coefficient on national incomes and per capita national incomes without
noticeably changing the distance and contiguity effects.
The scaled SUR estimates (in the third column for each year) are little
different than the scaled OLS results, although the magnitude of the
coefficients on per capita income is reduced slightly. The correlation of
disturbances across equations is sufficient to reject the hypothesis that the
residual covariance matrix is diagonal, indicating that SUR estimation is
appropriate.13 This makes sense in that the characteristics of countries not
picked up by the other regressors but affecting trade are likely to change
slowly over time. This estimation approach will be our preferred method in
assessing the impact of trade and currency blocs.
In the last two columns for each year we present results using alternative
estimation techniques. In much of the empirical gravity model literature, a
simple double-log OLS approach is taken. These estimates, in the fourth
column, deliver uniformly smaller coefficients except for a stronger effect of
per capita income. The Tobit estimates in the fifth column (also using
instrumental variables) most closely resemble the scaled OLS (instrumental
variables) results, although the effect of contiguity is more pronounced.
How do these results compare with those for later periods? Using data
I3 The cross-equation
correlation
of disturbances
is as follows:
r&,, = 0.79,
2
r35,38 = 0.71. The likelihood
ratio test (x’ distribution)
of whether
the off-diagonal
the variance-covariance
matrix are zero (indicating
no correlation
across years)
decisively
rejecting
that hypothesis
(see Greene,
1993, p. 454).
r&,, = 0.71,
elements of
is 1270.016,
B. Eichengreen,
D.A.
Irwin
I .I. lnt.
Econ.
38 (199.7)
1-24
13
from 1980 and 1990, Frankel et al. (1994) find that a double-log specification
yields uniformly lower coefficients on all of the independent variables than
our double-log estimation, although our instrumental variables approach
accounts for much of this difference. In results we do not report, a
double-log specification without instruments on our interwar data yields
similar coefficients on national incomes (around 0.7) to Frankel et al., but
lower coefficients on per capita national incomes (around 0.1-0.2 for the
interwar period compared with 0.3-0.5 in recent decades). Per capita
national incomes are commonly interpreted as a measure of intra-industry
trade, and a lower coefficient earlier in the century suggests that intraindustry trade among countries of comparable income levels may not have
been as important before World War II as after.14 Frankel et al. also find
slightly larger coefficients on distance (ranging from 0.5 to 0.6) compared
with interwar estimates (around 0.3-0.6)
providing no evidence that
declining transportation
costs have been an important influence on the
pattern of trade. They also find a higher coefficient on contiguity, consistent
with the formation of location-based trading patterns rather than colonialbased trading arrangements.
4.1, Trade blocs
Table 2, reporting only scaled OLS and scaled SUR results, introduces
variables representing the principal regional arrangements of the 1930s: the
British Commonwealth
and the German sphere of commercial influence
(both trade blocs), and the sterling area, the gold bloc, and the exchange
control countries (which we refer to as currency blocs).15 The first dummy
variable for each grouping equals unity if both trade partners belong to the
same bloc. Its coefficient indicates whether or not these countries tended to
trade more with one another as a result. (The exponential
of these
coefficients yields the impact of these policies on trade in percentage terms.)
The second dummy equals unity if one country but not both belong to the
same bloc. Its coefficient indicates whether the arrangement diverted trade
away from the rest of the world. To test whether the effects we attribute to
these variables reflect the commercial and financial initiatives of the 193Os,
I4 This is consistent with Lewis’s (1949) description of pre-World War I and interwar trade as
primarily an exchange of manufactured goods and raw materials between industrial and tropical
countries.
I5 Exchange controls and clearing arrangements resemble financial restrictions in some
respect but commercial policies in others. The International Monetary Fund (in its Annual
Report
on Exchange
Controls
and Exchange
Restrictions)
treats exchange controls separately
from trade policies. We follow this convention and discuss exchange controls and clearing
arrangements as a form of currency policy. Whether countries adopting them are properly
regarded as a bloc are from the data to determine.
14
Table 2
Determinants
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
1-24
of trade in the interwar period: Effect of overlapping trade and currency blocs
Variable
1928
1935
1938
Scaled SUR
IV
Scaled SUR
IV
Scaled SUR
IV
Constant
-4.83
(5.28)
-3.62
(4.19)
-6.72
(7.41)
National
incomes
1.02
(23.03)
0.81
(20.25)
0.95
(20.97)
Per capita
incomes
0.85
(16.25)
0.61
(13.67)
0.59
(13.98)
Distance
-0.71
(9.68)
-0.55
(7.59)
-0.51
(7.20)
Contiguity
0.61
(2.19)
0.28
(1.03)
0.26
(0.98)
WI in
Commonwealth
1.31
(3.97)
1.67
(5.22)
1.66
(5.25)
Commonwealth
member
0.01
(0.05)
-0.13
(0.87)
-0.13
(0.89)
W/in
Reichsmark
0.69
(2.22)
0.84
G-4)
0.89
(3.05)
Reichsmark
member
0.09
(0.55)
-0.31
(2.01)
-0.11
(0.71)
W/in sterling
area
0.04
(0.20)
-0.17
(0.68)
0.24
(1.10)
Sterling member
-0.10
(0.68)
0.08
(0.53)
0.29
(1.93)
W/in gold bloc
0.29
(0.73)
0.53
(1.36)
0.68
(1.76)
Gold bloc
member
0.56
(3.59)
0.39
(2.55)
0.64
(4.28)
Wlin exchange
control
0.66
(1.71)
0.86
(2.27)
0.67
(1.90)
B.
Table
Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (lW.5)
15
1-24
2 (continued)
1935
1938
IV
Scaled SUR
IV
Scaled SUR
IV
Exchange
control member
-0.41
(2.52)
-0.38
(2.30)
-0.29
(1 SO)
n
561
561
561
Variable
1928
Scaled
SUR
H’
0.67
0.62
0.62
S.E.
1.044
0.979
I.006
Notes:
See Table 1.
as opposed to interdependencies already evident in the previous decade, we
include the same variables in our equations for 1928.
The findings reported above survive this extension: the basic coefficients
retain their expected signs and, other than the occasional per capita income
and continguity term, are significant at conventional levels. As before, the
effects of distance, contiguity and the sum of national and per capita
incomes decline after 1928. The obvious explanation is again in terms of
commercial
policies, but now commercial policies other than the tariff
preferences for which we control, that overrode the effects of income and
geography.
The positive coefficient on ‘Within Commonwealth’
suggests unusually
heavy trade in 1928 among Commonwealth members (the United Kingdom,
Ireland, Canada, India, Australia, New Zealand, and South Africa in our
sample). Even though British tariff rates were low prior to the imposition of
the 1932 General Tariff, some preferences were already extended to the
Dominions, and the latter extended preferences to Britain and one another
(Layton and Rist, 1925; Capie, 1983). But it is likely that the prevalence of
Commonwealth
trade reflected more than preferences alone; commercial
and financial linkages that had developed over the years also contributed to
these patterns.16
The magnitude and significance of ‘Within Commonwealth’
increases
between 1928 and 1935. We can reject the hypothesis that this coefficient is
equal across years at the 90 percent level; the x2 test of the nonlinear
restriction equating the two coefficients across SUR estimates is 2.78 with
” Hamilton and Winters (1992) similarly find a persistent influence of historical ties in data
on U.K. trade with its former colonies and Dominions in the 1980s. de Menil and Maurel
(1993) use a gravity equation model to analyze trade for a more limited sample of countries in
1924 and 1926, reaching similar conclusions about the importance of the historical legacy in the
case of the successor states of the prewar Austro-Hungarian Empire.
16
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
1-24
the associated p-level of 0.09. Thus, the Ottawa Agreements of 1932 appear
to have reinforced the existing tendency toward intra-Commonwealth
trade.
The coefficient on ‘Commonwealth
Member’,
indicating bilateral flows
between Commonwealth
countries and the rest of the world, is negative,
though inconsistently significant, suggesting a weak trade-diverting effect of
Britain’s imperial arrangements. While consistent with Condliffe’s (1940)
assertion that Commonwealth
preferences had a negative impact on the
participating countries’ trade with the rest of the world, this effect is already
evident (and near1 significant at the 90 percent level in the scaled OLS
equation) in 1928. 17 The extent of diversion rises year by year, although only
the scaled OLS estimates suggest that it was significant (at the 90 percent
level in 1935 and the 95 percent level in 1938).
The coefficients for the Reichsmark bloc are surprisingly similar to those
for the Commonwealth.
There too a tendency is evident for participating
countries (Germany, Austria, Brazil, Bulgaria, Czechoslovakia,
Greece,
Hungary, and Romania in our sample) to already trade unusually heavily
with one another in 1928, a point noted by Ellis (1941, p. 258). There too
there is a suggestion of an increase in this propensity between 1928 and
1935-38, although the change in the coefficient is smaller and less significant
than in the case of the Commonwealth.
Basch (1941) argued that the
Reichsmark bloc was not designed to stimulate the volume of intra-bloc
trade, only to balance it while enhancing Germany’s self-sufficiency in raw
materials; our results are consistent with the first of these conclusions. The
scaled SUR estimates suggest that the Reichsmark bloc became strongly
trade diverting in the 1930s in contrast to our results for the Commonwealth where there is little evidence of such an effect.18
Compared with the existing literature, then, we are led to a more cautious
assessment of the effects of trade blocs in the 1930s. Some of the effects
commonly ascribed to them were already evident in the 1920s before the
discriminatory policies of the 1930s were adopted, as Schlote and Thorbecke
emphasize.
We also investigated the Ouchy Accord of the Benelux countries. Our
results for 1928 indicate that these countries already traded heavily with one
another prior to the agreement, but the ‘Within Ouchy’ coefficient increases
in magnitude in 1935 and again in 1938.r9 Despite the formal failure of the
Accord, the extensive political and commercial contacts of which Ouchy was
one manifestation
evidently led the Benelux countries to trade more
extensively with one another than contiguity and propinquity would other“According
to scaled SUR, there was no trade diversion due to Commonwealth
ship in that year.
18The x2 test statistic of 4.84 leads us to reject the hypothesis of equality.
19These results are available from the authors upon request.
member-
B. Eichengreen,
D.A.
Irwin
I J. In!.
Econ.
38 (1995)
1-24
17
wise suggest and without concomitant trade diversion. In contrast, the
Brocchi-Rome
Agreements between Austria, Hungary, and Italy significantly discouraged trade with the rest of the world, while failing to stimulate
the signatories’ trade with one another. Gordon (1941, p. 452) asserts that
“the effects of the Rome Agreements. . .were not as favorable as had been
anticipated”.
Condliffe (1940) provides a similar assessment; our results are
consistent with this view.
Finally, we tested for the existence of a Western Hemisphere
bloc
comprised of the United States and various Latin American countries.
Although these countries already traded unusually heavily with one another
in 1928, intra-hemisphere
trade had become more pronounced by 1935. By
1938, this intra-hemisphere-trade
effect is less apparent, perhaps reflecting
the more wide-ranging application of the Reciprocal Trade Agreements Act.
In no year does there appear to be a diversionary element in Western
Hemisphere trade.
4.2. Currency
blocs
The remaining coefficients capture the impact on trade of the sterling
area, the gold bloc countries, and the Central and Eastern European
countries with exchange controls and clearing arrangements. Participation in
the sterling area (Australia,
Denmark,
Finland, India, Ireland, New
Zealand, Norway, Portugal, Sweden, and South Africa in our sample) has
no discernible impact on trade in any year. In 1938, there is a positive
impact of the dummy variable for trade flows between sterling area and
non-sterling area countries. The rise of the sterling area’s trade with the rest
of the world in the 1930s is commonly ascribed to these countries’ rapid
recovery from the Depression, but to the extent that recovery is controlled
for by the national income terms, this cannot be the entire explanation.
Another possibility is these countries’ reliance on currency devaluation as a
recovery-promoting
policy. The members of the sterling area all followed
the United Kingdom off the gold standard at an early date. Devaluation
allowed them to reduce interest rates, helping to stimulate recovery, but
also enhanced their international
competitiveness,
encouraging them to
export more than other countries following more conservative international
monetary policies (Eichengreen and Sachs, 1985). This last effect may
account for the positive coefficient on ‘Sterling Member’.
There is little evidence that gold bloc countries (Belgium, France, the
Netherlands, Poland, and Switzerland in our sample) traded disproportionately with one another. The only coefficients approaching statistical significance at standard levels are those for 1938, after the gold bloc was dissolved.
As with the sterling area, this could reflect the trade-promoting
effects of
the simultaneous devaluation of gold bloc currencies, in this case starting in
18
B. Eichengreen, D.A. Irwin
I J. Znt. Econ. 38 (199.5) 1-24
1936. Although the coefficients on ‘Gold Bloc Member’,
the variable
indicating bilateral flows between gold bloc and non-gold bloc countries, are
already positive in 1928, indicating that these countries had a disproportionate tendency to trade with other parts of the world even before their
currency bloc was formed, they increase in size and statistical significance
between 1935 and 1938, consistent with the interpretation
of their growing
trade in terms of the trade-stimulating
effects of the post-1935
depreciations.20
The final pair of coefficients tests for trade creation and diversion on the
part of the exchange control countries. While their signs in 1935-38 suggest
that these policies encouraged trade among exchange control countries while
discouraging trade with the rest of the world, the same tendencies are
already evident in 1928, before controls were imposed. The results in Table
2 thus suggest that it is not necessarily appropriate to attribute either effect
to the controls themselves. The exchange control countries were a welldefined, isolated group, but were so before the 1930s. In the next subsection
we provide an interpretation
of the contrast between this finding and the
conclusions of qualitative studies.
4.3. Exchange rate variability
Nurkse (1944) argued that exchange rate volatility following the breakdown of the international gold standard increased the uncertainty associated
with international transactions, thereby discouraging trade. Following Frankel et al. (1994), we extend our model to include a measure of exchange rate
variability.
Our measure is the variance of log(e,le,-,),
where e, is the
average monthly bilateral nominal exchange rate between two countries
over the three prior years, i.e. from 1925 to 1927 in the case of trade in
1928.21
The scaled SUR estimates in Table 3 support Nurkse’s hypothesis mainly
for 1928 and, to a much lesser extent, 1938. At the bottom of the table we
present the mean value of our exchange rate variability measure: note that
variability is most pronounced in the years prior to 1928, when European
countries were still undertaking stabilization policies to reduce high inflation
rates in the aftermath of World War I.22 The absence of economical forward
*’ Formally, we cannot reject the equality of the coefficient in 1928 and 1935, although the x2
for the change between 1928 and 1938 of 2.43 yields a p-value of 0.119, which is nearly
significant at conventional levels.
*’ Gaps in the availability of exchange rate data (which we draw from League of Nations’
publications) reduce the sample size somewhat.
**The European countries that are responsible for the high exchange rate variability in
1925-27 are such countries as Belgium, Denmark, Finland, France, and Italy, which experienced periods of persistent inflation followed by stabilization and periods of deflation prior
to pegging their exchange rates.
B. Eichengreen,
D.A.
Irwin
I .I. Int.
Econ.
38 (1995)
19
l-24
Table 3
Bilateral trade and exchange rate variability
Variable
1928
1935
1938
Scaled SUR
Scaled SUR
Scaled SUR
Constant
-5.89
(5.07)
-6.07
(5.39)
-6.81
(5.99)
National
incomes
1.33
(17.48)
1.03
(19.38)
0.99
(17.77)
Per capita
incomes
1.14
(13.92)
0.79
(13.55)
0.68
(12.23)
-0.68
(7.10)
-0.63
(7.60)
-0.58
(6.96)
0.55
(2.00)
0.35
(1.14)
0.35
(1.11)
-0.04
(2.39)
-0.03
(1.08)
-0.03
(1.69)
W/in
Commonwealth
2.41
(3.35)
1.83
(5.13)
,190
(5.11)
Commonwealth
member
0.17
(0.W
-0.14
(0.86)
-0.01
(0.03)
W/in
Reichsmark
0.71
(2.45)
0.88
(2.69)
0.96
(2.81)
Reichsmark
member
-0.01
(0.08)
-0.10
(0.58)
0.01
(0.03)
W/in sterling
area
0.28
(0.92)
-0.20
(0.84)
0.12
(0.43)
-0.06
(0.76)
0.10
(0.64)
0.25
(1.14)
W/in gold bloc
0.29
(0.77)
0.21
(0.55)
0.49
(1.21)
Gold bloc
member
0.47
(2.63)
0.17
(1.01)
0.60
(3.51)
W/in exchange
control
0.80
(2.09)
0.23
(0.49)
0.39
(0.81)
Contiguity
Exchange rate
variability
Sterling member
20
B. Eichengreen,
D.A.
Irwin
/ J. Int.
Econ.
38 (199.5)
l-24
Table 3 (continued)
Variable
Exchange
control member
n
1928
1935
1938
Scaled SUR
Scaled SUR
Scaled SUR
-0.51
(2.74)
-0.62
(3.49)
-0.25
(1.38)
377
435
435
R’
0.72
0.67
0.64
S.E.
0.921
0.931
0.982
Mean value of
exchange rate variability
0.066017
0.000334
0.00454
markets and hedging instruments plausibly accounts for the continued
negative effect of variability on trade.
However, the impact of exchange rate variability on trade, while statistically significant in 1928, is economically unimportant compared with other
factors. Exchange rate variability reduced bilateral trade-on
average-by
only $2,500 a year, or by 0.13 percent. The expansion of trade in moving
from average exchange rate instability to that enjoyed by countries that
were on the gold standard (i.e. from 0.066 to 0.001 in 1928) were at best
minor. This is consistent with findings that post-war trade has not been
substantially affected by the collapse of the Bretton Woods system and the
move to market-determined
exchange rates. The magnitude of exchange
rate instability was smaller in 1932-34, when no countries were experiencing
sustained inflation comparable to that of 1925-27, although it increased in
1935-37 as various countries adopted floating rates. However, the effect on
trade, while negative, is statistically indistinguishable
from zero in both 1935
and 1938.
Including exchange rate variability alters the coefficients of the trade and
currency blocs, since these variables are correlated (partners in a currency
bloc having had stable bilateral exchange rates). There is little change in the
coefficients on the two sterling area variables between Tables 2 and 3,
suggesting that exchange rate stability was not a major source of the area’s
impact on trade. Whereas Table 2 indicates that gold bloc countries had a
disproportionate
tendency to trade with other parts of the world before,
during, and after the formation of their bloc, when we control for exchange
rate variability the tendency for those Continental European countries that
eventually comprised the gold bloc to trade disproportionately
with other
parts of the world tends to disappear in 1935. The obvious explanation is the
R. Eichengreen, D.A. Irwin I J. Int. Econ. 38 (199.5) 1-24
21
exchange dumping duties that gold bloc countries levied against imports
from countries with depreciated currencies.
After controlling
for exchange rate variability,
the tendency for the
Reichsmark bloc to be trade diverting, noted in Table 2, is weakened. To
the extent that these countries traded less with partners outside the
Reichsmark bloc than their incomes, distance, and contiguity would predict,
this would appear to reflect mainly the effect of exchange rate variability
between Reichsmark bloc members and other parts of the world, not merely
the diverting effects of the bloc’s commercial policies. Finally, Table 3
indicates a decline between 1928 and 1935 in the size and significance of the
coefficients on ‘Within Exchange Control’ which was not evident in Table 2.
This supports the belief that the imposition of exchange controls by both
trading partners discouraged bilateral trade. That this effect was not
apparent in Table 2 is attributable to the offsetting tendency for the stability
of bilateral exchange rates between such countries to encourage trade.
5. Conclusions
This paper has reassessed the role of commercial and financial policies in
the reorientation of international trade in the 1930s. We report evidence that
commercial policies attenuated prior linkages between income growth and
trade and that exchange rate instability only modestly discouraged international transactions. In contrast, the tendency toward regionalization
commonly ascribed to the formation of trade and currency blocs was already
evident prior to the regional policy initiatives of the 1930s; to a considerable
extent it is attributable to ongoing historical forces such as commercial and
financial linkages between countries forged over many years. While there is
some evidence that the formation of trade blocs diverted transactions
toward fellow bloc members at the expense of trade with the rest of the
world, this was only one of several factors at work, as also discussed in Irwin
(1993).
We find that the different currency blocs of the 1930s had very different
implications
for trade. Sterling area countries traded disproportionately
among themselves and with the rest of the world. Gold bloc members, in
contrast, did not trade disproportionately
with one another or with the rest
of the world, reflecting their indiscriminate use of tariffs and quotas to prop
up increasingly overvalued currencies, which neutralized any stimulus
derived from exchange rate stability. Countries applying exchange controls,
despite stabilizing their exchange rates, traded less with one another than
their economic characteristics would predict, due to the trade-inhibiting
effects of those policies.
What are the implications of these findings for discussions of the emerging
22
B. Eichengreen,
D.A.
Irwin
/ J. Int.
Econ.
38 (1995)
1-24
trade and currency blocs of the 199Os? They suggest caution for those
tempted to attribute to preferential trade and currency arrangements all
deviations in trade flows from those predicted by the readily observed
characteristics of trading partners. As in the 193Os, those deviations may
reflect not just regional policy initiatives but also long-lived historical forces
working to encourage disproportionate
volumes of trade among certain
countries, and perhaps encouraging those countries to cement their relationships through the adoption of preferential arrangements. They suggest that
trade and currency blocs are not inevitably either trade-creating or tradediverting. Trade and currency blocs can encourage trade both within the
bloc and outside it, as in the case of the sterling area, or discourage trade
even within the bloc, as with the countries that linked themselves together in
the 1930s through the use of exchange controls and bilateral clearing
arrangements.
Acknowledgements
Eichengreen acknowledges the financial support of the Center for German and European Studies and the Center for International
and Development Economic Research at the University of California at Berkeley. Irwin
acknowledges financial support from the James S. Kemper Faculty Foundation Research Fund at the University of Chicago’s Graduate School of
Business. Much of the research on this paper was completed during
Eichengreen’s
visit to the Research Department
of the International
Monetary Fund. For helpful comments, we thank Georges de Menil and two
anonymous referees.
Data appendix
This appendix presents the sources used in estimating the gravity equations.
Trade. League of Nations, The Network of World Trade, Geneva, 1942.
National income. Austria, Belgium, Bulgaria, Denmark, Finland, Germany, Hungary, Greece, Italy, the Netherlands, Norway, Spain, Sweden,
the Soviet Union: B.R. Mitchell, European Historical Statistics, 1750-1975,
2nd revised edn., Facts on File, New York, 1980. France: J.-C. Toutain, ‘Le
Produit Interieur Brut de la France de 1789 a 1982’, Economies et Societes,
1987. Switzerland, Czechoslovakia, and Poland: Colin Clark, Conditions of
Economic Progress, 3rd edn., Macmillan,
London, 1957. Romania: M. C.
Kaser and E. A. Radice, The Economic History of Eastern Europe, 19191975, Vol. 1, Economic Performance Between the Two Wars, Clarendon
Press, Oxford, 1985. United States: U.S. Bureau of the Census, Historical
Statistics of the United States, Colonial Times to 1970, Government Printing
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
l-24
23
Office, Washington, DC, 1975. Canada: M. C. Urquhart and K. A. H.
Buckley, Historical Statstics of Canada, Macmillan Press, Toronto, 1965.
Ireland and the United Kingdom: B.R. Mitchell, British Historical Statistics,
Cambridge University Press, New York, 1988. Australia and New Zealand:
N.G. Butlin, ‘Select Comparative Economic Statistics 1900-1940: Australia,
and Britain, Canada, Japan, New Zealand’, Source Paper No. 4, Australian
National University,
December 1984. India and Netherlands Indies: A.
Maddison, ‘Dutch Income in and from Indonesia’, Modern Asian Studies 23
(October 1989), 645-670. South Africa: B.R. Mitchell, International Historical Statistics: Africa and Asia, New York University Press, New York, 1982.
Japan, Korea, and Taiwan: Ohkawa et al. (1974), Suh Sang-Chul, Growth
and Structural Changes in the Korean Economy, 1910-1940, Harvard
University Press, Cambridge, MA, 1978, and Sam P.S. Ho, Economic
Development of Taiwan, 1860-1970, Yale University Press, New Haven,
1978, respectively. Cuba, Guatemala, Mexico, and Brazil: James W. Wilke,
ed., Statistical Abstract of Latin America, UCLA Latin America Center,
Los Angeles, 1990. Portugal: N. Valerio, ‘0 Produto National de Portugal
entre 1913 e 1947: Uma Primeiero Approximacao’,
Revistu de Historiu
Economica e Social, No. 11 (Janeir-Junho
1983), 89-102.
Population.
Australia, Austria, Belgium, Canada, Denmark,
Finland,
France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States: Maddison (1989a). New
Zealand: Butlin (1984). Cuba, Guatemala,
Mexico, and Brazil: Wilke
(1990). India and the Netherlands
Indies: Maddison (1989a). Portugal:
Valerio (1983). Ireland: Mitchell (1988). The following countries required
interpolation
between census dates. South Africa: Mitchell (1982). Greece
and Spain: Mitchell (1980). Bulgaria, Czechoslovakia, Hungary, Poland,
Romania, and the Soviet Union: P.S. Shoup, The Eastern Europe and Soviet
Union Data Handbook, (Columbia University Press, New York, 1981).
Distance. Derived from Linneman (1966).
Exchange rates. Calculated from the League of Nations Statistical Yeurbook, various years.
Land and labor force (for instrumental variables). International
Institute
of Agriculture,
International
Yearbook of Agriculture Statistics, Rome,
various years, p. xi. International
Labour Office, Yearbook of Lubour
Statistics, Geneva, 1939, p. 5.
References
Anderson,
J.E., 1979, A theoretical
foundation
for the gravity
equation,
American
Economic
Review
69, 106-116.
Anderson,
P.N., 1946, Bilateral
exchange
clearing policy (Ejnar
Munksgaard,
Copenhagen).
Basch, A., 1941, The new economic
warfare
(Columbia
University
Press, New York).
Bergstrand,
J.H.,
1985, The gravity
equation
in international
trade:
Some microeconomic
foundations
and empirical
evidence,
Review of Economics
and Statistics 67, 474-481.
24
B. Eichengreen,
D.A.
Irwin
I J. Int.
Econ.
38 (1995)
1-24
Capie, F., 1983, Depression and protectionism (Allen & Unwin, London).
Condliffe, J.B., 1940, The reconstruction of world trade (Norton, New York).
de Menil, G. and M. de Maurel, 1993, Trading with neighbors in turbulent times: Lessons from
the breakup of the Austro-Hungarian
Empire in 1919, unpublished manuscript, DELTA.
Eichengreen, B., 1991, Relaxing the external constraint: Europe in the 1930s in: G.
Alogoskoufis, L. Papademos and R. Portes, eds., External constraints on macroeconomic
policy: The European experience (Cambridge University Press, Cambridge).
Eichengreen, B., 1992, Golden fetters: The gold standard and the Great Depression, 19191939 (Oxford University Press, New York).
Eichengreen, B. and J. Sachs, 198.5, Exchange rates and economic recovery in the 1930s
Journal of Economic History 45, 925-946.
Ellis, H.S., 1941, Exchange control in Central Europe (Cambridge University Press, Cambridge).
Frankel, J., S.-J. Wei and E. Stein, 1994, APEC and regional economic arrangements in the
Pacific, unpublished manuscript, University of California at Berkeley.
Gordon, M.S., 1941, Barriers to world trade (Macmillan, New York).
Greene, W.H., 1993, Econometric analysis, 2nd edn. (Macmillan, New York).
Hamilton, C. and L.A. Winters, 1992, Opening up trade with Eastern Europe, Economic
Policy 14, 77-117.
Harrigan, J., 1992, Openness to trade in manufactures in the OECD, unpublished paper,
University of Pittsburgh.
Havrylyshyn, 0. and L. Pritchett, 1991, European trade patterns after the transition, World
Bank Working Paper WPS 748, World Bank, Washington, DC.
Hilgerdt, F., 1942, The network of world trade (League of Nations, Geneva).
Hummels, D. and J. Levinsohn, 1993, Product differentiation as a source of comparative
advantage?, American Economic Review (Papers & Proceedings) 83, 445-449.
Irwin, D.A., 1993, Multilateral and bilateral trade liberalization in the world trading system:
An historical perspective, in: J. de Melo and A. Panagariya, eds., New dimensions in
regional integration (Cambridge University Press, New York).
Kitson, M., 1992, The move to autarky: The political economy of Nazi trade policy,
Department of Applied Economics, University of Cambridge Working Paper No. 9201.
Lamartine Y.P., 1959, Forty years of foreign trade (Allen & Unwin, London).
Layton, W. and C. Rist, 1925, The economic situation of Austria (League of Nations, Geneva).
League of Nations, 1933, Economic survey 1932-33 (League of Nations, Geneva).
League of Nations, 1939, Survey of world trade, 1938 (League of Nations, Geneva).
Lewis, W.A., 1949, Economic survey: 1919-1939 (Allen & Unwin, London).
Linneman, H., 1966, An econometric analysis of international trade flows (North-Holland,
Amsterdam).
Maddison, A., 1989a, Phases of capitalist development (Oxford University Press, New York).
Maddison, A., 1989b, The world economy in the twentieth century (Organization for
Economic Cooperation and Development, Paris).
McDougall, D. and R. Hutt, 1954, Imperial preference: A quantitative analysis, Economic
Journal 64, 233-257.
Meyer, F.V., 1952, Britain, the sterling area and Europe (Bowes and Bowes, Cambridge).
Milward, A., 1981, The Reichsmark bloc and the international economy, in: G. Hirschfel and
L. Kettenacker, eds., Der ‘Fuhrerstaat’: Mythos und Realitat (Ernst Klett, Stuttgard).
Neal, L., 1979, The economics and finance of bilateral clearing arrangements, Germany
1934-38, Economic History Review 33, 391-404.
Nurkse, R., 1944, International currency experience (League of Nations, Geneva).
Schlote, W., 1952, British overseas trade from 1700 to the 1930s (Blackwell, Oxford).
Thorbecke, E., 1960, The tendency towards regionalization in international trade (Martinus
Nijhoff, The Hague).
Woytinskv, W.S. and E.S. Woytinsky, 1955, World commerce and governments: Trends and