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Trade Blocs, Currency Blocs and the Disintegration of World Trade in the 1930s

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  • Barry Eichengreen
  • Douglas A. Irwin

Abstract

The dramatic implosion and regionalization of international trade during the 1930s has often been blamed on the trade and foreign exchange policies that emerged in the interwar period. We provide new evidence on the impact of trade and currency blocs on trade flows from 1928 1938 that suggests a blanket indictment of interwar trade policies and payments arrangements is not warranted. Discriminatory trade policies and international monetary arrangements had neither a uniformly favorable nor unfavorable implication for world trade; instead the balance of trade-creating and trade-diverting effects depended on the motivations of policymakers and hence on the structure of their policies. We find, for example, that British Commonwealth tariff preferences affected trade more significantly than the sterling-bloc currency area, but both promoted within-group trade without diverting trade away from non-members. Exchange controls and bilateral clearing arrangements enacted by German and Central and Eastern European countries, by contrast, dominated other commercial policies in altering trade patterns, but curtailed trade with non-members with no offsetting trade-creating effects. We also find support for Ragnar Nurkse 's famous hypothesis that exchange-rate volatility in the interwar period diminished trade. Our results speak to the emerging regional trade and currency areas of today, such as the North American Free Trade Agreement and the EC's Single Market and European Monetary System, and suggest that their impact lies not in the regional or global character of the policy initiative, but in the structure and design of the underlying policies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4445.

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Date of creation: Aug 1993
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Publication status: published as Journal of International Economics, February 1995
Handle: RePEc:nbr:nberwo:4445

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  1. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, December.
  2. Burda, Michael & Wyplosz, Charles, 2009. "Macroeconomics: A European Text," OUP Catalogue, Oxford University Press, Oxford University Press, edition 5, number 9780199236824, October.
  3. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  4. Kitson, M., 1992. "The Move to Autarky: The Political Economy of Nazi Trade Policy," Cambridge Working Papers in Economics 9201, Faculty of Economics, University of Cambridge.
  5. Havrylyshyn, Oleh & Pritchett, Lant, 1991. "European trade patterns after the transition," Policy Research Working Paper Series 748, The World Bank.
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Cited by:
  1. Alberto Alesina & Robert Barro & Silvana Tenreyro, 2002. "Optimal Currency Areas," Harvard Institute of Economic Research Working Papers 1958, Harvard - Institute of Economic Research.
    • Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
  2. Kool, C. J. M. & Koedijk, K. G., 1997. "Real exchange rates between the wars," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 211-232, April.
  3. Giorgia Albertin, 2008. "Trade Effects of Currency Unions," IMF Working Papers 08/249, International Monetary Fund.

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