Trade Policy Disaster ─ Lessons from the 1930s

The recent economic crisis--with the plunge in the stock market, numerous bankfailures and widespread financial distress, declining output and rising unemployment--has beenreminiscent of the Great Depression. The Depression of the 1930s was marked by the spread ofprotectionist trade policies, which contributed to a collapse in world trade. Although policymakerstoday claim that they will resist the protectionist temptation, recessions are breeding grounds foreconomic nationalism, and countries may yet consider imposing higher trade barriers. In Trade PolicyDisaster, Douglas Irwin examines what we know about trade policy during the traumatic decade of the1930s and considers what we can learn from the policy missteps of the time. Irwin argues that theextreme protectionism of the 1930s emerged as a consequence of policymakers' reluctance to abandonthe gold standard and allow their currencies to depreciate. By ruling out exchange rate changes asan adjustment mechanism, policymakers turned instead to higher tariffs and other means ofrestricting imports. He offers a clear and concise exposition of such topics as the effect of highertrade barriers on the implosion of world trade; the impact of the Smoot-Hawley tariff of 1930; thereasons some countries adopted draconian trade restrictions (including exchange controls and importquotas) but others did not; the effect of preferential trade arrangements and bilateral clearingagreements on the multilateral system of world trade; and lessons for avoiding future tradewars.

Douglas A. Irwin is Professor of Economics at Dartmouth College. He is the author of Free Trade under Fire, Peddling Protectionism: Smoot-Hawley and the Great Depression, and other books.