How bad are world wars and great depressions for global trade?

Richard Baldwin, @IMD, 27 September 2024, Factful Friday.

Today’s Factful Friday presents some charts that shed light on the trade impact of the traumatic events between 1914 and 1945. These include WWI and WWII, the 1920-21 recession, and the Great Depression. While the finding on the overall trade is not surprising, the direction-of-trade findings are—or at least they were to me. The main surprise is who much North-North trade fell during this period.

Introduction.

If this were a multiple choice quiz and the title was the only question, every reader of Factful Friday would surely choose “Bad” rather than “Good”. If that’s you, bravo! You aced the quiz.

But how bad is bad? Today’s Factful Friday presents some charts that shed light on the impact. It starts with aggregate trade flows and moves on to the global direction-of-trade question. While the finding on the overall trade is not surprising, the direction-of-trade finding is—or at least I thought it was when I first found it in the UN (1962) data.

But I first show you some charts on GDP during these turbulent years, since trade changers are closely associated with changes in GDP. Think of it as a ‘life and times’ intro to the trade drama.

Who were the global GDP giants?

As background to the direction-of-trade chart I’m working up to, please study the chart below. It shows the global GDP shares of the ten largest nations in 1900. There are some curiosities. The US is the largest with 23% (a share that is not far from its share today) as might be expected. But China is number two with 15%. UK has 12% in the bronze medal spot, but India is close behind with 10%. I’m not sure I would have guessed that China+India was large that the US in 1900.

This point will come in handy when we see what WWI, the Great Depression, and WWII do to the trade among rich nations. Since the three shocks hit the rich nations harder than poor nations like China and India, the direction-of-trade changed in ways that I found surprising.

GDP of the G7.

While not as dominant as they are today, the G7 were still a big deal back then and they have better data in, for example, Maddison’s new dataset (China is missing for many years before 1950). The right chart shows the evolution of the G7’s GDP. The depressing impact of the WWI is not enormous at least in part because the US, Japan, and Canada were not as involved as the Continental members.

The left chart shows that the European 4 (UK, Italy, Germany, and France) experienced falling GDP during WWI, the other 3 members of the G7 saw the opposite. The US and Canada exported a lot to the continent during these years, as we’ll see. The Great Depression by contrast was much harder for the North American G7ers, and hardly bad at all for Japan. WWII was a big hit for Japan and the Europeans but much less for the US and Canada.

As we shall see, this mix of GDP performances had important implication for the pattern of global trade.

Global trade on a roller coaster.

The value of global trade looks like a roller coaster in the first six decades of the 20th century. The history unrolls like a movie—which almost always means that there is an act 1 (set up of the premise and characters), the confrontation (the drama part), and the resolution. If it is a Hollywood movie, there’s a happy ending. If it’s a French Noir, everyone dies. First there was the set up (1900-1914), then the confrontation (1914-1945), and final the resolution in Act three (1945-1960). This shows up clearly in the chart below that depicts global trade flows and that of the key nations at the time.

The next chart, based on the famous Federico-Tena data set, shows that world exports of goods followed somewhat different pattern. Global trade actually rose during WWI since much of the world was uninvolved and the combatants were buying goods hand over fist. There was, however, a global recession just after the war, 1920-1921, that knocked down world trade flows. The total had recovered by the start of the Great Depression but then plummeted as it never had before or since. It then recovered up to 1938 which is where the dataset ends. ?

The right chart shows the evolution of exports from the Americas and Europe from the same source. Here we see that WWI was bad for European exports but good for American exports (surging wartime demand for imported commodities, for example). The 1920-21 recession hit both regions. Europe recovered much more in the 1920s than the Americas. Then came the Great Depression that decimated the exports of both regions. The recovery in the 1930s was far from complete by the time WWII started.

The world direction of trade, 1900-1959.

Before the nature of globalization changed around 1990 when the Great Convergence started (Baldwin 2016), the rich nations were pretty dominant in world trade. That was nothing more than a result of the gravity model with the added proviso that China was pretty much autarkic (on purpose) and India’s trade was controlled by Britain.

When Act I started to blend into Act II, the North-North trade share dropped, as the chart below shows. It only recovered in the 1950s and even then, not back to the heydays. (See the Annex for a longer perspective based on a different data source.) South-South trade was and stayed small. The world share percentage points that North-North lost all went to North-South. As I showed in a recent Factful Friday , this trade was dominated by one-way trade. That is, Northern exports of manufactured goods were exchanged for South exports of primary goods.

The USSR was a minor force in world trade. This was on purpose. The communist doctrine claimed that trading with capitalist countries was participating in the exploitation of their workers. The labor theory of value, after all, said that market prices rip off labor since labor is the source of all value, but it doesn’t get all the value created. Capitalists, who bought their capital with value they stole from workers (property is theft, as they said), were taking profits that properly belonged to the workers.

The UK, which was a major trader back in the day, displays a culturally appropriate version of the world pattern. It’s export share to Western Europe and the US declined while its export share to the sterling area (its colonies and a few others) was growing during these turbulent years.

The US pattern is even starker. In 1900, it sent 70% of its exports across the North Atlantic, but by 1953 the figure was down to 15%.

I have run out of time to draw lessons, insights, and make bad jokes about the direction of trade, so I’m going to move on to the historical narrative. When I next take up the direction of trade issue in future Factful Fridays, I’ll be sure to say more. In particular, I want to look at how the world shifted to one where the flows were dominated by North-North interindustry trade. ?

An eventful half century: Bit of historical narrative.

The years from 1900 to 1960 were, as they say in Wisconsin, “hot times in the old town tonight”.

The first act, which ended in 1914, showed the audience how globalization was a fantastically successful, world shaping thing. They saw expanding trade and industry in today’s rich countries, and deindustrialization and declining world GDP shares in today’s not-rich countries. This was the first installment on the Great Divergence (Pomeranz 2001) that created today’s world where most nations are poor and a couple dozen are rich. ??

The Act-two confrontation, which started with World War I, saw the development of a handful of outcomes that shocked viewers to their core. Britain shrugged off the mantle of hegemon without any other country picking it up (yet). With the Russian Revolution, Marx’s predictions leap from paper to practice; communism became a real alternative to capitalism. Horse-and-sword warfare collided with the industrial revolution and the result was a complete transformation of war and its consequences. War now meant millions could die.

The confrontation deepened during the inter-war period. In the 1920s, fascism was invented and first tried out in Italy and Germany. If this had been a Randomized Controlled Trial, the Ethics Committee would have surely vetoed that.

When the Great Depression hit, the audience started to wonder if the hero would make it to the final scene. Protectionism became the name of the game, and tariffs soared in a way that would have taken the breath away from Donald Trump. Trade and economies stagnated. Unemployment soared.

During World War II, which was the end of Act-two, the US picked up the hegemon mantel from Britain. The USSR, which had enjoyed miraculous growth since its birth, also acquired superpower status. Nuclear weapons ended the war, and turned war among nuclear powers into what Bruce Springsteen would call “a suicide rap”. There was a lot of fighting, but not between the big powers.

Act 3 starts immediately after the war. Globalization resumes its climb but this time separately in the US-led and USSR-led blocks. The Act-3 world was a profoundly different world than the world knew in during the first blush of globalization’s youth. The US and the UK spearheaded the establishment of a system of global governance. The IMF oversaw maintaining a global fixed exchange rate system. The World Bank was tasked with ending world poverty, and the GATT was set up to lower tariffs and provide basic ‘rules of the road’ for international trade. Only one of those missions was accomplished—the GATT facilitated tariffs cuts among the rich nations. The IMF eventually reinvented itself as the planet’s financial fireman, and the World Bank is still doing the best it can.

The dollar replaced the pound as the dominant global currency, the colonies became countries, and Western Europe cast aside its deadly cycle of Franco-German wars with the formation of the European Economic Community (EEC).

China, after the establishment of the People's Republic in 1949 under Mao Zedong turned inward and aligned with the USSR. The People’s Republic reversed this with a gradual opening under Deng Xiaoping. The USSR continued to operate under a centralized economic model, with limited engagement in international trade, focusing instead on building its military and industrial capacities. In the early post-war years, it acquired nuclear weapons and beat the US into outer space.

Now, you must admit, that’s a movie that would be listed under both the Drama and Action sections on Netflix.

?Summary and concluding remarks.

The key points are:

·???????? The answer to the title is “very very bad”; the exports of the Americas and Europe are not much higher at the start of WWII (1938) than they were at the star of WWI two decades earlier. The hit to world exports was less devasting since the first W in WWI is a bit of an exaggeration, and the Great Depression hit the non-North Atlantic economy less hard (for the most part).

·???????? The two world wars and the Great Depression had very different effects on the North American members of the G7 compared to that of the Continental members. By the end, the North Americans GDP was much higher than before, while Europe’s was barely higher than it was at the end of WWI.

·???????? Exports of the Americas surged during WWII while Europe’s stagnated, but from the end of WWI, the two export series start to move together.

·???????? This 1918-1945 period saw a massive reduction in the share of world trade among the richest nations—so call North-North trade. The US turned to Canada, Latin America and Asia, while the UK turned to the sterling area countries.

And that’s it for today’s Factful Friday!

References

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Annex

Here is a good alternative view of North-North trade from a different source (I’ll explore it more in future posts).