Does trade policy only have a small impact on trade flows? Interwar evidence

I have been working for a number of years on interwar trade policy, trying to see if using more fine-grained data will alter the consensus view that 1930s protectionism didn’t matter much for trade flows, in the context of everything else that was going on at the time. It is time-consuming work, but we are beginning to produce some results now, the first of which are previewed here. And I suppose that one upside of the time it has taken us to put the dataset together is that, in the meantime, Brexit intervened, which will hopefully increase interest in quantitative studies of trade policy!

One reply on “Does trade policy only have a small impact on trade flows? Interwar evidence”

This whole debate about Brexit has gotten hi-jacked completely by political representatives, who want to make Brexit, about movement of goods as we would have understood it, in the 1930’s. The last time that I checked for example, China wasn’t part of any European Union – and how much stuff that does conform to that classic idea of ‘goods’ – is made in Asia now, and consumed in Europe? A huge amount. This idea that Britain being outside of the European region will somehow affect it from a perspective of movement of goods, just doesn’t stand up to any rational form of analysis. Indeed, you see now in Germany, yeah, even in Germany – that components for physical items like trains, cars and buses – components that used to be made in Germany and had to conform to a set of standards established in that region – get sourced now from as far away as Asia. Even though these components from outside, aren’t anything like the same in terms of standards. The European procurement system has gotten dysfunctional here, in that it wants to achieve a saving – and often the only way to achieve that – is using the same trick as America used, of bringing stuff in from places that have cheaper costs of production.

Look at Irish television and Dragon’s Den any evening, and Irish entrepreneurs are criticized by Dragons, for not looking at the option to lower costs of production, by using manufacturing sources that are outside of the European Union. And that’s right now, in a country that claims that it needs to be a part of the European Union, from a point of view of flow of goods and materials? ? ? Maybe, I’m a small bit dense, but something doesn’t quite stack up for me, in this. It suits politicians to make the Brexit debate, into a debate that is about flow of goods and materials – because then the politicians don’t actually have to exercise enough brain muscle to figure out – what Brexit in 2017, might actually mean. It’s really that simple.

There are very few ‘vertical’ industries left any longer. There were a lot of those in the 1930’s. I.e. Where one company had control over it all, design, fabrication and sales. Back then, goods weren’t as complicated as goods are today. There’s only one intelligent commentary that I can identify in the whole thing about Brexit, that is one coming from those in Britain who actually own and operate real enterprise. They’ll point to the fact, it isn’t flows of goods, or tariff agreements and so on, that is crucial any longer. What is crucial is the ease of deployment of parts of the business located in Britain, to other centers around the European region. It’s real easy to set up branches in Italy (or wherever one may be able to source human labor with a specific kind of skillset, within the EU), when Britain is a part of the European Union. That’s nothing to do with goods and services. It makes it much more difficult to do that thing, of establishing a satellite of the British-based enterprise, in some other part of the European Union, when Britain is outside of that area. That’s the only place where it matters. This is also the part, which isn’t talked about.

By the way, this wouldn’t have been an issue back in the 1930’s anyhow, because a lot of organizations were ‘vertical’, they could produce goods of a certain standard, of a certain amount of complexity – and do everything in-house. The idea of moving parts of operations, from Britain to Italy or wherever, would not arisen in the 1930’s in the same way as it does now. Today, the company is chasing the labor, instead of the other way around. Like, when Sean Lemass, in the 1950’s was at the department of Enterprise – he did a survey of all of the manufacturers that existed in Ireland. There could be a company based in Louth for example that was making shoes, that were very like the one’s made by a different company based in Waterford. Yet, that company based in Waterford had never known about the existence of one based in Louth. That is what Sean Lemass had discovered, when he worked at Enterprise back then. Listen to someone like Bill Joy nowadays for example, who started at Sun Microsystems out of Berkeley university in the United States – and has since, moved from industry into ‘venture capital’ – in the same way, as others have (like for example, the engineer who helped develop the ‘Netscape’ internet browser). What they’ll tell you is that the information technology communications and networking in today’s world has changed how ‘venture capital’ as a segment of the financial industry for enterprise, now works. They’re making connections like those which I described, an awful lot faster.

And based on this fact, that many companies are ‘component vendors’ now, and exist inside of industries that are heavily ‘horizontally’ structured, not vertical any longer, you can see how much of the problem of producing modern, complex goods, isn’t about moving the goods from ‘A’ to ‘B’. It’s actually a lot more about the complex planning, and development that goes in, before a good starts on a production line, at all. It’s not so much about movement of goods now, as it is about movement of knowledge of goods, or tapping into that knowledge contained in communities, that is located somewhere else. The movement of goods, or anything like that, just happens as a last stage in a very long, chain of events that have to happen.

And that’s how we end up in places like Germany today, with parts for trains being made in Germany, can’t compete with a part that’s not up to the same standard, and gets made somewhere else. Because out whole ‘procurement’ system in the European Union, doesn’t talk to the regulations and standards processes that we have established at the same time, in the EU. Short answer is, is that the EU stopped ‘working’ really, a while back, and stopped working in a really, really significant way. But the politicians still want to pretend that the European project is still in the fifties decade, and it’s still all about movement of coal and steel, within that ‘coal and steel union’. Back then it was very simple for economists to wrap their brains around the whole thing too, because it could all be reduced to those simple kind of ‘planning economy’ kinds of equations. Am I wrong?

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