- Lessons from the 1930s suggest that the economic consequences of Trump’s trade war could last for decades.
- The impacts of rising protectionism during the period between 1929 and 1932 – when the impacts of the Great Depression led economies to turn inwards – lasted until at least the 1960s, according to Oxford Economics.
- If history repeats itself, emerging markets will likely be particularly vulnerable.
LONDON – The impacts of Donald Trump’s trade war could be felt through the global economy for decades to come, if patterns followed during the last true trade conflict in the 1930s manifest themselves in 2018, according to research from Oxford Economics.
Writing on Friday, Adam Slater, a lead economist at the research house, argued that the impacts of rising protectionism during the period between 1929 and 1932 – when the impacts of the Great Depression led economies to turn inwards – lasted until at least the 1960s.
“The effects on world trade lasted decades,” Slater wrote to clients. “The ratio of world trade to world GDP fell from 19% to 10% from 1929 to 1932 and remained depressed for years afterwards – even in the late 1960s this ratio was only modestly higher than in 1929.”
The chart below shows that depression in trade:
Not only did the depression cause world trade volumes to plunge, it also fundamentally shifted the interactions between nations when trading with one another, something that could happen once more during Trump’s trade war.
Slater notes that during the protectionist period in the 1930s that the UK – still in possession of the British Empire at that point – drastically increased its trade dealings with countries in the empire, while other trading partners suffered.
Academics, Slater says, argue that “around 70% of the shift in UK imports towards the Empire resulted from protectionist policies brought in during 1931-32.”
“British Empire producers certainly did much better than other UK trading partners: exports from Australia, New Zealand and southern Africa to the UK only fell 1.4% from 1928-38, from the Indian Empire by 22%.
“By contrast French exports to the UK fell 66%, German and Latin American exports 46% and US exports 40% over the same period.”
As might be expected, during the 1930s it was smaller economies that suffered the most, as “trade became increasingly concentrated in the spheres of influence (including empires) of large economies,” according to Slater.
Emerging markets in particular were impacted – something many commentators expect will also be the case during the 2018 trade war.
Part of that impact came down to tumbling commodity prices. Emerging markets are frequently reliant on commodity exports for prosperity, so falling prices tend to be almost universally negative for such economies.
“Real non-fuel commodity prices fell over 50% from 1929-32, inflicting big terms of trade losses (manufactured prices fell a third) and sparking a wave of debt defaults,” Slater notes.
Particularly impacted were Venezuela, Mexico, and Argentina, which saw GDP falls of 21%, 18%, and 14% respectively over the period, as the chart below illustrates:
There are early signs that a similar pattern could emerge in 2018’s trade war, with oil prices diving in the last week on worries about rising protectionism from the US and China.
While the trade war will be almost universally negative, Slater does offer a crumb of comfort, noting that “long-term output losses from protectionism may be lower than feared.”
He adds that the “current rise in protectionism is on a much smaller scale than the 1930s … Even if 20% tariffs were imposed on US$1 trillion of word trade (i.e. about 5% of total world trade), that would only raise the world weighted average tariff rate by around 1 percentage point from its current level of about 3%.”
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