A historical approach of International Political Economy

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1. Introduction

“Trade makes everyone better off”. This simple principle is probably one of the most well-known economic facts. Obviously, by trade, a country can enjoy the wide variety of goods which by alone cannot produce. Not only that, trade is undoubtedly lucrative for any country participating in it. After the Industrial Revolution occurred during the late 19th century, a rapid progress in the shipping technology made the trade extremely profitable, and a prominent economist David Ricardo, applying the law of comparative advantage, had proven that trade can be beneficial in any condition, even to the country with a low productivity. Nobody can deny the positive impact of trade which exerts thoroughly on our lives.

However, despite the obvious and well-proven benefits of trade, historically the world economy has not always been favorable for free trade. Actually, people once did support a highly protective trade policy even after they had seen the benefits of the free trade. To fully understand these strange phenomena, we have to consider not only the hypothetical economic theories but the reality of the actual world filled with contending political perspectives of many countries and disparate goals of numerous interest groups in our society. This essay will examine the changing trends of world economy regarding its openness throughout two centuries with the four different perspectives of International Political Economy.

2. Before 1914 – First Wave of Free Trade

With the decline of the old mercantilism in the 19th century, the world economy had entered to the new phase, which is extremely favorable to free trade, or laisser faire. Before the advent of the World War I, the world traded freely with almost no restraint. During the period, trade grew at an average rate of 3.5 percent each year, three and a half times more rapidly than the previous 300 years (Oatley, 15).

In international political perspective, the strong leadership of Great Britain enabled the free trade between countries. Great Britain emerged as a hegemon during the 19th century and used its power to establish a stable and open world economy (Oatley, 29). Great Britain was predominant figure in both the world’s politics and economy. Obviously, with its flourishing industries, Great Britain wanted to open its market. What important is that Great Britain actually had sufficient power to mold the world’s economy to open its own market. After it repealed the Corn Law in 1846, Great Britain strongly pursued for trade liberalization and other countries generally had no choice but to comply with Great Britain’s policy due to its predominance in international politics and economy.

Classical gold standard also ensured the free trade between countries during this period, which explains an international economic point in the trend well. Under the classical gold standard, a monetary system during the period, each government pledged to exchange its national currency for gold at a permanently fixed rate of exchange (Oatley, 15). First, the gold standard stabilized international price relationship since it the fixed amount of gold had no chance for devaluation of currency. Furthermore, the standard assured the liquidity for international payments with the Bank of London guaranteeing the exchange of money and gold. Thus, many countries were able to trade goods and services across the border freely without any worry.

Also, scores of government supported the trade liberalization policy. The ideas of English classical economists proved the trade itself to be highly profitable, and subsequently governments adopted the ideas in their policy. The British government started the adoption by repealing its highly protective Corn Law in 1840. The Cobden-Chavalier Treaty between Britain and France also had substantial influences. Starting from the treaty of 1960, which eliminated most tariffs on trade, numerous governments negotiated to establish a network of bilateral treaties that substantially reduced trade barriers throughout the world (Oatley, 15). Actually, European governments were highly motivated to liberalize trade by ideological considerations (Frieden and Lake, 88).

Diverse interest groups in each country’s society also played a significant role in the trade liberalization. In order to pursue overseas business opportunities, individual entrepreneurs in many countries pressured their governments to lift restrictions on international trade (Frieden and Lake, 73). And as we all know, the influence of interest groups on the government policy is quite huge. Most prominent example is the English one. The interest of entrepreneurs and workers in Manchester led the repeal of the Corn Law, and it is the Corn Law that initiated worldwide movement toward the free trade.

3. The Interwar Period : 1914 – 1945

During the interwar years, the world’s trade and financial flow fell sharply. Every country was interested in only protecting its own industry and pursued a highly protective economy imposing high tariffs on foreign goods. The result was the sluggish world trade which restricted its range only in regional blocs and colonial areas.

According to the hegemonic stability theory, the presence of hegemon is absolutely needed for the world economy to freely trade. At the dawn of the World War I, however, the slowly decreasing British hegemonic power eventually showed its limitation with the rise of the United States and Germany. Britain did not have enough power to reestablish the devastated world economy after the tragic war. In contrast, the United States, which had enough resources and power, did not willing to take the hegemonic position (Oatley, 30). Instead, the United States poured its efforts in establishing a protectionist isolationism for its own good. In the end, the vacant place for the absolute hegemon in the international economy led to sharp decline of the international trade.

During the interwar period, the global economy faced considerable changes. After the World War I, economies of the European countries were seriously destroyed by the debts and reparations of war and eventually became highly reliant to the U.S. economy. Thus, unavoidably, American stock market crash of October 1929 brought the Great Depression, the tragic economic recession which significantly lowered the economic outputs and raised unemployment rates throughout the world (Oatley, 17). The recession in economy unavoidably ended up with the decline of the trade and soon the world economy became highly protective. The interwar gold exchange standard which succeeded the classical gold standard was simply not as effective as the former one.

Domestic political situations too were unfavorable for the trade. The Great Depression in America soon extended out over the world and so easily destroyed the world’s economy. Governments did not exactly know how to react to the unprecedented economic crisis, and their solution was to raise tariffs for the protection of the home market. Smooth-Hawley Tariff Act of the United States led the way. Also, the governments tried to solve the problem by creating the restrictive trading blocs among regional areas and colonies. (Oatley, 17) These responses of government ultimately led to the highly disintegrated and insulated world economy and trade seemed to lose its value over the world. The World War I and succeeding the Great Depression had discouraging influences on people’s attitude toward free trade. In a broad picture, the crisis had changed the mood of global economy, from bright and hopeful one to gloomy and depressing one. Before they faced the failure of the economy, people strongly believed in the “invisible hand”, or power of the market and other hopeful economical theories regarding trade. However, after the collapse of the global economy, it was hard for people to completely rely on the free trade. Instead, people wanted strong government which will protect their country’s own industry, regulate the general price levels, save people from being unemployed. The changed attitudes of people also contributed in the decline of the world trade.

4. After 1945 – Again to Openness

The extreme protectionism in economy during the interwar period never offered an ultimate solution. Rather, the unstable economic situation brought another war, the World War II. People started to learn some valuable lessons from the past; the high tariffs and bloc economy did not fulfilled their expected roles. After the end of the World War II, the world economy again paid attentions to the benefits of trade, which they had forgotten for years. The importance of trade again brought people’s interests. This time, various institutions for proper trades between countries were established to prevent further mistakes, and the world economy carefully started to reintroduce the free trade.

After some times of disorder, the United States eventually took the hegemonic role in the international economy. Before the early 20th century, American industry was not as strong as to compete with those of European countries and that was the major reason why the U.S. avoided the free trade. However, as American industry rose to the international preeminence, the U.S. became willing to open their markets to the world and accept its role as a hegemon. After the end of the World War II, the United States led multilateral negotiations in 1945 and 1947 in order to make a postwar trade system (Oatley, 31). The established trading system, GATT lowered the tariffs between countries and guaranteed reciprocal trade system. Not only that, the United States fulfilled its role as a hegemon by supporting the devastated European economy with the Marshal Plan. With this effort of the United States, the European countries soon recovered from the remnants of the war. The recovered world economy and postwar trade system such as GATT were well enough to revitalize the free trade.

The Brenton-Wood System supported the open trade in the field of international economy. The Brenton-Wood System, the postwar international monetary system, was basically contrived to reconstruct the foundation for more active trades in global economy. Therefore, naturally the system accepted various ideas which can possibly facilitate international trade. The system attempted to solve the problem regarding inadequate liquidity by the exchange control but at the same time ensuring order and stability in the foreign exchange market. (Frieden and Lake, 227-228). Also, the system helped to provide the institutional structures at the center of the global economy. The World Trade Organizations, the International Monetary Fund, and the World Bank all originated from the Brenton-Wood system’s design for the international trade (Oatley, 18). The system was explicitly aimed for the return to the heydays of the international trade before the two world wars and it worked out well. After the World War II, American policymakers changed their attitude towards the trade policy. Concluding that the United States had gained enough power to control a stable global economy, the United States abandoned former isolationism and led postwar reconstruction. Together with British policymakers who also strived for the stable international trade, American policymakers contributed a great deal in newly establishing the international monetary order (Oatley, 18). Not only that, governments’ changed role during the Great Depression also exerted influences on the new trends in the international trade. It is pretty obvious that the world economy tried to restore the free trade of the late 19th century. However, the governments which played more active role in their economy during the Great Depression than that of the Lassier Faire continued to have certain amount of insulation between domestic and the international economy. Actually, the rules embodied in the Bretton Woods system provided this insulation (Oatley, 18). And the changed governments’ role eventually made difference between the trade before the wars and after the wars.

The major reason why people changed their preference from the free trade to the protectionism was the outbreak of the World War I and following the Great Depression. However, the conversion rarely had positive effects. The global economy was shrinking without trade wasting the benefits that can be gained through trade, and many countries fought for the colonies which can support their economy by offsetting the negative effects of not having trade. The consequences turned out tragically. The failure to reconstruct a stable economy caused the Second World War to happen (Oatley, 18). Obviously, people were now ready to rethink about the trade liberalization. With the restored support towards trade for people, the postwar economic system can easily incline for the free trade. However, people’s attitudes were actually changed since the 19th century. Even though people had noticed the benefits of free trade, they now also knew that the proper intervention of government was also needed in order to prevent economic disasters such as the Great Depression. The postwar economic system reflected the changed attitudes of people, mainly pursuing the restoration of the 19th century global economy but assuring certain amount of government intervention (Oatley, 18).

5. Conclusion

Even though the benefits which can be gained through free trade between countries are pretty obvious, in reality, the world economy cannot always have tendency to the open trade since there are diverse factors with substantial influences other than purely economic factors. In the process of policy making, the economy and politics are strongly affiliated. So we must understand not only economy but politics to fully understand the trade tendency in the real world economy. The four perspectives on International political economy – international political, international economic, domestic political/institutional, and domestic economic/social – can help us understand the trends in the world economy more easy.

After Adam Smith, David Ricardo, and other economists proved the advantage of free trade, the world economy had enjoyed the open economy which was more liberal than that of any period throughout the history. The two sturdy columns, strong British leadership which pursued trade liberalization and stable International Gold Standard which ensured the security of the trade, strongly supported the free trade until the World War I began in 1914. Government policies, which were influenced by the interests of individuals, were also favorable for the free trade.

After the World War I, the world economy entered to the new period which was based on protectionist isolationism. With the absence of absolute hegemon in the economy and the Great Depression which followed the world war, the world had no choice but to abandon the free trade and maintain a highly protective economy with high tariffs and restricted trade which applied only to regional blocs and colonies. The nightmare of the Great Depression was so enormous that nobody dared to apply the trade liberalization again.

However, the protectionism also turned out to be not appropriate. The unstable world economic order brought another tragic disaster, the World War II. Corollary, another massive change in the global economy happened after the end of another war. The most prominent change resided in the American policy. The United States finally accepted its role as a hegemon in the world’s economy and politics, and the U.S. played its role as a hegemon greatly. The U.S. established the post-war economic order based on the principle of RTAA and contrived the Brenton-Wood System. Its strong support to the European countries through the Marshall Plan contributed to change people’s attitude toward the trade. Many institutions founded during this period in the hopes of restoring the free trade in 19th centuries activated the global economy by increasing trades.

6. Works Cited

(Books)
Friden, Jeffrey, and Lake, Thomas. International Political Economy. New York: St.Martin’s Press, 2000
Oatley, Thomas. International Political Economy. New York: Pearson Longman, 2008
(Periodical Articles)
Moon, Jung-Hyuk. “Classical Gold Standard” Hangyeore 18 Jan. 2005: A26.
Choi, Eun-Bi. “Postwar Trade and Brentton-Wood System” Dong-ah Daily 15 Apr. 2007: A26.
(Internet Resources)
“The Great Depression” Naver Blog 19 Jul. 2005. 30 Oct. 2007 .
Ju, Ah-Lok. “The Repeal of the Corn Law” Velociraptor 15 Mar. 2007. 30 Oct. 2007 .

Links to other sites on the Web

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