International trade: Eighty years of work destroyed in 100 days
Louis Johnston for the Avon Hills Salon
Economists and historians will spend years sifting through the wreckage created by Donald Trump’s first 100 days in office. A good question to begin with will be, why did the Trump administration deliberately wreck the international trading system?
We can’t answer this question yet. However, we can look at how the system came to be in order to understand what we have lost.
The late 19th century witnessed the greatest movements of goods and people that had ever taken place in human history. In fact, relative to production and population, these flows were far greater than what we observe today. Yet, this system crashed and burned in the inferno of World War I. The international trading system was shattered.
The industrialized countries of Europe and the United States tried to put the pre-war system back together, but did so without understanding how the system truly worked. The conventional wisdom was that before World War I, economies prospered and trade exploded because of the spread of the gold standard. Most policymakers thought that putting that system back together would go a long way toward repairing the damage of the war.
This was a fatal mistake as the policy mandarins had the causation backwards. The gold standard operated as well as it did because of the relative stability of the international economy from 1870 to 1914, not the other way around. By forcing themselves back into these “golden fetters” — to borrow a phrase coined by John Maynard Keynes — the industrialized economies made it impossible to deal with a serious recession when it came in 1929.
The policies of the gold standard required economies to do exactly the opposite of what we would today prescribe for an economy in recession. Today, we would recommend monetary expansion via lowered interest rates. Then, the monetary authorities — especially the Bank of England and the Federal Reserve Board — raised interest rates to protect their exchange rates. This drove economies from recession into depression and ultimately into another world war.
In 1944, the United States and Britain convened a conference in Bretton Woods, N.H., to plan the post-war international system. The assembled leaders decided that the malfunctioning of the international economy had played an important part in causing the Great Depression and the war. They believed that they needed to build international institutions to keep the international economy functioning smoothly. The resulting institutions, the International Monetary Fund, the World Bank, and the World Trade Organization, are with us today.
The World Trade Organization grew out of a treaty known as the General Agreement on Tariffs and Trade (GATT). Every few years, the members of GATT would get together and negotiate new trade agreements that reduced tariffs and other restrictions on the flow of goods and services. These negotiations from the mid-1950s through the 2000s were deliberate and detailed, with the goal always being to create systems and institutions through which trade disputes could be settled without resorting to trade wars.
Donald Trump destroyed this system, beginning on January 20 and culminating on “Liberation Day,” April 2. We find ourselves in a situation that is like the one faced by policymakers after World War I. The results of their efforts were collapsing trade, depression, fascism and another world war. Let’s keep that in mind as we try to stop the destruction taking place now and build new, more resilient institutions in the future.