Trade Wars: A Comparative Study of Anglo-Hanse, Franco-Italian, and Hawley-Smoot Conflicts
Published online by Cambridge University Press: 13 June 2011
Three trade wars are examined using variable-sum game theory. The Anglo-Hanse trade wars (1300–1700) are explained as an iterated Prisoners' Dilemma that failed to evolve into cooperation due to transaction costs, rent seeking, and economic recession. The late-igthcentury tariff war between France and Italy is a case of an asymmetric trade war that illustrates the danger to a weak country of provoking a trade war with a strong country, with the result that the former is forced to make major concessions. The Hawley-Smoot conflicts of the 1930s are cited as an example of the cooperation-inhibiting effect of publicness in trade negotiations.
- Part III: Applications to Economic Affairs
- World Politics , Volume 38 , Issue 1 , October 1985 , pp. 147 - 172
- Copyright © Trustees of Princeton University 1985
1 A study with a limited number of cases cannot purport to test theory, but it may aspire to the more modest objective of “history illuminated by theory.” Since we are considering only cases in which trade wars actually occurred, illumination is restricted to the processes and outcomes of the wars, telling us little about why such wars occur. In order to answer the latter question, we would have to consider examples in which trade wars did not occur (e.g., the Anglo-German trade rivalry prior to World War I).
2 There may also be zero-sum trade games, where the only type of cooperation we might observe would be the formation of “minimum winning coalitions,” such as the current interest of the E.E.C. and Japan in excluding the developing countries from any share in the U.S. steel market.
4 The games of Deadlock, Called Bluff, and Bully are described in Snyder, Glenn H. and Diesing, Paul, Conflict Among Nations (Princeton: Princeton University Press, 1977), 41–48Google Scholar.
5 See Jervis, Robert, “Cooperation under the Security Dilemma,” World Politics 30 (January 1978), 167–214CrossRefGoogle Scholar.
6 Riezman, Raymond, “Tariff Retaliation from a Strategic Viewpoint,” Southern Economic Journal 48 (January 1978), 583CrossRefGoogle Scholar–93. Specifying the payoffs in a two-dimensional utility space, Riezman's point is that the more acute the angle of the bargaining set bounded by CD-CC-DC, the greater chance that CC (representing free trade), rather than some other point on the line CD-CC-DC, will allow the countries to reach their maximum income (or highest joint indifference curve).
7 The implications of this argument are explored in Conybeare, John, “Public Goods, Prisoners' Dilemmas and the International Political Economy,” International Studies Quarterly 28 (March 1984), 5–23CrossRefGoogle Scholar. A quantitative example is provided by McCloskey, D. N., “Magnanimous Albion: Free Trade and British National Income,” Explorations in Economic History 17 (July 1985), 303CrossRefGoogle Scholar–20. McCloskey argues that Britain's national income was lowered by the transition to free trade in the 1840s.
8 Rent-seeking refers to groups that shift income to themselves by, for example, imposing tariffs on competing foreign goods; see Colander, David, ed., Neoclassical Political Economy (Cambridge, MA: Ballinger, 1984Google Scholar).
9 Becker, Gary S., Landes, Elisabeth M., and Michael, Robert T., “An Economic Analysis of Marital Instability,” Journal of Political Economy 85 (December 1977), 1141CrossRefGoogle Scholar–87.
10 There is now a huge theoretical literature on the conditions under which large numbers will reduce public-good cooperation; for a recent critical analysis, see Comes, Richard and Sandier, Todd, “Easy Riders, Joint Production and Public Goods,” Economic Journal 94 (September 1984), 580Google Scholar–99.
11 Quoted by Postan, M. M., “The Trade of Medieval Europe: The North,” in Postan, Medieval Trade and Finance (Cambridge: Cambridge University Press, 1973), 108CrossRefGoogle Scholar. See also Postan's “The Economic and Political Relations of England and the Hanse from 1400 to 1475,” ibid.; Dollinger, Phillipe, The German Hanse (Stanford, CA: Stanford University Press, 1973Google Scholar); and Nash, E. G., The Hansa (London: Bodley Head, 1924Google Scholar).
12 See Unwin, George, ed., Finance and Trade Under Edward III (Manchester: Manchester University Press, 1918Google Scholar); Froissart, Jean, Chronicles (1369–1390; reprint trans, and ed. by Brereton, Geoffrey, New York: Penguin, 1968Google Scholar). England had a near-monopoly on the supply of wool to Europe, and behaved like a rational hegemon, taxing wool exports heavily from 1275.
13 This last period is covered by Zins, Henryk, England and the Baltic (Totowa, NJ: Rowman & Littlefield, 1972Google Scholar); Hinton, R. W. K., The Eastland Trade and the Commonweal in the Seventeenth Century (Cambridge: Cambridge University Press, 1959Google Scholar); and Fedorowicz, J. K., England's Baltic Trade in the Early Seventeenth Century (New York: Cambridge University Press, 1985Google Scholar).
14 See Viner, Jacob, “English Theories of Foreign Trade Before Adam Smith,” in Viner, , Studies in the Theory of International Trade (1937; reprinted, Clifton, NJ: A. M. Kelley, 1975), 63Google Scholar.
15 See Edmundson, George, Anglo-Dutch Rivalry During the First Half of the Seventeenth Century (Oxford: Clarendon Press, 1911Google Scholar); Henderson, W. O., “The Anglo-French Commercial Treaty of 1786,” Economic History Review 10 (August 1957), 104CrossRefGoogle Scholar–12; Davis, Ralph, The Rise of the Atlantic Economies (Ithaca, NY: Cornell University Press, 1973Google Scholar).
16 The costs of restraints were more severe than at present because transport costs and taxes constituted a high proportion of the total price. Increases in taxes had a severe effect on trade flows, compounded by the loss of economies of scale in transport costs when taxes were raised, and thus further reducing trade.
17 As in the case of OPEC today, the probable low elasticity of demand (i.e., response of demand to changes in price) for English cloth and wool meant that a tax on cloth or wool exported by the Hanse could raise revenue without greatly reducing the quantity of trade, everything else being equal (but cf. fn. 16). Cloth duties were less than 10%, but by 1470, wool taxes rose to the equivalent of 25% for denizens and 48% for aliens; trade taxes provided 30–50% of the Crown's revenue. See Carus-Wilson, E. M. and Coleman, Olive, England's Export Trade, 7275–1547 (Oxford: Oxford University Press, 1963), 22–25Google Scholar, 194.
18 This example reinforces a point made in Section II, that large-number public-good problems may not evolve into cooperation because there is no mechanism for punishing defection. On the problem of violence as a public “bad,” see Neher, Philip, “The Pure Theory of Muggery,” American Economic Review 63 (June 1978), 437Google Scholar–45.
19 Viner (fn. 14), 117.
20 See McKay, Derek and Scott, H. M., The Rise of the Great Powers: 1648–1815 (London: Longman, 1983Google Scholar).
21 Milward, Alan, “Tariffs as Constitutions,” in Strange, Susan and Tooze, Roger, eds., The International Politics of Surplus Capacity (London: Allen & Unwin, 1981), 62Google Scholar.
22 Though size and strength are highly correlated, vulnerability to the disruption of trade, rather than smallness per se, is the source of bargaining weakness. In these cases, vulnerability is a result of both a high level of agricultural production relative to GNP and a high degree of commodity and geographic concentration of trade; these factors are combined with, and partly reflected in, low total and per capita income.
23 For background, see Coppa, Frank J., “The Italian Tariff and the Conflict Between Agriculture and Industry: The Commercial Policy of Liberal Italy, 1866–1922,” Journal of Economic History 30 (December 1970), 742CrossRefGoogle Scholar–69. The main source for the tariff wars described below is Great Britain, Parliament, Parliamentary Papers (Commons), “Reports on Tariff Wars Between Certain European States,” Cmnd. 1938 (Commercial No. 1, February 1904).
24 Many tariff systems at this time had dual rates: on each commodity there was a low MFN rate for countries that granted similar concessions and a higher general rate for countries that did not.
25 Great Britain (fn. 23), 15.
26 On the diplomatic background to the tariff war, see Harvey, Walter B., Tariffs and International Relations in Europe, 1860–1914 (Chicago: University of Chicago Libraries, 1938Google Scholar).
27 In 1970 U.S. dollars, Italy's per capita income in 1890 was I466, and its GNP was I15 billion; France's per capita and GNP were $668 and $26 billion. Data from Crafts, N. F. R., “Gross National Product in Europe 1870–1910: Some New Estimates,” Explorations in Economic History 20 (October 1983), 387–401CrossRefGoogle Scholar.
28 See Great Britain (fn. 23); and U.S. Department of Commerce, Bureau of Foreign and Domestic Commerce, Tariff Relations Between Germany and Russia (1890–1914), by Domeratzky, L., Tariff Series No. 38 (Washington, DC: GPO, 1918Google Scholar).
29 Cited in Harvey (fn. 26), 84.
30 See Stephen Van Evera, “Why Cooperation Failed in 1914,” in this collection, on “windows” of vulnerability as a cause of World War I.
31 United States, Tariff Commission, Tariff Bargaining Under Most Favored Nation (Washington, DC: GPO, 1934Google Scholar). The difficulties of negotiating MFN treaties while an autonomous tariff was in effect were not lost on contemporary observers; see Bidwell, Percy W., “Tariff Reform: The Case for Bargaining,” American Economic Review 23 (March 1933) 137Google Scholar–51.
32 Tariff conflicts before and after Hawley-Smoot are described in Jones, Joseph M., Tariff Retaliation (Philadelphia: University of Pennsylvania Press, 1934CrossRefGoogle Scholar).
34 size of its market; hence the smaller country will have higher export and lower import prices, implying more favorable terms of trade and greater overall gains from trade. By the same logic, a large country will improve its terms of trade and welfare by imposing a tariff on a smaller country's exports. The smaller country can only lower its welfare by applying a tariff to the larger country, because it cannot change the terms of trade but only reduce the volume of trade, thereby hurting itself and possibly the larger country.
35 See Hirschman, Albert O., National Power and the Structure of Foreign Trade (Los Angeles: University of California Press, 1985), 98–116Google Scholar.
36 On the techniques for internalizing MFN publicness, see Snyder, Richard C., The Most Favored Nation Clause (New York: King's Crown Press, 1948Google Scholar); Snyder also classified 510 trade treaties on this criterion in “Commercial Policy as Reflected in Treaties from 1932 to 1939,” American Economic Review 30 (September 1940), 787–802Google Scholar.
37 The effective rate of protection is the nominal tariff weighted downward by the penalty value of inputs that are imported and pay a tariff. Hence, a country that lowers its tariffs on inputs such as raw materials, leaving output tariffs constant, will raise the effective level of protection for the output good.
38 United States, Tariff Commission, Operation of the Trade Agreements Program, July 1934-April 1948, Part III, Trade Agreements Concessions Granted by the U.S. (Washington, DC: GPO, 1948), 66Google Scholar.
39 Several studies argue that by 1938 Britain's national income was about 2.3% higher than it would have been in the absence of the tariff; see Capie, Forrest, Depression and Protectionism: Britain Between the Wars (London: Allen & Unwin, 1983), 106Google Scholar; see also McCloskey (fn. 7). One study of U.S. tariff policy suggests that U.S. welfare is raised slightly by a tariff; see Basevi, Giorgio, “The Restrictive Effect of the U.S. Tariff and Its Welfare Value,” American Economic Review 58 (September 1968), 840Google Scholar–49.
40 Moving from bilateral to multilateral negotiations increases the amount of public-good spillover (see Section V), particularly favoring small countries when in the form of across-the-board tariff reductions. However, multilateral talks may also increase transaction costs; the Kennedy Round of multilateral negotiations from 1963 to 1967 took considerably longer than the previous Dillon Round of bilateral negotiations in 1960–1961.
41 See Tietenberg, T. H., Emissions Trading (Washington, DC: Resources for the Future, 1985Google Scholar).