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Folke Hildegrat PDF
Folke Hildegrat PDF
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access to The American Economic Review
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THE CASE FOR MULTILATERAL TRADE
By FOLKE HILGERDT
League of Nations
The case for multilateral trade has frequency been argued in vague
and general terms. It is easy enough to point out that the requirements
of any two countries for each other's products cannot be expected to be
equal, and that, accordingly, certain advantages gained from inter-
national trade depend upon triangular or multilateral settlement. But
this truth-or shall we call it truism-does not carry us very far. Nor
do the tools of deductive reasoning to which economists usually have
recourse.
In fact, multilateral trade is a subject which can best be approached
by statistical research. When we have explored the multilateral pattern
or patterns according to which payments among nations are normally
settled, we may be able to consider the case for multilateral trade in
specific terms and with an understanding of the subject that cannot
be acquired otherwise.
Such a study presents no easy task. Each country as a rule exports
on balance to certain countries and imports on balance from others.
As there are some 200 "countries" (or statistical areas) to consider,
the student is faced with what may appear a most confused and in-
volved network of bilateral trade balances. The difficulties of analysis
are increased by statistical imperfections of various kinds, including
the lack of adequate information concerning international transactions
other than trade in goods.
Without pretending that all these difficulties have been overcome, I
am happy to present a few details of an inquiry on multilateral trade
that has been pursued over years.1 The figures I am going to show
refer to merchandise trade alone, the importance of which in inter-
national business transactions is overwhelming; but they give a clue to
the manner in which payments on account of other transactions are
settled.
One of the chief results of the inquiry was the fact that normally
almost all the bilateral balances of trade of almost all countries are
involved in what may be called the world system of multilateral trade.
When the work started, it did not seem necessary that this should be
'For more detailed information, see The Network of World Trade issued recently by
the League of Nations. It should be observed, however, that the following pages give
certain particulars not included in The Network of World Trade.
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394 AMERICAN ECONOMIC ASSOCIATION
the case; it was thought possible that the chief balances of trade might
be accounted for by triangular or multilateral settlement within smaller
groups of countries and that only minor balances might have served
settlement among the groups. The fact that all but a few countries
partook directly in a world-wide system of settlement naturally stresses
the importance of international interdependence so frequently over-
looked in the past.
The outline of this system became clear when it was found that al-
most all countries could be arranged in the order of the direction of
their balances of trade, so that each country had an import balance
from practically all countries that preceded it in the list and an export
balance to practically all countries that succeeded it.
At the beginning of this list we find the tropical debtor countries
with export balances in almost all directions, and at the end of it the
European creditor countries with import balances from almost all
countries, the United Kingdom being the most typical case. But be-
tween these two extremes the countries arrange themselves in an order
that is not necessarily determined by the absolute or relative magnitude
of their total balances of trade.
A synoptical view is afforded by Chart 1, in which countries repre-
senting nine-tenths of the world's trade have been arranged in the
order just referred to. Only the three largest trading countries-the
United Kingdom, the United States, and Germany-are shown sep-
arately; the other countries are grouped in three categories: the Tropics,
the regions of recent settlement in the temperate belts (including the
British dominions, the Argentine, Uruguay, and Paraguay), and Europe
with the exception of the United Kingdom and Germany. The year
considered is 1928, since in the thirties the system was disturbed by
factors which we shall consider later.
The figures in the chart represent the balances of trade, in millions
of dollars, among the six specified countries or groups, after the trade
values had been adjusted so as to represent "frontier values" in cases
where imports are not recorded c.i.f., and certain other minor ad-
justments made. Of the two amounts shown on the arrow between any
two groups, the smaller represents the export balance of the group
from which the arrow emerges, and the larger the import balance of
the group to which the arrow points. Obviously the inclusion of freight
in imports tends to increase the import balances and to reduce the
export balances; if freight between the areas concerned were excluded
throughout (as, for instance, in United States trade returns) the bal-
ance of trade would be about midway between the two amounts shown.
Naturally, the real network of trade balances is more involved than
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INTERNATIONAL ECONOMIC RELATIONS 395
CHART 1
5 80~~~~'0
TROPIC-SW 9WKINGDOM
Note. Balances in millions of dollars, calculated from adjusted fron
(imports valued c.i.f., exports f.o.b.). Both import and export balances are shown; the
smaller of the two figures in each square represents the export balance of the group from
which the arrows emerge, and the larger figure the import balance of the group to which
the arrows point. The difference between the amounts in question is due largely to the
inclusion in imports of transport costs between the frontiers of the exporting and import-
ing countries. The figure for the import balance of the "Regions of Recent Settlement in
the Temperate Belts" from the United States should be 690 instead of 670 as indicated
in the chart.
The chief countries omitted from the chart are the U.S.S.R., which
in fact entered the system between the "regions of recent settlement"
and Germany; China, which if account is taken of "invisible" items
and certain imperfections in the Chinese trade statistics, is found to
fit in between the Tropics and the United States; and Japan whose
international accounts appear to have been settled according to a
more complicated multilateral pattern than that of most other coun-
tries.2
2Other nontropical countries of Asia and the North-African countries are also omitted
from the chart.
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396 AMERICAN ECONOMIC ASSOCIATION
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INTERNATIONAL ECONOMIC RELATIONS 397
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398 AMERICAN ECONOMIC ASSOCIATION
the rest of the world, which had absorbed the bulk of the British over-
sea investments. The British investments in Europe and, later, in the
United States tended to decline and by the twenties represented less
CHART 2 CHART 3
UNITED KINGDOM: TRADE BALANCES
(GENERAL TRADE, COUNTRY OF GERMANY: TRADE BALANCES
SHIPMENT) IN MILLIONS Of REICHSMARKS
ANNUAL AVERAGES IN MILLIONS OF POUNDS 1890 1900 1912
-40 / -4050
1-80 ___~~~~~~~~~~~
-20a 820o
0 / /
than a tenth of the total. The income from oversea investments thus
tended to be transferred by net imports from countries other than those
in which the investments were made.5
' The chart exaggerates to a certain extent the rapidity with which triangular trade
developed, since the figures are affected by changes in the recorded distribution of trade
that resulted from the establishment of direct shipping routes to certain countries of Conti-
nental Europe. The inverse relation between United Kingdom net imports from, and
investments in, important areas is strikingly illustrated by Diagram 7 in The Network
of World Trade.
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INTERNATIONAL ECONOMIC RELATIONS 399
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400 AMERICAN ECONOMIC ASSOCIATION
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INTERNATIONAL ECONOMIC RELATIONS 401
crisis of 1931. The economic and monetary instability after World War
I had given rise to big international movements of "hot money" either
seeking speculative gain or simply seeking to avoid loss. French funds
alone, invested in the big international money markets and re-lent
through them to debtor countries all over the world, equaled several
billion dollars. A large-scale withdrawal of these funds was initiated
when the French franc was legally stabilized in June, 1928, and con-
tinued unabated until the crisis occurred in 1931. Let us consider what
takes place when short-term capital is being rapidly withdrawn from
a country. The currency derived from that country's export surpluses
in certain directions is being transferred abroad in the liquidation of
debt and thus cannot fulfill its usual function of financing import
balances in other directions. The currency situation thus tightens both
in the country in question and in those from which it used to derive
its net imports. In such a situation it is customary to have recourse to
measures of commercial policy. But because of fear of retaliation,
countries usually avoid imposing import restrictions on manufactured
goods or foodstuffs from a country with which they enjoy an export
surplus. If a country A reduces its import balance from country B, the
latter cannot retaliate but must reduce its imports from country C, with
which it has an import balance, and so on. Thus, the restrictions, spread-
ing like wildfire, aim directly at reducing bilateral balances, and coun-
tries tie each other by ties which they cannot loosen by either unilateral
or bilateral action. Equalization of trade balances in one direction en-
tails equalization in others. This was, briefly, what happened during
the early thirties, and there resulted a general economic warfare which
lasted until the war broke out.
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402 AMERICAN ECONOMIC ASSOCIATION
Monetary Aspect
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INTERNATIONAL ECONOMIC RELATIONS 403
not only with exchange stability but also with the feasibility of free
transfer from one currency to another-covers the same period as the
world system of multilateral trade which we have examined; namely,
from the early seventies' to 1931, with the exception of World War I
and the years immediately following it.
Exchange stability is not a prerequisite for international monetary
equilibrium of the same kind as uniformity of exchange rates applied
in different markets. Its importance is more indirect but may be as
great, as we saw from our historical analysis. The lack of exchange sta-
bility is likely to lead to the formation of speculative migratory funds
the withdrawal of which may disturb the system of multilateral trade,
as it did around 1930.
Financial Aspect
As we have seen, interest and dividends due from overseas to Euro-
pean creditor countries are normally transferred through multilateral
trade. Blocking of such trade accordingly hinders the transfer of capi-
tal yields, except insofar as trade channels can be diverted so as to
permit of transfer in bilateral transactions between debtor and creditor
country. To achieve this, the creditor country may endeavor to increase
its import from the debtor country, or to reduce its export to it. An
increase in imports is generally limited, for the investments had gen-
erally served the development of the debtor country's export to the
world market. With the best will in the world, the United Kingdom and
the Netherlands, for example, would not have been able to absorb
more than a fraction of the rubber exported by the Netherlands Indies
and British Malaya, two-thirds of which normally went to the United
States. But even a reduction in exports from creditor to debtor country
has its limits, besides being of great concern to the export industry.
From the experience gained during the thirties, we know that creditor
countries are by no means willing to sacrifice their export industry;
rather, in the conflict between financial and economic interests, they are
likely to sacrifice the financial. But even if they do not, the transferable
yield of investments is likely to decline.
When such a decline occurs, the market value of direct investments
decreases, and investments in bonds are likely to be repudiated, as
happened on a large scale in the thirties. Consequently, it does not pay
to make new investments, and a tendency arises to liquidate outstand-
ing investments, even at a loss. The development of world resources
by means of capital from the wealthier countries ceases, a condition
which, sooner or later, will affect all countries. The rapid and general
economic progress of the period 1870-1930 would not have been pos-
'More exactly, 1873; cf. William Adams Brown, Jr., The International Gold Standard
Reinterpreted, 1914-34, Vol. I, p. xv.
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404 AMERICAN ECONOMIC ASSOCIATION
sible had not the system of multilateral trade facilitated the develop-
ment of production in economically young countries with the aid of
foreign capital.
Economic A spects
We just mentioned that in the creditor countries not only finance but
also the export industry is affected by the disorganization of the system
of multilateral trade. More obvious, however, are the effects upon the
economies of several countries situated along the roundabout transfer
routes between debtor and creditor countries. As their export balances
towards the countries on the right of Chart 1 are reduced or disappear,
they can no longer finance their import balances from countries shown
to the left. As the latter countries (particularly the tropics and the
"regions of recent settlement in the temperate belts") are the chief
suppliers of primary products, there arises the problem of commercial
access to raw materials which overshadowed commercial and political
relations during the thirties. In the light of our analysis this problem is
reduced simply to one of maintaining a working system of multilateral
trade.
As the monetary demand for primary products which many coun-
tries can exercise in the world market is thus reduced, the prices of
such goods decline and unsalable stocks pile up in the exporting coun-
tries. This increase in stocks and the inability of other countries to
buy are two sides of the same phenomenon. The price fall naturally
spreads from international to national markets. As long as only pri-
mary goods decline in price, a boom tendency may be released in in-
dustrial countries, owing to the widening producer's margin between
the cost of raw materials and the price of the finished product. But
when the price fall spreads to finished goods, an industrial depression
is likely to set in, and all branches of economic and financial life are
affected. In such a situation countries are likely to protect their na-
tional price level by means of import restrictions.
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INTERNATIONAL ECONOMIC RELATIONS 405
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406 AMERICAN ECONOMIC ASSOCIATION
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INTERNATIONAL ECONOMIC RELATIONS 407
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