Politics, Institutions, and Trade: Lessons of the Interwar Era

Recent studies cast doubt on the value added of international trade agreements and institutions. Using a new data set that consists of about 35,000 observations on the trade of fifty-four nations between 1919 and 1938, we examine whether this skepticism also applies to the infamous interwar trade blocs. Traditional historical accounts attribute to them a large drop in international trade and a rise in the political tensions that would later erupt in World War II. In this study, we show that no bloc raised trade among its members as a whole or decreased trade between members and nonmembers. However, our findings are not wholly consistent with the skepticism recent studies express. We argue that conflicts of interest among the great powers encouraged the emergence of the bloc system and also gave rise to intrabloc trade shifts consistent with the political interests of their great-power hubs. The political-military alliances these conflicts created also reduced trade between their signatories, and we argue more generally that the causal chain runs from politics to trade. As a result, measuring only the effect of agreements and institutions on aggregate trade between their members can generate inaccurate estimates of their value added.