《国际政治经济学》文献资料（Political Economy of Regionalization and Globalization）Economic Regionalism Evidence from Two 20th Century Episodes

Economic Regionalism:Evidence from Two 20th Century Episodes BARRY EICHENGREEN and JEFFREY A.FRANKEL ABSTRACT This paper analyzes two types of evidence on the economics and politics of regional commercial relations in the 1930s and 1990s:statistical and political.Our statistical analysis uncovers a tendency toward regionalism in both the 1930s and 1990s.At the same time,our political analysis suggests that the parallels should not be pushed too far. In the 1930s,the regionalization of trade was sometimes an attempt to discourage mul- tilateral transactions and other times a response to the collapse of the multilateral sys- tem.In the 1980s,in contrast,regionalism has been a device for overcoming entrenched resistance to multilateral liberalization and for building coalitions favoring liberaliza- tion over still wider areas. INTRODUCTION Observers of economic trends cannot agree on whether growing regionalism is a fact,much less on its economic and political significance.They agree that an increasing share of the trade of Western Europe and East Asia stays within those regions.The United States is still Japan's largest export market,however,and the European Union(EU)remains the single most important destination of American exports.Even where the disproportionate growth of intra-regional trade is clear,there is dispute about whether this trend reflects the rela- tively rapid growth of incomes (in Asia)and market liberalization permitting the natural determinants of trade to reassert themselves (in Europe)or the manipulation of economic relationships by governments.The most important international monetary innovation of recent years-the European Monetary System-is a regional initiative,but its financial corollary,the removal of capital controls,has increased financial interdependence globally rather than simply regionally.It is far from clear,in other words,that international mone- tary relations are evolving into a world of currency blocs.Japan may be the leading source of foreign investment in East Asia,and Germany in Eastern Europe,but the United States invests in both regions,and Germany and Japan invest heavily in North America.Here, too,there is disagreement about whether intra-regional investments flow naturally from the economic advantages of proximity or reflect the efforts of governments to promote regional self-sufficiency. These different interpretations are important because they have different implications for the future of the international system.Those for whom the growth of intra-regional trade and investment is a mere concommitant of economic liberalization-the reassertion of natural economic relationships-perceive no threat to the global commercial and finan- Barry Eichengreen and Jeffrey A.Frankel.Department of Economics.549 Evans Hall #3880.University of California at Berkeley,Berkeley,CA 94720-3880. North American Journal of Economics Finance 6(2):89-106 Copyright 1995 by JAI Press Inc. ISSN1062-9408 All rights of reproduction in any form reserved

Economic Regionalism: Evidence from Two 20th Century Episodes BARRY EICHENGREEN and JEFFREY A. FRANKEL ABSTRACT This paper economics and politics of regional commercial relations political. Our statistical analysis uncovers a tendency toward regionalism in both the 1930s and 1990s. At the same time, our analysis suggests that the should not be pushed too far. In the 193Os, the regionalization sometimes an attempt to discourage tilateral transactions contrast, regionalism has been a device for overcoming entrenched resistance to multilateral liberalization and for building coalitions Observers of economic trends cannot agree on whether growing regionalism is a fact, much less on its economic and political significance. They agree that an increasing share of the trade of Western Europe and East Asia stays within those regions. The United States is still Japan’s largest export market, however, and the European Union (EU) remains the single most important destination of American exports. Even where the disproportionate growth of intra-regional trade is clear, there is dispute about whether this trend reflects the rela￾tively rapid growth of incomes (in Asia) and market liberalization permitting the natural determinants of trade to reassert themselves (in Europe) or the manipulation of economic relationships by governments. The most important international monetary innovation of recent years-the European Monetary System-is a regional initiative, but its financial corollary, the removal of capital controls, has increased financial interdependence globally rather than simply regionally. It is far from clear, in other words, that international mone￾tary relations are evolving into a world of currency blocs. Japan may be the leading source of foreign investment in East Asia, and Germany in Eastern Europe, but the United States invests in both regions, and Germany and Japan invest heavily in North America. Here, too, there is disagreement about whether intra-regional investments flow naturally from the economic advantages of proximity or reflect the efforts of governments to promote regional self-sufficiency. These different interpretations are important because they have different implications for the future of the international system. Those for whom the growth of intra-regional trade and investment is a mere concommitant of economic liberalization-the reassertion of natural economic relationships-perceive no threat to the global commercial and finan￾Barry Eichengreen and Jeffrey A. Fmnkel l Department of Economics, 549 Evans Hall #3880, University of California at Berkeley, Berkeley, CA 94720-3880. North American Journal of Economics & Finance 6(2): 89-106 Copyright 0 1995 by JAI Press Inc. ISSN 1062-9408 All rights of reproduction in any form reserved

90 EICHENGREEN and FRANKEL cial system.There need be no conflict between regionalism and multilateralism in this view.Those for whom the growth of intra-regional trade and investment links and exchange-rate stabilization at the regional level reflects the efforts of governments to achieve national political objectives warn,in contrast,that the multilateral system may be in jeopardy. Our goals in this paper are to establish what has happened and analyze what it means. Both tasks are harder than they may seem.The redirection of trade and financial flows is readily documented,but the reasons for this redirection are not.Systematizing the evidence requires a theoretical and empirical framework to structure the analysis.We use multiple regression and the gravity model of international trade.The implications of our findings for the future are even more difficult to assess,since we possess neither models of the political and economic ramifications akin to the gravity model nor consensus forecasts of the inde- pendent variables.Here,we employ the last historical episode of economic and political regionalism-namely,the 1930s-as a metric with which possible implications can be gauged;in other words,as a way of drawing systematic comparisons.We conclude that the dynamics of regionalism have been different in the two periods,implying different eco- nomic and political consequences. WHAT HAS HAPPENED The Postwar Years Table 1 presents statistics on the intra-regional share of the trade of the members of the European Union,EFTA,the East Asian countries,the Western Hemisphere,NAFTA, Asia-Pacific Economic Cooperation(APEC),MERCOSUR,and the Andean Group coun- tries.Intra-regional trade shares (denoted "Ratio 1")increased between 1965 and 1990 from 45%to 53%among the APEC countries,from 1%to 3%among the Andean coun tries,from 36%to 47%among the members of the EU,and from 20%to 30%among the East Asian countries. On the basis of statistics like Ratio 1,it might be argued that world trade is becoming more regionalized.That the share of intra-regional trade is increasing,however,need not mean that the members of this grouping are undertaking discriminatory trade policy mea- sures to bring this about (or even the indirect measures that Japan is charged with employ- ing to the same end,such as overseas development assistance and direct foreign investment).The growth of intra-regional trade could be a natural result of rapid growth in per capita incomes.A typical East Asian country trades more with another typical East Asian country than it did 20 years ago,partly for the same reason that a typical country anywhere in the world does:the East Asian countries have grown richer and loom larger in the world economy (see Frankel 1993). A simple way of adjusting a grouping's intra-regional trade share for the growth of mar- kets is to divide it by that region's share of global trade.We denote this statistic as"Ratio 2."It is apparent that East Asia's bias toward intra-regional trade did not,in fact,increase over the period 1965-1980.For APEC,the Western Hemisphere,the EU,and most of the other groupings,in contrast,there was by this measure a discernible trend toward greater intra-regional trade. A more systematic way of adjusting for the natural determinants of trade is by means of the gravity model.The assumptions of the model are that trade between two countries is proportionate to the product of their GNPs and the product of their per capita GNPs,an

EICHENGREEN and FRANKEL cial system. There need be no conflict between regionalism and multilateralism in this view. Those for whom the growth of intra-regional trade and investment links and exchange-rate stabilization at the regional level reflects the efforts of governments to achieve national political objectives warn, in contrast, that the multilateral system may be in jeopardy. Our goals in this paper are to establish what has happened and analyze what it means. Both tasks are harder than they may seem. The redirection of trade and financial flows is readily documented, but the reasons for this redirection are not. Systematizing the evidence requires a theoretical and empirical framework to structure the analysis. We use multiple regression and the gravity model of international trade. The implications of our findings for the future are even more difficult to assess, since we possess neither models of the political and economic ramifications akin to the gravity model nor consensus forecasts of the inde￾pendent variables. Here, we employ the last historical episode of economic and political regionalism-namely, the 193Os-as a metric with which possible implications can be gauged; in other words, as a way of drawing systematic comparisons. We conclude that the dynamics of regionalism have been different in the two periods, implying different eco￾nomic and political consequences. WHAT HAS HAPPENED The Postwar Years Table 1 presents statistics on the intra-regional share of the trade of the members of the European Union, EFTA, the East Asian countries, the Western Hemisphere, NAFTA, Asia-Pacific Economic Cooperation (APEC), MERCOSUR, and the Andean Group coun￾tries. In&a-regional trade shares (denoted “Ratio 1”) increased between 1965 and 1990 from 45% to 53% among the APEC countries, from 1% to 3% among the Andean coun￾tries, from 36% to 47% among the members of the EU, and from 20% to 30% among the East Asian countries. On the basis of statistics like Ratio 1, it might be argued that world trade is becoming more regionalized. That the share of it&a-regional trade is increasing, however, need not mean that the members of this grouping are undertaking discriminatory trade policy mea￾sures to bring this about (or even the indirect measures that Japan is charged with employ￾ing to the same end, such as overseas development assistance and direct foreign investment). The growth of intra-regional trade could be a natural result of rapid growth in per capita incomes. A typical East Asian country trades more with another typical East Asian country than it did 20 years ago, partly for the same reason that a typical country anywhere in the world does: the East Asian countries have grown richer and loom larger in the world economy (see Frankel 1993). A simple way of adjusting a grouping’s inn-a-regional trade share for the growth of mar￾kets is to divide it by that region’s share of global trade. We denote this statistic as “Ratio 2.” It is apparent that East Asia’s bias toward intra-regional trade did not, in fact, increase over the period 19651980. For APEC, the Western Hemisphere, the EU, and most of the other groupings, in contrast, there was by this measure a discernible trend toward greater intra-regional trade. A more systematic way of adjusting for the natural determinants of trade is by means of the gravity model. The assumptions of the model are that trade between two countries is proportionate to the product of their GNPs and the product of their per capita GNPs, an

Economic Regionalism:Two 20th-Century Episodes 91 TABLE 1.Intra-regional Trade Shares Since the 1960s Intra-regional trade Ratio 1 Total trade of the region Intra-regional trade/Total trade of the region Ratio 2 Total trade of the reglon /World trade 1990 1987 1985 1980 1975 1970 1965 EAEC Ratio 1 0.293 0.263 0.256 0.229 0.213 0.198 0.199 Ratio 2 0.931 0.858 0.842 0.913 0.974 1.011 1.219 APEC Ratio 1 0.532 0.536 0.536 0.420 0.428 0.446 0.446 Ratio 2 1.015 1.029 0.967 0.872 0.908 0.911 0.529 WH Ratio 1 0.285 0.279 0.310 0.272 0.309 0.311 0.315 Ratio 2 0.848 0.794 0.783 0.795 0.878 0.784 0.787 EEC Ratio 1 0.471 0.465 0.424 0.416 0.402 0.397 0.358 Ratio 2 0.802 0.794 0.790 0.716 0.677 0.640 0.566 EFTA Ratio 1 0.076 0.084 0.080 0.080 0.104 0.099 0.080 Ratio 2 0.571 0.621 0.683 0.624 0.799 0.684 0.533 EUR Ratio 1 0.602 0.601 0.548 0.538 0.524 0.532 0.502 Ratio 2 0.957 0.958 0.953 0.860 0.816 0.794 0.738 MERCOSUR Ratio 1 0.061 0.050 0.043 0.056 0.040 0.051 0.061 Ratio 2 2.757 2.042 1.404 1.689 1.075 1.494 1.759 ANDEAN Ratio 1 0.026 0.026 0.034 0.024 0.021 0.012 0.008 Ratio 2 1.728 1.612 1.731 0.887 0.669 0.374 0.181 NAFTA Ratio 1 0.246 0.238 0.274 0.214 0.246 0.258 0.237 Ratio 2 0.788 0.733 0.754 0.710 0.794 0.728 0.670 increasing function of adjacency (when two countries share a common land border),and inversely related to the distance between them.Dummy variables are added when both countries in a given pair belong to the same regional grouping.This provides a means of determining how much trade within each region is due to factors common to trade through- out the world and how much remains to be explained by regional effects. The dependent variable in all regressions is the value of trade (imports plus exports),in log form,between pairs of countries.The standard determinants of trade(national incomes, per capita incomes,distance,and adjacency)are all significant statistically.The estimated coefficient on the log of the product of the two countries'GNPs,at 0.7,indicates that trade increases with size but less than proportionately.This reflects the fact that small countrics tend to be more dependent on trade than larger,more diversified ones.The estimated coef- ficient on the product of per capita GNPs,at 0.3,indicates that richer countries trade more The coefficient on the log of distance is about-0.6,indicating that when distance between two nonadjacent countries is higher by 1%,trade between them falls by 0.6%.2 The coeffi- cient on adjacency,at 0.7,indicates that two countries sharing a common border trade roughly twice as much [exp(0.7)=2.0]as two otherwise similar countries. If there were nothing to the notion of trade blocs,these basic variables would soak up most of the variation in bilateral trade flows,leaving little to attribute to a dummy variable

Economic Regionalism: Two POth-Century Episodes 91 TABLE 1. Intra-regional Trade Shares Since the 1960s Ratio 1 = Intra-regional trade Total trade of the region Ratio 2 = Intra-regional trade / Total trade of the region Total trade of the region / World trade 1990 1987 1985 1980 1975 1970 1965 EAEC APEC WH EEC EFTA EUR MERCOSUR ANDEAN NAFTA Ratio 1 0.293 Ratio 2 0.931 Ratio 1 0.532 Ratio 2 1.015 Ratio 1 0.285 Ratio 2 0.848 Ratio 1 Ratio 2 0.471 0.802 Ratio 1 0.076 Ratio 2 0.571 Ratio 1 0.602 Ratio 2 0.957 Ratio 1 0.061 Ratio 2 2.757 Ratio 1 0.026 Ratio 2 1.728 Ratio 1 0.246 Ratio 2 0.788 0.263 0.858 0.536 1.029 0.279 0.794 0.465 0.794 0.084 0.621 0.601 0.958 0.050 2.042 0.026 1.612 0.238 0.733 0.256 0.842 0.536 0.967 0.310 0.783 0.424 0.790 0.080 0.683 0.229 0.913 0.420 0.872 0.272 0.795 0.416 0.716 0.213 0.974 0.428 0.908 0.309 0.878 0.198 0.199 1.011 1.219 0.446 0.446 0.911 0.529 0.311 0.315 0.784 0.787 0.402 0.397 0.358 0.677 0.640 0.566 0.080 0.104 0.099 0.080 0.624 0.799 0.684 0.533 0.548 0.953 0.043 1.404 0.538 0.524 0.532 0.502 0.860 0.816 0.794 0.738 0.056 0.040 0.05 1 0.061 1.689 1.075 1.494 1.759 0.034 0.024 0.021 0.012 0.008 1.731 0.887 0.669 0.374 0.181 0.274 0.214 0.246 0.258 0.237 0.754 0.710 0.794 0.728 0.670 increasing function of adjacency (when two countries share a common land border), and inversely related to the distance between them.’ Dummy variables are added when both countries in a given pair belong to the same regional grouping. This provides a means of determining how much trade within each region is due to factors common to trade through￾out the world and how much remains to be explained by regional effects. The dependent variable in all regressions is the value of trade (imports plus exports), in log form, between pairs of countries. The standard determinants of trade (national incomes, per capita incomes, distance, and adjacency) are all significant statistically. The estimated coefficient on the log of the product of the two countries’ GNPs, at 0.7, indicates that trade increases with size but less than proportionately. This reflects the fact that small countries tend to be more dependent on trade than larger, more diversified ones. The estimated coef￾ficient on the product of per capita GNPs, at 0.3, indicates that richer countries trade more. The coefficient on the log of distance is about -0.6, indicating that when distance between two nonadjacent countries is higher by l%, trade between them falls by 0.6%.2 The coeffi￾cient on adjacency, at 0.7, indicates that two countries sharing a common border trade roughly twice as much [exp(0.7) = 2.01 as two otherwise similar countries. If there were nothing to the notion of trade blocs, these basic variables would soak up most of the variation in bilateral trade flows, leaving little to attribute to a dummy variable

92 EICHENGREEN and FRANKEL TABLE 2.Regression Estimates of the Gravity Model,1965-1990 1965 1970 1975 1980 1985 1990 GNP 0.64 0.64 0.72 0.72 0.51 0.74 (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) GNP/capita 0.36 0.45 0.34 0.31 0.06 0.16 (0.03) (0.03) (0.03) (0.02) (0.03) (0.02) Distance -0.47 0.58 -0.76 -0.70 0.49 0.74 (0.06) (0.06) (0.06 (0.05) (0.06) (0.05) Adjacency 0.63 0.54 0.47 0.67 0.70 0.68 (0.17) (0.17) (0.19) (0.18) (0.20) (0.16) EAEC2 1.72 1.53 0.55 0.86 -1.54 1.03 (0.37) (0.36) (0.37) (0.31) (0.33) (0.27) EAECN 0.41 0.11 0.09 0.42 0.89 0.66 (0.16) (0.15) (0.15) (0.12) (0.14) (0.11) APEC2 0.31 0.94 1.23 1.58 2.84 0.90 (0.32) (0.30) (0.31) (0.25) (0.28) (0.23) APECN -0.12 0.11 0.21 0.16 0.73 -0.20 (0.16) (0.15) (0.15) (0.13) (0.15) (0.12) EEC2 -0.10 0.24 0.45 0.24 1.55 0.12 (0.20) (0.20) (0.33) (0.20) (0.21) (0.19) EECN 0.07 0.06 0.07 0.35 0.46 0.06 (0.09) (0.09) (0.08) (0.08) (0.09) (0.08) EFTA2 -0.38 0.30 -0.45 0.04 0.10 -0.49 (031) (031) (0.33) (0.33) (0.36) (0.30) EFTAN 0.57 0.53 -0.60 0.26 -0.58 -0.53 (0.10) (0.10) (0.10) (0.09) (0.11) (0.09) NAFTA2 0.35 0.91 -1.00 0.02 -0.05 0.25 (0.63) (0.65) (0.70) (0.70) (0.72) (0.61) NAFTAN -0.41 0.65 -0.64 -0.19 -0.26 -0.07 (0.14) (0.14) (0.14) (0.12) (0.14) (0.11) MERCOSURZ -0.30 0.38 0.21 0.82 0.79 2.06 (0.45) (0.45) (0.49) (0.50) (0.52) (0.44) MERCOSURN -0.26 -0.08 -0.08 0.11 0.68 0.87 (0.12) (0.11) (0.11) (0.10) (0.12) (0.10) ANDEAN2 0.92 0.001 0.53 0.74 0.07 0.41 (0.53) (0.41) (0.45) (0.39) (0.62) (0.34) ANDEANN -0.10 0.02 -0.01 0.23 0.27 -0.07 (0.11) (0.10) (0.10) (0.10) (0.12) (0.09) Number of 1194 1274 1453 1708 1343 1573 Observations Adjusted R2 0.70 0.73 0.73 0.73 0.57 0.79 Notes:Standard errors are in parentheses.All variables except the dummies are in logarithms. Source: See text

92 EICHENGREEN and FRANKEL TABLE 2. Regression Estimates of the Gravity Model, 1995-1990 1965 1970 1975 1980 1985 1990 GNP GNP/capita Distance Adjacency EAEC2 EAEC, APEC* APEC, EEC2 EEC, EFTA, EFTAN NAFTA2 NAFTAN MERCOSUR, MERCOSUR, ANDEAN* ANDEANN Number of Observations Adjusted R2 0.36 0.45 (0.03) (0.03) -0.47 -0.58 (0.06) (0.06) 0.63 0.54 (0.17) (0.17) 1.72 1.53 (0.37) (0.36) 0.41 0.11 (0.16) (0.15) 0.31 0.94 (0.32) (0.30) -0.12 0.11 (0.16) (0.15) -0.10 -0.24 (0.20) (0.20) 0.07 0.06 (0.09) (0.09) -0.38 -0.30 (0.31) (0.31) -0.57 -0.53 (0.10) (0.10) -0.35 -0.91 (0.63) (0.65) -0.41 -0.65 (0.14) (0.14) -0.30 0.38 (0.45) (0.45) -0.26 -0.08 (0.12) (0.11) -0.92 0.001 (0.53) (0.41) -0.10 0.02 (0.11) (0.10) 1194 0.70 1274 0.73 0.72 (0.02) 0.34 (0.03) -0.76 (0.06) 0.47 (0.19) 0.55 (0.37) 0.09 (0.15) 1.23 (0.31) 0.21 (0.15) -0.45 (0.33) 0.07 (0.08) -0.45 (0.33) -0.60 (0.10) -1.00 (0.70) -0.64 (0.14) 0.21 (0.49) -0.08 (0.11) 0.53 (0.45) -0.01 (0.10) 1453 0.73 0.72 (0.02) 0.31 (0.02) -0.70 (0.05) 0.67 (0.18) 0.86 (0.3 1) 0.42 (0.12) 1.58 (0.25) 0.16 (0.13) 0.24 (0.20) 0.35 (0.08) (:::) -0.26 (0.09) -0.02 (0.70) -0.19 (0.12) 0.82 (0.50) 0.11 (0.10) 0.74 (0.39) 0.23 (0.10) 1708 0.73 0.51 0.74 (0.02) (0.02) 0.06 0.16 (0.03) (0.02) -0.49 -0.74 (0.06) (0.05) 0.70 0.68 (0.20) (0.16) -1.54 1.03 (0.33) (0.27) -0.89 0.66 (0.14) (0.11) 2.84 0.90 (0.28) (0.23) 0.73 -0.20 (0.15) (0.12) 1.55 0.12 (0.21) (0.19) 0.46 0.06 (0.09) (0.08) 0.10 -0.49 (0.36) (0.30) -0.58 -0.53 (0.11) (0.09) -0.05 0.25 (0.72) (0.61) -0.26 -0.07 (0.14) (0.11) 0.79 2.06 (0.52) (0.44) 0.68 0.87 (0.12) (0.10) -0.07 0.41 (0.62) (0.34) 0.27 -0.07 (0.12) (0.09) 1343 0.57 1573 0.79 Nofes: Standard errors are in parentheses. All variables except the dummies are in logarithms s ource: See text

Economic Regionalism:Two 20th-Century Episodes 93 indicating whether two countries are members of the same regional grouping.Variations in intra-regional trade would be due solely to the proximity of countries and their rates of eco- nomic growth.In fact,many of the dummy variables for membership in the same regional grouping are highly significant statistically.(These variables appear with the subscript"2" to denote the fact that both countries are members of the regional grouping.)Consider the results for 1980.The coefficients imply that two countries both located in the Asia/Pacific region traded almost five times as much as would two otherwise similar countries [exp(1.58)-4.85].Two countries both located in East Asia traded an cstimated twice as much [exp(0.86)=2.36].The coefficients for membership in the EU and EFTA are smaller and less consistently significant.There is no evidence of a NAFTA effect in any of the sub- sequent years.There is some,albeit less than overwhelming,evidence of a pro-trade bias among the members of MERCOSUR and,to a lesser extent,the Andean Group. Each equation also includes a second dummy variable set to unity when only one of two trading partners is a member of the regional grouping in question.(These terms appears with the subscript"N'to denote trade with nonmembers of the group.)A negative coeffi- cient indicates trade diversion:that members of a regional grouping trade less with non- members than their economic characteristics and the average behavior of countries in the sample would predict.The 1980 estimates suggest that EFTA was trade diverting.EFTA members traded 23%less with nonmembers than did other countries in the sample,control- ling for other characteristics [exp(-0.26)=.77].On the other hand,most of the"subscript- N"coefficients are significantly positive for East Asia and the EU,indicating that these countries opened up to trade with nonmembers at the same time as they liberalized trade within the region.There are,however,variations in the signs and significance of these coefficients over time.The coefficient for East Asia turns negative in 1985,although it is again positive in 1990.That for APEC turns negative in 1990,although it is insignificantly different from zero at conventional(95%)confidence levels.There is some indication that the members of NAFTA traded less with other parts of the world than would be predicted by their economic characteristics and average behavior of other countries in the sample, although there is no evidence that this effect increased with the negotiation of free trade agreements first between the United States and Canada and then with Mexico. On balance.these results point to the conclusion that the regional trade arrangements of the 1980s were trade creating rather than trade diverting.The strongest evidence of trade- creating effects is for the countries bordering on the Pacific. The Interwar Years Tables 3 and 4 provide comparable analyses for the interwar years.Table 3 displays intragroup trade shares and intragroup trade normalized by the group's share of world trade for the principal potential trade blocs of the period.We adopt an inclusive definition of potential blocs,considering the British Commonwealth,the German sphere of commercial influence (Germany,Austria,Brazil,Bulgaria,Czechoslovakia,Greece,Hungary,and Romania),the dollar area(the Western Hemisphere minus Brazil and Canada),the yen bloc (Japan,Korea,Formosa,and Manchuria),the franc zone(France,Algeria,Tunisia, French Morocco,French Africa,and French Indo-China),and the guilder zone (the Neth- erlands and the Dutch East Indies). Ratio 1 and Ratio 2 behave quite differently in the different cases.There is an upward shift in 1935 in the intra-bloc trade of both the British Commonwealth and the franc zone

Economic Regionalism: Two POth-Century Episodes 93 indicating whether two countries are members of the same regional grouping. Variations in intra-regional trade would be due solely to the proximity of countries and their rates of eco￾nomic growth. In fact, many of the dummy variables for membership in the same regional grouping are highly significant statistically. (These variables appear with the subscript “2” to denote the fact that both countries are members of the regional grouping.) Consider the results for 1980. The coeffkients imply that two countries both located in the Asia/Pacific region traded almost five times as much as would two otherwise similar countries [exp( 1.58) = 4.851. Two countries both located in East Asia traded an estimated twice as much [exp(0.86) = 2.361. The coefficients for membership in the EU and EFTA are smaller and less consistently significant. There is no evidence of a NAFTA effect in any of the sub￾sequent years. There is some, albeit less than overwhelming, evidence of a pro-trade bias among the members of MERCOSUR and, to a lesser extent, the Andean Group. Each equation also includes a second dummy variable set to unity when only one of two trading partners is a member of the regional grouping in question. (These terms appears with the subscript “w’ to denote trade with nonmembers of the group.) A negative coeffi￾cient indicates trade diversion: that members of a regional grouping trade less with non￾members than their economic characteristics and the average behavior of countries in the sample would predict. The 1980 estimates suggest that EFTA was trade diverting. EFTA members traded 23% less with nonmembers than did other countries in the sample, control￾ling for other characteristics [exp(-0.26) = .77]. Gn the other hand, most of the “subscript￾N” coefficients are significantly positive for East Asia and the EU, indicating that these countries opened up to trade with nonmembers at the same time as they liberalized trade within the region. There are, however, variations in the signs and significance of these coefficients over time. The coefficient for East Asia turns negative in 1985, although it is again positive in 1990. That for APEC turns negative in 1990, although it is insignificantly different from zero at conventional (95%) confidence levels. There is some indication that the members of NAFTA traded less with other parts of the world than would be predicted by their economic characteristics and average behavior of other countries in the sample, although there is no evidence that this effect increased with the negotiation of free trade agreements first between the United States and Canada and then with Mexico. On balance, these results point to the conclusion that the regional trade arrangements of the 1980s were trade creating rather than trade diverting. The strongest evidence of trade￾creating effects is for the countries bordering on the Pacific. The lntetwar Years Tables 3 and 4 provide comparable analyses for the interwar years. Table 3 displays intragroup trade shares and intragroup trade normalized by the group’s share of world trade for the principal potential trade blocs of the period. We adopt an inclusive definition of potential blocs, considering the British Commonwealth, the German sphere of commercial influence (Germany, Austria, Brazil, Bulgaria, Czechoslovakia, Greece, Hungary, and Romania), the dollar area (the Western Hemisphere minus Brazil and Canada), the yen bloc (Japan, Korea, Formosa, and Manchuria), the franc zone (France, Algeria, Tunisia, French Morocco, French Africa, and French Indo-China), and the guilder zone (the Neth￾erlands and the Dutch East Indies). Ratio 1 and Ratio 2 behave quite differently in the different cases. There is an upward shift in 1935 in the intra-bloc trade of both the British Commonwealth and the franc zone

94 EICHENGREEN and FRANKEL TABLE 3.Intra-regional Trade Shares in the Interwar Years Intra-regional trade Ratio 1 Total trade of the region Intra-regional trade /Total trade of the region Ratio 2 Total trade of the region/World trade 1928 1935 1938 Franc Zone Ratio 1 0.247 0.439 0.423 Ratio 2 0.318 0.568 0.729 British Commonwealth Ratio 1 0.403 0.464 0.484 Ratio 2 0.141 0.163 0.172 Western Hemisphere Ratio 1 0.212 0.203 0.197 Ratio 2 0.091 0.107 0.101 German Bloc Ratio 1 0.255 0.234 0.235 Ratio 2 0.178 0.159 0.153 Guilder Zone Ratio 1 0.124 0.110 0.139 Ratio 2 0.287 0.288 0.330 Yen Zone Ratio 1 0.289 0.383 0.478 Ratio 2 0.533 0.535 0.563 Source: League of Nations (1941). countries according to both measures.In contrast,there is no evidence by either measure of the German bloc relying more on intra-bloc trade.The evidence for the other blocs is mixed.There is no evidence of a shift in intra-dollar area trade according to Ratio 1 but some rise according to Ratio 2.(This difference may be attributable to the fact that U.S. trade collapsed dramatically after 1928.)Ratio I suggests an increase in the share of intra- group trade on the part of the yen-bloc countries,but not so Ratio 2,while the converse is true for the members of the guilder zone. Table 4 reports gravity equations for 1928,1935,and 1938.We include only the leading trade blocs of the period:the Commonwealth,the German bloc,and the dollar area.3 The coefficients on the product of national incomes are strikingly close in 1928 to their postwar values of 0.7,suggesting that the tendency for larger economies to trade more than smaller ones was equally pronounced in the 1920s.4 These coefficients decline in magnitude in 1935 and 1938,however,as if the tendency for tariff increases to discourage trade reduced the trade dependence of larger countries disproportionately.The coefficients on the product of per capita incomes is smaller in 1928 than after World War II,suggesting a somewhat smaller tendency for rich countries to trade more than poor ones between the wars.(This coefficient is sometimes interpreted in terms of the prevalence of intra-industry trade,since this is the type of trade in which pairs of high-income countries are thought to engage in disproportionately.Thus,the rise in its magnitude between the 1920s and the 1970s plau- sibly reflects the growing importance of this form of trade.)The coefficients on distance and adjacency are also smaller in 1928 than in the 1970s and 1980s,as if other factors,such as a history of colonial ties,mattered more than geography for the pattern of trade.The magnitude of the coefficients declines between 1928 and 1935-1938,as if factors like polit- ical and imperial ties increasingly overrode geography as a determinant of trade

94 EICHENGREEN and FRANKEL TABLE 3. Intra-regional Trade Shares in the lnterwar Years Ratio 1 = Intra-regional trade Total trade of the region Ratio 2 = Intra-regional trade / Total trade of the region Total trade of the region /World trade 1928 1935 1938 Franc Zone Ratio 1 0.247 0.439 0.423 Ratio 2 0.318 0.568 0.729 British Commonwealth Ratio 1 0.403 0.464 0.484 Ratio 2 0.141 0.163 0.172 Western Hemisphere Ratio 1 0.212 0.203 0.197 Ratio 2 0.091 0.107 0.101 German Bloc Ratio 1 0.255 0.234 0.235 Ratio 2 0.178 0.159 0.153 Guilder Zone Ratio 1 0.124 0.110 0.139 Ratio 2 0.287 0.288 0.330 Yen Zone Ratio 1 0.289 0.383 0.478 Ratio 2 0.533 0.535 0.563 Source: League of Nations (1941). countries according to both measures. In contrast, there is no evidence by either measure of the German bloc relying more on intra-bloc trade. The evidence for the other blocs is mixed. There is no evidence of a shift in intra-dollar area trade according to Ratio 1 but some rise according to Ratio 2. (This difference may be attributable to the fact that U.S. trade collapsed dramatically after 1928.) Ratio 1 suggests an increase in the share of intra￾group trade on the part of the yen-bloc countries, but not so Ratio 2, while the converse is true for the members of the guilder zone. Table 4 reports gravity equations for 1928, 1935, and 1938. We include only the leading trade blocs of the period: the Commonwealth, the German bloc, and the dollar area.3 The coefficients on the product of national incomes are strikingly close in 1928 to their postwar values of 0.7, suggesting that the tendency for larger economies to trade more than smaller ones was equally pronounced in the 1920~.~ These coefficients decline in magnitude in 1935 and 1938, however, as if the tendency for tariff increases to discourage trade reduced the trade dependence of larger countries disproportionately. The coefficients on the product of per capita incomes is smaller in 1928 than after World War II, suggesting a somewhat smaller tendency for rich countries to trade more than poor ones between the wars. (This coefficient is sometimes interpreted in terms of the prevalence of intra-industry trade, since this is the type of trade in which pairs of high-income countries are thought to engage in disproportionately. Thus, the rise in its magnitude between the 1920s and the 1970s plau￾sibly reflects the growing importance of this form of trade.) The coefficients on distance and adjacency are also smaller in 1928 than in the 1970s and 198Os, as if other factors, such as a history of colonial ties, mattered more than geography for the pattern of trade. The magnitude of the coefficients declines between 1928 and 19351938, as if factors like polit￾ical and imperial ties increasingly overrode geography as a determinant of trade

Economic Regionalism:Two 20th-Century Episodes 95 We again estimate pairs of dummy variables,with the subscripts"2"and"N,"for the Commonwealth,the German sphere of influence,and the dollar area.An advantage of the interwar data is that it may be possible to distinguish the effects of explicit trade prefer- ences from other factors shaping international transactions.The data for 1928 essentially predate Britain's imperial preferences,Germany's bilateral agreements,and other discrim- inatory trade-policy initiatives that are sometimes thought to have had such a powerful impact on the direction of trade in the 1930s.Thus,the coefficients for 1928 capture other bloc-specific determinants of the pattern of trade such as the legacy of colonial and impe- rial ties.The change in these coefficients between 1928 and 1935-1938 then provides a measure of the effects of trade-policy initiatives. The coefficient for 1928 shows that members of the British Commonwealth already traded twice as much [exp(0.75)=2.11]as would have been predicted by their other char- acteristics and by the average behavior of countries in the sample.They showed no ten- dency to trade less with other parts of the world.The members of what became the German sphere of influence in the 1930s displayed a similar tendency to trade disproportionately TABLE 4.Regression Estimates of the Gravity Model,1928-1938 Independent Variable 1928 1935 1938 Constant -4.02 -3.53 4.29 (0.59) (6.13) (0.58) GNP 0.69 0.56 0.60 (0.03) (0.03) (0.03) GNP/Capita 0.19 0.08 0.10 (0.05) (0.04) (0.04) Distance 0.48 -0.37 -0.34 (0.06) (0.06) (0.05) Adjacency 0.34 0.19 0.18 (0.19) (0.18) (0.18) Commonwealth2 0.75 1.15 0.92 (0.23) (0.21) (0.20) CommonwealthN 0.04 0.04 -0.07 (0.10) (0.10) (0.10) German2 0.84 0.88 0.58 (0.22) (0.21) (0.19) GermanN 0.17 0.21 0.22 (0.10) (0.31) (0.09) Dollar2 0.33 0.57 0.53 (0.35) (0.31) (0.32) DollarN 0.25 0.06 0.20 (0.13) (0.12) (0.11) Number of observations 419 418 426 Adjusted R2 0.66 0.62 0.62 Notes: Standard errors in parentheses. All variables except the dummies are in logarithms

Economic Regionalism: Two ZOth-Century Episodes 95 We again estimate pairs of dummy variables, with the subscripts “2” and “N,” for the Commonwealth, the German sphere of influence, and the dollar area. An advantage of the interwar data is that it may be possible to distinguish the effects of explicit trade prefer￾ences from other factors shaping international transactions. The data for 1928 essentially predate Britain’s imperial preferences, Germany’s bilateral agreements, and other discrim￾inatory trade-policy initiatives that are sometimes thought to have had such a powerful impact on the direction of trade in the 1930s. Thus, the coefficients for 1928 capture other bloc-specific determinants of the pattern of trade such as the legacy of colonial and impe￾rial ties. The change in these coefficients between 1928 and 19351938 then provides a measure of the effects of trade-policy initiatives. The coefficient for 1928 shows that members of the British Commonwealth already traded twice as much [exp(0.75) = 2.1 l] as would have been predicted by their other char￾acteristics and by the average behavior of countries in the sample. They showed no ten￾dency to trade less with other parts of the world. The members of what became the German sphere of influence in the 1930s displayed a similar tendency to trade disproportionately TABLE 4. Regression Estimates of the Gravity Model, 1928-1938 Independent Variable 1928 1935 1938 Constant GNP GNP/Capita Distance Adjacency Commonwealthz CommonwealthN German2 GermanN Dollar2 DollarN Number of observations 419 418 426 Adjusted R* 0.66 0.62 0.62 -4.02 -3.53 (0.59) (6.13) 0.69 0.56 (0.03) (0.03) 0.19 0.08 (0.05) (0.04) -0.48 -0.37 (0.06) (0.06) 0.34 0.19 (0.19) (0.18) 0.75 1.15 (0.23) (0.21) 0.04 -0.04 (0.10) (0.10) 0.84 0.88 (0.22) (0.21) -0.17 -0.21 (0.10) (0.3 1) 0.33 0.57 (0.35) (0.3 1) -0.25 0.06 (0.13) (0.12) -4.29 (0.58) 0.60 (0.03) 0.10 (0.04) -0.34 (0.05) 0.18 (0.18) 0.92 (0.20) -0.07 (0.10) 0.58 (0.19) -0.22 (0.09) 0.53 (0.32) -0.20 (0.11) Notes: Standard errors in parentheses. All variables except the dummies are in logarithms

96 EICHENGREEN and FRANKEL with one another in 1928,which is plausibly attributable to the fact that many of these countries were formerly constituents of Prussia and the Austro-Hungarian Empire,regions with long-standing economic links.There is also evidence that these (largely)Central European countries traded less with the rest of the world than would be predicted by their other characteristics.Countries in the Western Hemisphere,in contrast,showed no ten- dency to trade disproportionately with one another but displayed a significant tendency to trade less than expected with the rest of the world. Particularly interesting from the standpoint of present concerns is how these coefficients change between 1928 and 1935-1938.There is an increase in the tendency for Common- wealth members to trade disportionately with one another,as would be expected on the basis of the system of imperial preference established following Britain's adoption of the General Tariff in 1932.This is consistent with our findings in Table 3.The coefficient on trade between Commonwealth countries and the rest of the world switches its sign,from positive to negative,as if the system of Commonwealth preferences was discriminatory, but the effect is small and weak. The literature on the bilateral agreements used by Germany to secure supplies of raw materials and increase the self-sufficiency of its sphere of influence does not yield clear predictions for the volume of trade (discussed further below).While the coefficient for trade between two members of the bloc increases modestly between 1928 and 1935,it falls by a still larger amount in 1938;there is little evidence here that the trade policies of the members of the German bloc stimulated trade among them.Again,this confirms the results of Table 3.This is not surprising insofar as the goal of these policies was to promote self- sufficiency,not to encourage trade.Indeed,there is evidence that trade with the rest of the world was discouraged.There is statistically significant evidence for 1935 and 1938 that the members of the German bloc traded less with the rest of the world than their other char- acteristics and the average behavior of countries in the sample would predict,unlike 1928, when the coefficient in question differs insignificantly from zero at conventional levels of confidence. The econometric evidence provides little support for the existence of a dollar bloc in the 1930s.While the coefficient on Dollar2,denoting that both trading partners are members of the dollar bloc,is positive in all three years.in no year does its coefficient differ signif- icantly from zero at standard confidence levels.Again,the multivariate results do not differ from the simple tabulations of Table 3 in this respect.Nor is there much evidence of trade diversion:the coefficients on Dollary,while uniformly negative,also differ insignificantly from zero. Thus,in contrast to the evidence for the 1980s,which suggests that regional trade arrangements tended to be trade creating more often than trade diverting,the evidence for the 1930s points to the existence of both benign and malign regionalism.It suggests that the Commonwealth bloc was largely trade creating,whilc Germany's bilateral arrange- ments discouraged trade with countries outside its sphere of influence but without encour- aging trade within it,especially in the years leading up to World War II. WHAT IT MEANS To interpret the implications of these patterns of emerging regionalism,it is necessary to analyze their political and economic origins.Our argument is that the roots of regionalism were very different in the two periods,pointing to different implications

96 EICHENGREEN and FRANKEL with one another in 1928, which is plausibly attributable to the fact that many of these countries were formerly constituents of Prussia and the Austro-Hungarian Empire, regions with long-standing economic links5 There is also evidence that these (largely) Central European countries traded less with the rest of the world than would be predicted by their other characteristics. Countries in the Western Hemisphere, in contrast, showed no ten￾dency to trade disproportionately with one another but displayed a significant tendency to trade less than expected with the rest of the world. Particularly interesting from the standpoint of present concerns is how these coefficients change between 1928 and 1935-1938. There is an increase in the tendency for Common￾wealth members to trade disportionately with one another, as would be expected on the basis of the system of imperial preference established following Britain’s adoption of the General Tariff in 1932. This is consistent with our findings in Table 3. The coefficient on trade between Commonwealth countries and the rest of the world switches its sign, from positive to negative, as if the system of Commonwealth preferences was discriminatory, but the effect is small and weak. The literature on the bilateral agreements used by Germany to secure supplies of raw materials and increase the self-sufficiency of its sphere of influence does not yield clear predictions for the volume of trade (discussed further below). While the coefficient for trade between two members of the bloc increases modestly between 1928 and 1935, it falls by a still larger amount in 1938; there is little evidence here that the trade policies of the members of the German bloc stimulated trade among them. Again, this confirms the results of Table 3. This is not surprising insofar as the goal of these policies was to promote self￾sufficiency, not to encourage trade. Indeed, there is evidence that trade with the rest of the world was discouraged. There is statistically significant evidence for 1935 and 1938 that the members of the German bloc traded less with the rest of the world than their other char￾acteristics and the average behavior of countries in the sample would predict, unlike 1928, when the coefficient in question differs insignificantly from zero at conventional levels of confidence. The econometric evidence provides little support for the existence of a dollar bloc in the 1930s. While the coefficient on Dollurz, denoting that both trading partners are members of the dollar bloc, is positive in all three years, in no year does its coefficient differ signif￾icantly from zero at standard confidence levels. Again, the multivariate results do not differ from the simple tabulations of Table 3 in this respect. Nor is there much evidence of trade diversion: the coefftcients on DollurN, while uniformly negative, also differ insignificantly from zero. Thus, in contrast to the evidence for the 198Os, which suggests that regional trade arrangements tended to be trade creating more often than trade diverting, the evidence for the 1930s points to the existence of both benign and malign regionalism. It suggests that the Commonwealth bloc was largely trade creating, while Germany’s bilateral arrange￾ments discouraged trade with countries outside its sphere of influence but without encour￾aging trade within it, especially in the years leading up to World War II. WHAT IT MEANS To interpret the implications of these patterns of emerging regionalism, it is necessary to analyze their political and economic origins. Our argument is that the roots of regionalism were very different in the two periods, pointing to different implications

Economic Regionalism:Two 20th-Century Episodes 97 Roots of Regionalism Between the Wars The second half of the 19th century was a heyday of multilateral trade.Countries incor- porated most-favored-nation clauses into their bilateral treaties,and Great Britain pursued all-but-unilateral free trade and an open-door policy with respect to its Empire.In a sense, however.regional initiatives were never entirely absent:the German Reich of 1870 consol- idated a regional free trade area that had begun as the Zollverein in 1833 and the Austro- Hungarian Empire functioned as a full-fledged customs union.But any regional tendencies were modest by the standards of the 20th century. In the 1920s and 1930s,regional trade policies were driven by political rivalry between the leading European powers:Germany,Britain,and France.In the aftermath of World War I,Germany's geopolitical ambitions were suppressed,but France supported regional initiatives in Eastern Europe in an effort to enhance its influence relative to that of Britain Once Germany reasserted itself in foreign affairs,it sought to build a self-contained regional bloc composed of the Reich and the countries to its east in order to minimize dependence on potential enemies and to achieve geopolitical aims.This encouraged France and Britain to pursue bloc-oriented initiatives of their own.The United States,in contrast, stood off to the side;its stake in the regionalization of Europe was slight and its trade pol- icies were driven by domestic considerations with only modest regional implications. From the beginning of the interwar period,France sought to increase the economic and military strength of the Little Entente(Czechoslovakia,Romania and Yugoslavia),which it supported with loans and trade concessions.The policy was pursued initially in an effort to counter British commercial incursions into the region and then to contain Germany's grow- ing influence.German influence first became apparent in 1931 with its proposal for an Austro-German customs union,which was blocked by France,Britain,and the United States,who were able to do so because Germany was in the throes of a banking crisis and desperate for their support.Germany's commercial influence reached its apex when Aus- tria was incorporated into the Reich in March 1938 and Hitler annexed the Sudeten region of Czechoslovakia in September. Germany's goal was to supplement its industrial capacity with a reliable supply of agri- cultural goods and raw materials from a self-contained bloc of countries to its east.Ger- man policies essentially entailed a set of barter transactions negotiated with each of the smaller members of the bloc (see Ellis 1941 for details).When an Eastern European coun- try ran a bilateral surplus with Germany,as many did,its central bank received a credit in blocked marks to be used,subject to further negotiation,for purchasing German goods. This was one reason why the arrangement was trade diverting:revenues earned from exports to Germany could not be used to finance imports from the rest of the world.In addition,the prices charged for trade conducted under the provisions of bilateral agree- ments tended to be higher than those in trade with the rest of the world;other countries in the bloc were hardly encouraged to export to markets outside it (Basch 1941,p.36). Finally,Germany's renunciation of its previous offer to extend most-favored-nation status to the United States led the United States to place Germany on its so-called"blacklist," requiring German products to be subject to the maximum Smoot-Hawley Tariff (Tasca 1939,p.32). As for why German policies did not encourage trade within the bloc,it is important to recall that their purpose was partly to encourage regional specialization and interchange and partly to insure the reliability of supplies.'Self-sufficiency meant increasing domestic production of many goods that Germany had previously imported from abroad;this

Economic Regionalism: Two 2Oth-Century Episodes 97 Roots of Regionalism Between the Wars The second half of the 19th century was a heyday of multilateral trade. Countries incor￾porated most-favored-nation clauses into their bilateral treaties, and Great Britain pursued all-but-unilateral free trade and an open-door policy with respect to its Empire. In a sense, however, regional initiatives were never entirely absent: the German Reich of 1870 consol￾idated a regional free trade area that had begun as the Zollverein in 1833 and the Austro￾Hungarian Empire functioned as a full-fledged customs union. But any regional tendencies were modest by the standards of the 20th century. In the 1920s and 193Os, regional trade policies were driven by political rivalry between the leading European powers: Germany, Britain, and France.6 In the aftermath of World War I, Germany’s geopolitical ambitions were suppressed, but France supported regional initiatives in Eastern Europe in an effort to enhance its influence relative to that of Britain. Once Germany reasserted itself in foreign affairs, it sought to build a self-contained regional bloc composed of the Reich and the countries to its east in order to minimize dependence on potential enemies and to achieve geopolitical aims. This encouraged France and Britain to pursue bloc-oriented initiatives of their own. The United States, in contrast, stood off to the side; its stake in the regionalization of Europe was slight and its trade pol￾icies were driven by domestic considerations with only modest regional implications. From the beginning of the interwar period, France sought to increase the economic and military strength of the Little Entente (Czechoslovakia, Romania and Yugoslavia), which it supported with loans and trade concessions. The policy was pursued initially in an effort to counter British commercial incursions into the region and then to contain Germany’s grow￾ing influence. German influence first became apparent in 1931 with its proposal for an Austro-German customs union, which was blocked by France, Britain, and the United States, who were able to do so because Germany was in the throes of a banking crisis and desperate for their support. Germany’s commercial influence reached its apex when Aus￾tria was incorporated into the Reich in March 1938 and Hitler annexed the Sudeten region of Czechoslovakia in September. Germany’s goal was to supplement its industrial capacity with a reliable supply of agri￾cultural goods and raw materials from a self-contained bloc of countries to its east. Ger￾man policies essentially entailed a set of barter transactions negotiated with each of the smaller members of the bloc (see Ellis 1941 for details). When an Eastern European coun￾try ran a bilateral surplus with Germany, as many did, its central bank received a credit in blocked marks to be used, subject to further negotiation, for purchasing German goods. This was one reason why the arrangement was trade diverting: revenues earned from exports to Germany could not be used to finance imports from the rest of the world. In addition, the prices charged for trade conducted under the provisions of bilateral agree￾ments tended to be higher than those in trade with the rest of the world; other countries in the bloc were hardly encouraged to export to markets outside it (Basch 1941, p. 36). Finally, Germany’s renunciation of its previous offer to extend most-favored-nation status to the United States led the United States to place Germany on its so-called “blacklist,” requiring German products to be subject to the maximum Smoot-Hawley Tariff (Tasca 1939, p. 32). As for why German policies did not encourage trade within the bloc, it is important to recall that their purpose was partly to encourage regional specialization and interchange and partly to insure the reliability of supplies.7 Self-sufficiency meant increasing domestic production of many goods that Germany had previously imported from abroad; this

98 EICHENGREEN and FRANKEL included even raw materials and certain manufactures that had previously been imported from Central and Eastern European sources(Basch 1941,pp.31-33).In the second half of the 1930s,the Schacht Plan was adopted to limit German imports to foodstuffs and raw materials.The reliability of supplies was attained by tailoring commercial arrangements to particular transactions.Different exchange rates were used for transactions with different countries and in different commodities.Arrangements were negotiated directly between governments.None of this encouraged private initiative-the development of new trade between importing and exporting firms and trade in new products-or the growth of intra- bloc trade that is normally expected to result from closer regional links. The rise of Germany's economic power and its formation of a Central European trading bloc encouraged France and Britain to respond in like fashion.But both French and British trade policies were heavily shaped by other considerations.France had already extended imperial preferences to its empire.It had integrated Algeria into the metropolitan economy and applied French tariffs to its colonies(see Carsow 1935).But any desire to extend this pattern of discrimination in the 1930s was frustrated by other factors.For one thing,France remained true to the gold standard,which strengthened its ties with the other members of the gold bloc.Working in the other direction was pressure in France,mainly from the agri- cultural sector,for unilateral increases in protection.In the end,the second tendency dom- inated:France increased tariffs and quotas on imports from all foreign countries rather than attempting to form a regional arrangement with the gold bloc.8 The British response must be understood against the backdrop of the long-standing cam- paign for imperial self-sufficiency and the impact of the Great Depression on British trade politics.Since Joseph Chamberlain's turn-of-the-century tariff reform movement,there had been sentiment for selective tariffs to protect British industries and divert the country's overseas trade toward the empire.That Joseph's son Neville was Chancellor of the Exche- quer in the National Government of 1932 illustrates the extent of this continuity.The sever- ity of the Depression,the rise of unemployment,and then the uncertainties of a floating pound sterling strengthened the hands of those seeking the adoption of a tariff(see,for example,Capie 1983). The policy response was the General Tariff of 1932,which imposed duties in the range of 20%to 33%on a wide variety of merchandise imports.In anticipation of a conference to be held in Ottawa later in the year,the Dominions were granted free entry until November 15,1932.It was anticipated that,if discussions at Ottawa failed to yield fruit,many of their goods would pay a duty of 10%(Drummond 1972,p.92). Negotiations at Ottawa led to the admission duty-free of certain exports from the Domin- ions and the application to others of lower tariffs than those levied against"foreign"coun- tries,in return for which the Dominions reduced their tariffs on various British goods. Drummond (1972)notes that these arrangements did not prevent other countries from increasing their sales to both Britain and the Dominions.Only in 1932-1933 was there a fall in foreign sales to Britain and the Empire.While the General Tariff and imperial pref- erence could not have been good for the Commonwealth's trade with the rest of the world, the limited nature of British protection,by international standards,minimized its trade- diverting effects.In addition,Britain made aggressive use of the "enormous bargaining power"conferred by its system of imperial preference;this may have succeeded,as in the Argentine case,in reducing the tariffs that other countries levied on British products(Tasca 1939,Pp.131-132)

98 EICHENGREEN and FRANKEL included even raw materials and certain manufactures that had previously been imported from Central and Eastern European sources (Basch 1941, pp. 31-33). In the second half of the 193Os, the Schacht Plan was adopted to limit German imports to foodstuffs and raw materials. The reliability of supplies was attained by tailoring commercial arrangements to particular transactions. Different exchange rates were used for transactions with different countries and in different commodities. Arrangements were negotiated directly between governments. None of this encouraged private initiative-the development of new trade between importing and exporting firms and trade in new products---or the growth of intra￾bloc trade that is normally expected to result from closer regional links. The rise of Germany’s economic power and its formation of a Central European trading bloc encouraged France and Britain to respond in like fashion. But both French and British trade policies were heavily shaped by other considerations. France had already extended imperial preferences to its empire. It had integrated Algeria into the metropolitan economy and applied French tariffs to its colonies (see Carsow 1935). But any desire to extend this pattern of discrimination in the 1930s was frustrated by other factors. For one thing, France remained true to the gold standard, which strengthened its ties with the other members of the gold bloc. Working in the other direction, was pressure in France, mainly from the agri￾cultural sector, for unilateral increases in protection. In the end, the second tendency dom￾inated: France increased tariffs and quotas on imports from all foreign countries rather than attempting to form a regional arrangement with the gold bloc.’ The British response must be understood against the backdrop of the long-standing cam￾paign for imperial self-sufficiency and the impact of the Great Depression on British trade politics. Since Joseph Chamberlain’s turn-of-the-century tariff reform movement, there had been sentiment for selective tariffs to protect British industries and divert the country’s overseas trade toward the empire. That Joseph’s son Neville was Chancellor of the Exche￾quer in the National Government of 1932 illustrates the extent of this continuity. The sever￾ity of the Depression, the rise of unemployment, and then the uncertainties of a floating pound sterling strengthened the hands of those seeking the adoption of a tariff (see, for example, Capie 1983). The policy response was the General Tariff of 1932, which imposed duties in the range of 20% to 33% on a wide variety of merchandise imports. In anticipation of a conference to be held in Ottawa later in the year, the Dominions were granted free entry until November 15, 1932. It was anticipated that, if discussions at Ottawa failed to yield fruit, many of their goods would pay a duty of 10% (Drummond 1972, p. 92). Negotiations at Ottawa led to the admission duty-free of certain exports from the Domin￾ions and the application to others of lower tariffs than those levied against “foreign” coun￾ties, in return for which the Dominions reduced their tariffs on various British goods. Drummond (1972) notes that these arrangements did not prevent other countries from increasing their sales to both Britain and the Dominions. Only in 1932-1933 was there a fall in foreign sales to Britain and the Empire. While the General Tariff and imperial pref￾erence could not have been good for the Commonwealth’s trade with the rest of the world, the limited nature of British protection, by international standards, minimized its trade￾diverting effects. In addition, Britain made aggressive use of the “enormous bargaining power” conferred by its system of imperial preference; this may have succeeded, as in the Argentine case, in reducing the tariffs that other countries levied on British products (Tasca 1939, pp. 131-132)