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NUMER 2 / LIPIEC 2019

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From Free Trade to Protectionism: British Trade After World War II

The military upheavals of the twentieth century took a heavy toll on the European economy. Great Britain was not spared, as the expenses of the war effort severely depleted the country's resources. Once World War II ended, swift economic recovery became the primary objective and the condition on which the revival of Britain's role as a world power depended. Thus, British trade policy in the decades following the end of the war was determined by Britain's ambition to return to its pre-war economic and political status. Initially, Britain expected to recast its empire, and all economic measures were taken with the goal in mind. Tariffs and imperial preference, the preferential treatment of Commonwealth countries in terms of trade, were imposed to encourage economic recovery, protect the sterling's value, and emphasize Britain's role as an independent power. However, as it became evident that Western Europe gained significance while the Commonwealth no longer constituted a reliable foundation for British power, Britain agreed to secure its relationship with the continent. In the 1950s and 1960s, attempts were made to establish Britain's place in Europe through economic integration and liberalization of trade. By the 1970s, Britain was once more committed to free trade, a doctrine absent from British policy since the 1930s.
       

Since the nineteenth century, free trade had been a central idea in British economic policy. However, it encountered its first obstacles in the 1870s, once Western European economies, notably those of Germany and France, became more industrialized and threatened Britain with competition. The continent as a whole was turning towards protectionism; the economic slump of 1873-1896, the scramble for colonial possessions, and the expiration of bilateral free trade treaties all encouraged the demand for tariffs and protection. In Britain, proponents of the fair trade, imperial preference, and tariff reform movements emerged to demand a decrease in the level of trade liberalization. Nonetheless, free trade was abandoned only as late as in 1932, after the experiences of World War I and the Great Depression demonstrated that Britain's position as the dominant economic power was no longer certain. Instead, imperial preference was adopted, and the remaining proponents of a liberal trade policy agreed that free trade could not be realized on advantageous terms unless backed by international regulation.
       
The end of World War II saw a further reversal of the British approach to trade liberalization. Britain found itself weakened economically by severe debt, destruction of many of its merchant ships, and the loss of a considerable portion of its export markets. Nonetheless, the British hoped to return to their pre-war role as one of the world powers. In order for the vision to materialize, a swift economic recovery was imperative. The country needed inexpensive food products and raw materials, all of which could be supplied at convenient prices by the member countries of the Commonwealth. Thus, imperial preference was a crucial condition for obtaining essential products on favourable terms. In addition, tariffs were necessary to protect the weak post-war economy from a flood of American imports, an event Britain's dollar reserves were insufficient to afford.  Furthermore, foreign competition would be disastrous for British industry; it was estimated that a decrease in tariffs could lower British manufacturing output by 6.7%, while if tariffs were abandoned totally, output was expected to fall by 16.5%. Evidently, if Britain wished to become an economic world power once more, protectionist policies were required to provide conditions suitable for recovery. 
       
Another economic consideration on which the revival of British strength rested was the protection of the sterling's value. A strong sterling was necessary to make British financial services attractive, maintain the trust of countries holding credit in pounds, and create affordable conditions for the payment of British debts. Preparations had also to be made for the eventual dollar convertibility of the pound, a prominent postulate of Britain's American allies. A sterling area locked away behind a tariff wall promised the required conditions for accumulating the  dollar reserve needed for introducing convertibility. Immediate trade liberalization, especially if realized in the form of a European customs union, threatened the sterling area through competition. The sterling area's trade balance would be disturbed while no new opportunities for accumulating the desired dollars would be offered. Abandoning the sterling area and adopting pound to dollar convertibility before the dollar shortage had been overcome promised a financial crisis, similar to one which occurred in 1947 during a brief period of premature convertibility. If Britain wished to see London as a financial hub once more, it had to protect the strength of the sterling, for which imperial preference and tariffs were the prerequisites.
       
However, Britain's determination to maintain imperial preference and discriminate against goods coming from outside the Empire was not in line with the American vision of the post-war world. The ideas of open markets and free trade were central to the plans laid down at the Bretton Woods Conference in 1944. The US pressed Britain to abandon its imperial preference in favour of trade liberalization and integration with the continent. Despite the Anglo-American alliance, Britain's vision of its place in the post-war world was not the one imagined by the US. The British expected to see a world dominated by Britain and America, with Western Europe remaining relatively insignificant. At the time, 50% of British trade was conducted with the Commonwealth, while only 20% with Europe. As the main British markets lay outside of Europe, the gains to be made from freer trade with the continent did not offset the losses of abandoning imperial preference. The Commonwealth was seen as instrumental to rebuilding Britain's pre-war status, and tariffs were required to maintain control over this important sphere of influence. Thus, the British were unwilling to sacrifice the plans of recasting their empire to American demands, and by 1948 succeeded at negotiating the retention of imperial preference.
       

Despite the success, the British triumph over the US in the debate over imperial preference and trade policy was short lived. The Bretton Woods system was expected to proceed, and with it an open world economy in which smaller trading blocs such as Britain's imperial preference area had no place. The British could not refuse to engage in a project which the US enthusiastically advocated if it wanted to retain the American alliance and support. Finally, as post-war recovery took place across the world and trade revived, the shortage of dollars was expected to decrease, allowing Britain to return the pound to convertibility and thus removing the sterling area's raison d'etre. Aside from diplomatic pressures, economic considerations began to speak in favour of closer integration with Europe. The British economy was still in recovery, and additionally burdened by growing defense expenses related to its American commitments, while the sterling remained weaker than desired. Trade with the Commonwealth, after reaching its heights in the early 1950s, declined by the end of the decade. Meanwhile, British exports to Europe were growing. Clearly, imperial preference and discriminatory tariffs were not proving to be as beneficial a means of defending trade and currency as it was initially expected. Western Europe quickly gained significance, and Britain faced the danger of balancing between an increasingly integrated and exclusive Europe and an American ally for whom British welfare was not a priority. 
       
Nevertheless, the British wished to see European integration carried out on their own terms, preferably with Britain playing a leading role. Despite its recognition of Western Europe's growing significance, Britain was unwilling to abandon the Commonwealth and the visions of a recast Empire entirely. Trade with the Commonwealth, though in decline, still amounted to around 30% of Britain's total, and the role of Britain as a world power linking Europe and the Americas still appeared feasible. Thus, when the European Economic Community began to develop in the late 1950s without British contribution, Britain found itself in opposition. The EEC's Common Agricultural Policy clause was especially unpalatable to the British, as they believed it would threaten Commonwealth farmers, whom Britain was still intent on protecting. After the Free Trade Area, and alternative to the EEC proposed by the British, was not approved by the six founding members of the EEC, Britain resorted to founding the European Free Trade Area (EFTA) in 1959. The EFTA offered the advantage of trading freely in manufactured goods only, which eased British concerns for Commonwealth agricultural producers. Also, it was not a customs union, alleviating British fears of becoming overly tied to a single European bloc by the need to adhere to a joint tariff policy. Thus, by trying to reconcile links to the Commonwealth with European integration, the British hoped to secure leading roles in two worlds at the same time. 
       
Britain's participation in the EEC negotiations marked a major breakthrough in British economic policy, as it forced the British to admit that cooperation with Western Europe was more important to Britain's international position than initially predicted. However, the decisive change in the British approach towards the continent originated in the Empire. The Suez Crisis of 1956 signified that Britain's imperial era was at an end, and reviving the empire was not a realistic strategy. Furthermore, during the 1960s, Commonwealth members such as Canada or Australia increasingly developed a life of their own, turning away from Britain in favour of forging their own economic and political relations. Between 1965 and 1968, controversy over events in South Africa and the British government's subsequent response caused an outcry across the Commonwealth, accelerating the breakup of linkages between Britain and member countries. Thus, a final blow was dealt to the British hope of eventually recasting the empire on the basis of the Commonwealth. In 1971, the British government published a report in which the Commonwealth-oriented strategy was renounced and Britain committed to closer relations with the European continent, trade relations included. The transformation was complete in 1973, after Britain was finally allowed to join the EEC. From then on, Britain began to build its influence in Europe, contributing to the expansion of free trade and economic liberalization.
       
Britain's entry into the EEC gave a pause to Britain's tortuous search for its place in the post-war world. Throughout the years between 1945 and 1973 Britain circled between the belief in the Empire's revival, the wish to make the Commonwealth the foundation of its strength, the commitments to the Anglo-American alliance, and the growing desire to partake in Western Europe's rising importance. Despite the contradictions, the overarching theme of Britain's decision-making was always the goal of recasting the country's pre-war status as a world power. Economically, this meant pursuing policies which would guarantee the swiftest recovery and return Britain to its role as the economic leader of Europe and the Commonwealth. Thus, protectionism and imperial preference were applied immediately after the war, when economic recovery and a strong sterling appeared central to the achievement of the goal. However, trade liberalization and European integration were pursued as soon as it became clear that the future of British influence lay in Europe. Even then, the British were reluctant to abandon their idea of their role within Europe, standing firm in the EEC negotiations of the 1950s, and launching their own trade area in 1959. Thus, the history of Britain's trade policy in the wake of World War II demonstrates the importance of the vision the British held for their country, and their unwillingness to sacrifice their economic and political interests. The British dilemma of choosing between Western Europe and the Commonwealth is not new, and likely to persist as an issue for British decision makers. However, given the overall satisfactory economic and political performance exhibited by Britain so far, it can be expected that whatever policy will be adopted, it will be done with the country's interests in mind.
 

Laura Polcyn


Laura Polcyn - studentka trzeciego roku historii i ekonomii na Lakehead University w Thunder Bay (Ontario).


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