Trade Wars of the Interwar Period: Protectionism's Path to World War II
The interwar period (1919-1939) witnessed an unprecedented rise in protectionist policies that fundamentally reshaped global trade patterns and contributed significantly to the geopolitical tensions that ultimately led to World War II. This escalating cycle of economic nationalism, retaliatory tariffs, and trade bloc formation created an environment where international cooperation deteriorated and resource competition intensified, laying economic groundwork for the coming global conflict.
The Post-World War I Economic Landscape
The economic aftermath of World War I created fertile conditions for trade conflicts. European economies emerged severely weakened, with total European exports plummeting from 155.6 billion 1990 USD in 1913 to just 81.7 billion in 1920[1]. The punitive Treaty of Versailles imposed harsh economic terms on Germany, including significant limitations on its ability to set tariffs and severe reparation payments[2]. These restrictions contributed to the hyperinflation of the Reichsmark by 1923, heightening German economic resentment[3].
The economic dislocations following WWI saw many nations abandon the internationalist economic policies that had characterized the pre-war era. The United States, despite President Wilson's internationalist vision, retreated into a form of isolationism that included heightened trade barriers. The term "America first" gained popularity during this period, reflecting a focus on domestic policy and high tariffs[4]. Though Wilson had won the Nobel Peace Prize in 1919 for his work initiating the League of Nations, the United States never joined the organization, foreshadowing later trade tensions[4].
Early Protectionist Policies in the 1920s
The 1920s witnessed an acceleration of protectionist measures across major economies:
The United States Leads with Tariff Barriers
Following World War I, the United States quickly moved to protect its domestic industries, particularly agriculture, from foreign competition. Congress passed the Emergency Tariff Act in 1921, followed by the more comprehensive Fordney-McCumber Tariff Act of 1922[5]. This legislation raised the average American ad valorem tariff rate to 38%, a significant increase from previous levels[6]. The Fordney-McCumber Act also authorized the president to raise or lower tariff rates by up to 50% to equalize foreign and domestic production costs[5].
These protectionist measures soon triggered retaliatory responses. Within five years, America's trading partners had significantly raised their own tariffs on U.S. goods. France increased tariffs on automobiles from 45% to 100%, Spain raised duties on American goods by 40%, and Germany and Italy increased tariffs on wheat[6]. This cycle of retaliation began to fragment the global trading system and is sometimes cited as a contributing factor to the Great Depression[6].
The German-Polish Customs War
A telling example of interwar trade conflicts was the German-Polish customs war that ran from 1925 to 1934. This dispute illustrates how trade policy was weaponized for territorial and political aims. The Weimar Republic, under Foreign Affairs Minister Gustav Stresemann, deliberately increased tolls on Polish coal and steel products to create economic pressure, hoping to force Poland to surrender territory[6].
Poland responded with increased toll rates on German products. Rather than capitulating, Poland developed the port of Gdynia as an alternative export route, allowing Polish goods to reach Western European markets without transiting through Germany[6]. This customs war exemplifies how trade disputes often failed to achieve their political objectives while causing significant economic disruption.
The Great Depression and Trade War Escalation
The onset of the Great Depression in 1929 dramatically accelerated protectionist tendencies worldwide, transforming sporadic trade disputes into something approaching a global trade war.
The Smoot-Hawley Tariff and Global Retaliation
The most notorious protectionist measure of this period was the United States' Smoot-Hawley Tariff Act of 1930, which raised U.S. import duties by approximately 20% on top of already high tariff levels[7]. Sponsored by Senator Reed Smoot and Representative Willis Hawley, the legislation was initially designed to protect American farmers from foreign competition but expanded to cover manufactured goods as industrial lobbies pressed for inclusion[7].
The economic consequences were severe. U.S. imports fell dramatically from $4.4 billion in 1929 to $1.5 billion in 1933 (a 66% decrease), while exports declined from $5.4 billion to $2.1 billion (a 61% drop)[8]. More significantly, overall world trade contracted by approximately 66% between 1929 and 1934[8].
Professional economists overwhelmingly opposed the legislation, with more than 1,000 economists signing a petition urging President Herbert Hoover to veto the bill[7][4]. Their concerns proved prescient as trading partners quickly retaliated with their own protective measures. Canada implemented retaliatory tariffs in June 1930, even before the U.S. law was officially passed in July[9]. This pattern of retaliation spread globally, further constricting international trade flows and deepening the worldwide depression.
Protectionism as Depression Response
While the Smoot-Hawley Tariff is often portrayed as a cause of the Great Depression, the relationship was more complex. The economic downturn was already underway when the tariff legislation was enacted, with roots in financial instability, falling demand, and poor banking practices[8]. However, most economic historians agree that the tariff and subsequent trade war significantly worsened the crisis by shrinking global trade, damaging export industries, and intensifying deflationary pressures[4][8].
As the Depression deepened, protectionism became a common policy response across nations. According to economists Eichengreen and Irwin, protectionism was exercised primarily as a defense against deflationary forces in the global economy, particularly for countries that remained committed to the gold standard[1][10]. Countries that abandoned the gold standard earlier generally implemented fewer trade restrictions, as they could use monetary policy to stimulate their economies instead.
The Formation of Trade Blocs
As multilateral trade declined, nations increasingly organized into preferential trade blocs centered around major economies and their colonial or political spheres of influence.
The British Commonwealth Preference System
The British Empire responded to the collapsing global trading system by turning inward. The Imperial Economic Conference held in Ottawa in 1932 (also known as the Ottawa Conference) established a system of imperial preference designed to promote trade within the British Empire[10]. Rather than implementing a common protectionist policy against non-Empire nations, the system worked through a series of bilateral agreements providing preferential access to Empire goods[10].
The impact was substantial. Britain's shift toward protection after 1930 reduced the total value of British imports by 9-10%, with the largest effect felt in 1933[11]. More dramatically, the Empire's share of British imports rose from 27% to 39.2% between 1930 and 1935[11]. Counterfactual analysis suggests that without these protectionist measures, the Empire's share would have only increased to about 31.4%, meaning that protection accounted for roughly 77% of the shift toward imperial trade[11].
Other Regional Trade Blocs
Similar regional trade arrangements emerged elsewhere. Germany developed the Reichsmark bloc, creating a network of bilateral trade agreements with Central and Southeastern European countries that tied these economies more closely to German interests[10]. Currency blocs also formed around the remaining gold standard countries (the gold bloc) and the sterling area centered on Britain[10].
These trading blocs intensified economic nationalism and reinforced geopolitical divisions. According to Jacks and Novy, "the trade wars mainly served to intensify pre-existing efforts towards the formation of trade blocs which dated from at least 1920"[1]. This fragmentation of the global economy along political lines created conditions where economic and strategic interests became increasingly aligned.
Trade Tensions and the Road to World War II
While trade conflicts alone did not cause World War II, they contributed significantly to the deteriorating international environment and economic motivations that fueled aggression by the future Axis powers.
Economic Grievances and Territorial Expansion
For Germany, economic grievances stemming from the Versailles Treaty and subsequent trade restrictions became central to Nazi ideology and territorial ambitions. Hitler's regime advanced a concept of economic self-sufficiency (autarky) that required territorial expansion to secure resources[12]. The Nazi concept of Lebensraum (living space) had significant economic dimensions—controlling farmland, oil, and raw materials would reduce Germany's dependence on potentially hostile trading partners[12].
Similar economic motivations influenced Italian expansion. Mussolini's 1935 invasion of Ethiopia was partly driven by the desire to secure markets and resources. When the League of Nations imposed sanctions in response, these measures backfired by pushing Italy closer to alliance with Nazi Germany[12].
Strategic Resources and the Path to War in the Pacific
The role of trade restrictions in precipitating the Pacific War is particularly direct. As Japan expanded into China and Southeast Asia in the late 1930s, the United States employed increasingly restrictive trade measures to pressure Japan to halt its aggression. The critical turning point came in mid-1941, when the U.S., Britain, and the Netherlands froze Japanese assets and imposed an oil embargo following Japan's occupation of French Indochina[12].
This oil embargo represented an existential threat to Japan, which obtained approximately 80% of its petroleum from the United States[12]. Faced with the prospect of its navy and air force grinding to a halt within months, Japanese leadership made the fateful decision to secure oil-rich territories in Southeast Asia, particularly the Dutch East Indies (Indonesia). This strategic imperative required neutralizing the American Pacific Fleet, leading directly to the attack on Pearl Harbor in December 1941[12].
The Role of Strategic Materials
Control of industrial raw materials became increasingly important in pre-war planning. Nickel, essential for hardening steel used in armor plating for warships and tanks, illustrates how trade in strategic materials intersected with military preparations. The Canadian-based International Nickel Company (INCO) pursued commercial opportunities in the German market during the 1930s, inadvertently contributing to Nazi rearmament while complicating British blockade strategies[13].
Professor Alfred Zimmern of Oxford University referred to nickel as "the bottleneck of all armament," highlighting how specific raw materials could become critical choke points in military-industrial production[13]. As nations increasingly viewed trade through a security lens, economic interdependence came to be seen as vulnerability rather than a foundation for peace.
The Breakdown of International Economic Cooperation
By the late 1930s, the global trading system had fragmented into competing economic blocs with diminished commercial interactions between them. According to Gordon's 1941 analysis, by 1939 roughly half of world trade remained subject only to tariffs or was tariff-free, while the other half was tightly restricted by non-tariff barriers including exchange controls, licensing systems, and quantitative restrictions[1][10].
This economic fragmentation reinforced political divisions and reduced the economic costs of conflict. With trade links already severely curtailed and economic self-sufficiency a policy goal, the economic deterrent against war—the disruption of valuable commercial relationships—had been significantly weakened.
Conclusion
The trade wars of the interwar period represent a cautionary tale about the relationship between economic and geopolitical tensions. What began as attempts to protect domestic industries and respond to the trauma of the Great Depression evolved into a system of competing trade blocs that reinforced rather than mitigated international hostilities.
Protectionist policies are estimated to have accounted for about half of the 25% decline in world trade during this period, indirectly contributing to the economic factors that made war more likely[4]. By intensifying economic nationalism, reducing international economic integration, and driving the scramble for resources and markets, trade conflicts helped create conditions where military solutions to economic problems appeared increasingly viable.
The lessons from this period informed post-WWII economic planning, leading to the Bretton Woods institutions and the General Agreement on Tariffs and Trade, which sought to prevent a recurrence of destructive trade wars. These institutions recognized that economic cooperation and trade integration could serve as foundations for peace—a principle the interwar period had demonstrated primarily through its absence.
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- https://www.nber.org/system/files/working_papers/w25830/w25830.pdf
- https://www.worldhistory.org/article/2409/the-causes-of-wwii/
- https://georgetownsecuritystudiesreview.org/2024/11/08/the-loss-of-indispensable-consolations-the-rise-of-protectionism-and-its-role-in-global-conflicts/
- https://www.ucl.ac.uk/news/2025/feb/analysis-us-tried-high-tariffs-and-america-first-policies-1930s
- https://history.state.gov/milestones/1921-1936/protectionism
- https://en.wikipedia.org/wiki/Trade_war
- https://www.investopedia.com/terms/s/smoot-hawley-tariff-act.asp
- https://en.wikipedia.org/wiki/Smoot–Hawley_Tariff_Act
- https://www.fraserinstitute.org/commentary/trumps-trade-war-backing-us-1930s
- https://warwick.ac.uk/fac/soc/economics/staff/dnovy/tradeblocs_published.pdf
- https://microeconomicinsights.org/impact-protection-trade-lessons-britains-1930s-policy-shift/
- https://nordicdefencereview.com/trade-wars-batter-defence-industry-and-sometimes-lead-to-real-wars/
- https://www.tandfonline.com/doi/full/10.1080/07075332.2024.2323493
