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How the “Great War” Changed Global Trade

Posted November 11, 2014

On the day commemorating the armistice concluding hostilities of the First World War that began a 100 years ago, it is perhaps an appropriate time to reflect not only on the sacrifice of those involved, but also, at least in the context of this blog, to consider how that terrible cataclysm changed global trade forever.

Though infrequently mentioned in popular accounts about the war’s causes, many historians regard the changing dynamics of international trade and a shift in the balance of economic power at the beginning of the last century as key factors making armed conflict between the major European powers almost inevitable.

In his book How America Got It Right, the military historian Bevin Alexander even goes so far as blaming “trade rivalry” for being the principle cause of the war. More than anything else, Alexander contends, it was Britain’s mounting fear of Germany’s tremendous economic growth and global trade ambitions which led to the fateful alliances that would eventually collide with one another in the summer of 1914. He quotes the British Prime Minister Lord Arthur Balfour as telling an American diplomat in 1907, “We are probably fools not to find a reason for declaring war on Germany before she builds too many ships and takes away our trade.”

Following decades of unprecedented expansion in terms of global output and trade, along with living standards in Europe and North America rising at a pace never before seen, in the first decade of the 20th century the world was experiencing the freest flow of goods, services and capital in human history. The First World War abruptly brought that century-long trend toward globalization to a screaming halt. In a Foreign Affairs essay a number of years ago, the historian Niall Ferguson attached this phenomenon to a very specific event from the war, writing that “the sinking of the Lusitania also symbolized the end of the first age of globalization.”

The war’s devastating effects extended far beyond the battlefields of Europe. It destroyed global markets, disconnected financial ties and destabilized economies around the world. Many countries like Britain and France would never fully recover from the massive costs incurred during the war and indeed some, like the decaying Ottoman Empire and the Habsburg Empire in Austria-Hungary, ceased to exist altogether (along with one of the first free trade areas in the world). “One of the lasting changes was that Europe’s volume of merchandise trade didn’t recover. There was permanent damage to the European share of world trade,” according to Professor David Stevenson, an historian at the London School of Economics.

Having invested heavily for decades in its nascent rail transportation network and rapidly expanding industrial infrastructure, America was the world’s most indebted nation prior to 1914. However, following years of supplying the Allied countries with vast amounts of raw materials, such as oil, steel and wheat, in addition to financing a significant portion of their wartime expenditures, America emerged from the conflict in the 1920s as the world’s largest creditor and dominant global trading economy.

The wreckage of the First World War and its subsequent historical ramifications such as the Great Depression and the Second World War had profoundly harmful effects on trade and crippled the global economy for more than half a century. Not until the 1950s was substantial progress made to repair and reverse the fundamental damage the war had caused to the international trading system and return to policies of steadily increased economic integration and globalization.