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Grand Strategy and Foreign Economic Policy: British Grand Strategy in the 1930s

Published online by Cambridge University Press:  13 June 2011

Lars S. Skålnes
Lars S. Skålnes
Affiliation:
University of Oregon
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Abstract

Variation in the need for military and political support from military allies affects the degree to which foreign economic policies will discriminate in favor of military allies and against adversaries and other countries. Powers in need of such support will pursue discriminatory foreign economic policies in order to change the configuration of domestic interests to favor not only closer economic relations but also closer political relations. By strengthening domestic support for an alliance, policymakers make it more difficult for their allies to renege on alliance commitments. Stronger political relations in turn reinforce the deterrent effect of the alliance. Because the net strategic benefits from closer relations in their case are lower, powers that can go it alone without support from allies will refrain from discriminatory policies. Shifts in strategic need make it possible to explain variation in the links between security considerations and foreign economic policies within alliances over time and also across alliances. British grand strategy in the 1930s illustrates how shifts in strategic need influence the degree to which foreign economic policies discriminate in favor of potential military allies.

Type
Research Article
Information
World Politics , Volume 50 , Issue 4 , July 1998 , pp. 582 - 616
Copyright
Copyright © Trustees of Princeton University 1998

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References

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3 As in much of the literature on grand strategy, my article focuses on great powers. See Paul M. Kennedy, “Grand Strategy in War and Peace: Toward a Broader Definition,” in Kennedy, ed., Grand Strategies in War and VCACC (New Haven: Yale University Press), 6, 186 n. 18. My article adopts Barry Posen's definition of grand strategy as a “means-end chain,” embodying “a state's theory about how it can best ‘cause' security for itself.” Posen, , The Sources of Military Doctrine: France, Britain, and Germany between the World Wars (Ithaca, N.Y.: Cornell University Press, 1984), 13Google Scholar.

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7 Some examples are the Austro-Italian alliance from 1882 to 1914 and the alliance between Germany and Russia in the 1880s. See ibid., 243.

8 They may also have incentives to communicate their own trustworthiness. I deal with this possibility in Politics, Markets, and Grand Strategy: Foreign Economic Policies as Grand Strategic Instruments (forthcoming). I focus in this article on attempts to increase the reliability of allies.

9 Mundell, Robert A., “Tariff Preferences and the Terms of Trade,” Manchester School of Economic and Social Studies 32 (January 1964), 9–10CrossRefGoogle Scholar; and Pomfret, Richard, Unequal Trade: The Economics of Discriminatory International Trade Policies (New York: Basil Blackwell, 1988), 121-22Google Scholar, 136, 159–60. Pomfret points out that in cases in which the beneficiary's export supply is perfectly inelastic, for instance, trade will not increase between donor and beneficiary (p. 150).

10 The more inelastic the foreign-export supply curve is, the more a tariff will improve the terms of trade. When the foreign-export supply curve is perfectly elastic, the tariff-imposing country cannot affect the terms of trade but only the volume of its trade with the rest of the world.

11 When preferential tariffs are mutual, some sets of tariff reductions will improve the terms of trade of both parties with respect to the rest of the world. For example, both parties improve their terms of trade when tariffs are reduced so as to avoid changes in the terms between them. These conclusions follow if it is assumed that initial tariffs are low, tariff reductions are small, and all exports are gross substitutes in world consumption. For a discussion of why these assumptions are necessary, see Mundell (fn. 9).

12 Similarly, Scott C.James and David A. Lake argue that economic hegemons can use the opening of their markets to alter the incentives facing economic actors in other countries. The economic actors and also political leaders then may come to favor free trade policies that are in the hegemon's economic interest. See James, and Lake, , “The Second Face of Hegemony: Britain's Repeal of the Corn Laws and the American Walker Tariff of 1846,” International Organization 43 (Winter 1989)CrossRefGoogle Scholar. Whereas for James and Lake the hegemon's economic strategy reflects its economic interest, in my article the economic strategy is part of a great power's grand strategy, designed to affect the quality of the ties between military allies.

13 A possible objection to this argument is that economic agents may seek to weaken political and military ties if they think that thereby war will be avoided and trading patterns maintained. On the whole, however, it does not seem unreasonable to assume that strong ties will deter rather than invite attack from enemies.

14 See Pollins, Brian M., “Conflict, Cooperation, and Commerce: The Effect of International Political Interactions on Bilateral Trade Flows,” American Journal of Political Science 33 (August 1989), 741;CrossRefGoogle Scholar and idem, , “Does Trade Still Follow the Flag? A Model of International Diplomacy and Commerce,” American Political Science Review 83 (June 1989), 470.Google Scholar Pollins ignores government policymakers' roles in formulating and implementing foreign economic policies that reflect political considerations. Because he has no notion of the supply of foreign economic policies, Pollins includes both economic and security concerns as arguments in importers' utility functions. Thus, importers are motivated by “the desire to reward friends, punish adversaries, and minimize risk” (June 1989,470). That importers care about diplomatic relations because they affect the probability that economic ties may be disrupted, and thus also the risk that the importers face, is an important insight. I regard the desire to reward friends and punish adversaries, however, as derivative of the desire to minimize risk. When minimizing risk is not important—for instance, when close substitutes for imports exist—importers will not worry about rewarding friends and punishing adversaries. For government officials motivated by security considerations, in contrast, the economic consequences of a disruption of economic ties are less important than the impact such a disruption will have on political and military relations with allies and adversaries. Although political factors constrain the choices of private economic actors, the actors' behavior remains motivated by the desire to maximize economic welfare. See also the discussion of Pollins's argument in Gowa (fn. 1), 57–58.

15 Kurt Taylor Gaubatz argues similarly that a trade agreement may create domestic constituencies with interests in maintaining the agreement, making it more difficult for policymakers to renege on the agreement. See Gaubatz, , “Democratic States and Commitment in International Relations,” International Organization 50 (Winter 1996), 123CrossRefGoogle Scholar. Economic discrimination, of course, does not make escape from alliance commitments impossible.

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20 As Gowa herself points out, exit risk cannot explain the cross-alliance variation that “exists within international systems” (emphasis in the original). Gowa (fn. 1), 78.

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28 Ibid., 298. Paul Schroeder and Paul Kennedy have drawn attention to the continuity in British foreign policy between the 1800s and the 1930s. Schroeder (fn. 25); and Kennedy, , Strategy andDiplo-macy, 1870–1945 (London: Allen and Unwin, 1983)Google Scholar, chap. 1.

29 Richardson (fn. 23), 307.

30 Reynolds (fn. 24), 9.

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35 To Reynolds, Munich is “the desperate aberration from appeasement rather than its culmination.” Reynolds (fn. 24), 8.

36 MacDonald (fn. 21), 105–8; and Schmidt, Gustav, The Politics and Economics of Appeasement: British Foreign Policy in the 1930s, trans. Jackie Bennett-Ruete (New York: Berg, 1986), 35, 37–38,46Google Scholar.

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38 Drummond, Ian M. and Hillmer, Norman, Negotiating Freer Trade: The United Kingdom, the United States, Canada, and the Trade Agreements of 1938 (Waterloo, Ont.: Wilfrid Laurier University Press, 1989), 4–5Google Scholar, 7, 37–38, 155–56; Kottman (fn. 37), 120, 123; and Harrison, Richard A., “The United States and Great Britain: Presidential Diplomacy and Alternatives to Appeasement in the 1930s,” in Schmitz, David F. and Challener, Richard D., eds., Appeasement in Europe: A Reassessment of U.S. Policies (Westport, Conn.: Greenwood Press, 1990), 114-15Google Scholar.

39 See Harrison, Richard A., “The Runciman Visit to Washington in January 1937: Presidential Diplomacy and the Non-commercial Implications of Anglo-American Trade Negotiations,” Canadian Journalof'History/Annales Canadiennes d'Histoire 19 (August 1984), 221-23Google Scholar; and Roskill (fn. 22), 184.

40 Rowland, Benjamin M., Commercial Conflict and Foreign Policy:A Study in Anglo-American Relations, 1932–1938 (New York: Garland Publishing, 1987), 223-26Google Scholar.

41 Drummond and Hillmer (fn. 38), 35.

42 Rowland (fn. 40), 229.

43 Ibid.

44 MacDonald, C. A., The United States, Britain and Appeasement, 1936–1939 (New York: St. Martin's Press. 1981), 24.CrossRefGoogle Scholar

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46 Kottman (fn. 37), 220.

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51 The American department of the Foreign Office concurred, remarking on April 1, 1937, “however great the importance of having a friendly America, a friendly Empire is of greater importance still. We cannot destroy the Commonwealth for the beaux yeux of the Middle West.” For this reason the initial list of American demands for economic concessions was rejected as too extreme. MacDonald (fn. 44), 25.

52 Rowland (fn. 40), 240–41; and PRO, Cabinet Office [CAB] 23/90, Cabinet conclusions, October 27,1937.

53 Schatz (fn. 50), 100.

54 Kottman (fn. 37), 221–22.

55 Rowland (fn. 40), 267; also Reynolds (fn. 24), 16.

56 Drummond and Hillmer (fn. 38), 34.

57 Kottman (fn. 37), 219.

58 FO 371/21501, A 5747/1/45, July 25,1938.

59 CAB 23/94, Cabinet conclusions, July 28,1938; also FO 371/21501, A 5747/1/45, July 18,1938.

60 CAB 23/94, Cabinet conclusions, July 28,1938.

61 Imperial lard exports to the United Kingdom had previously benefited from a 10 percent preferential rate. British bacon curers, it was also decided, would receive compensation for the reduced duty would thereby lose income from the duty as well as see its outlays increase. “In view, however, of the great political importance of reaching agreement with the United States, he felt justified in facing that,” he added. CAB 23/94, Cabinet conclusions, July 28,1938.

62 FO 371/21501, A 5774/1/45, July 25,1938.

63 CAB 23/94, Cabinet conclusions, July 28, 1938.

64 FO 371/21501, A 5747/1/45, July 18,1938. As a percentage of U.S. agricultural exports to the United Kingdom, lard had declined from approximately 7 percent in 1929 to 3 percent in 1937. See Bidwell (fn. 37).

65 CAB 23/96, Cabinet conclusions, October 19, 1938; Feiling (fn. 24), 322; Kottman (fn. 37), 263; Schatz (fn. 50), 100–101; Rowland (fn. 40), 348, 359; and Drummond and Hillmer (fn. 38), 140–41, 156.

66 CAB 23/96, Cabinet conclusions, October 19,1938.

67 The German embassy in Washington got the message, interpreting a trade agreement as a sign of Anglo-American solidarity. As the German charge d'affaires in Washington put it, “The Embassy has frequently reported on the parallelism of Anglo-American policy in recent years. The imminent conclusion of a trade agreement has a significance which goes far beyond economic matters.” The following letters appear in Documents on German Foreign Policy [DGFP], D: The German Charge d'Affaires in the United States (Thomsen) to the German Foreign Ministry, September 12, 1938, vol. 1, no. 462: The German Ambassador in the United States (Dieckhoff) to the German Foreign Ministry, September 27,1937, vol. 1, no. 409.

68 MacDonald (fn. 44), 114–15.

69 David Reynolds observes that “it is not enough to cite Chamberlain's personal prejudices [against the United States]. One must look at what he did, or did not do, in order to determine his policy towards the United States.” Reynolds (fn. 24), 16. The trade agreement and the concessions that a skeptical Chamberlain was nevertheless willing to provide illustrate Reynold's viewpoint well.

70 Bond, Brian and Murray, Williamson, “The British Armed Forces, 1918–39,” in Millett, Alan R. and Murray, Williamson, eds., Military Effectiveness, vol. 2, The Interwar Period (Boston: Allen and Unwin, 1988), 109Google Scholar; Bond (fn. 22), 235; Gibbs (fn. 22), 798–800; and Posen (fn. 3), 154–58.

71 CAB 23/77, Cabinet conclusions, November 29,1933; Richardson, J. Henry, British Economic Foreign Policy (1936; reprint, New York: Garland, 1983), 110-12Google Scholar; and Haight, Frank Arnold, French Import Quotas:A New Instrument of Commercial Policy (1935; reprint, Nendeln: Kraus, 1970), 105-7Google Scholar.

72 Drummond, Ian M., The Floating Pound and the Sterling Area, 1931–1939 (Cambridge: Cambridge University Press, 1981), 217CrossRefGoogle Scholar; idem, , London, Washington, and the Management of the Franc, 1936–39, Princeton Studies in International Finance, no. 45 (Princeton: Princeton University Press, 1979), 1;Google Scholar and Oye, Kenneth A., Economic Discrimination and Political Exchange: World Political Economy in the 1930s and 1980s (Princeton: Princeton University Press, 1992), 129Google Scholar. Other commentators, however, have taken the agreement as representing “a fundamental change” (Kindleberger) in international monetary relations. See Drummond (1981), 201–2.

73 Drummond (fn. 72, 1979), 9,15. Greater currency stability also made it easier for the British to contemplate a trade agreement with the United States. Crozier, Andrew J., Appeasement and Germany's Last Bidfor Colonies (New York: St. Martin's Press, 1988), 242-43Google Scholar.

74 Sayers, R. S., The Bank of England, 1891–1944, 3 vols. (Cambridge: Cambridge University Press, 1976), 478Google Scholar, 480; and Drummond (fn. 72,1981), 211, 220.

75 The Bank of France and the Bank of England had engaged in consultations even before the Tripartite Declaration. The Federal Reserve Bank of New York became involved after the declaration was a fact. Drummond (fn. 72, 1981), 217. In the case of Britain and the United States, the equalization funds had been set up several years prior to the agreement.

76 Drummond (fn. 72,1979), 1; idem (fn. 72,1981), 223; and Eichengreen, Barry, Elusive Stability: Essays in the History of International Finance, 1919–1939 (Cambridge: Cambridge University Press, 1990), 149-50CrossRefGoogle Scholar.

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78 Drummond (fn. 72, 1981), 250; idem (fn. 72, 1979), 54; and Oye (fn. 72), 128.

79 Drummond (fn. 72,1979), 55.

80 Inflows of gold threatened to lead to an appreciation of the pound, making British exports less competitive.

81 Drummond (fn. 72,1979), 1, 7, 32, 35–36, 53–55.

82 Schmidt (fn. 36), 33–37; and Robbins, Keith, Appeasement (Oxford: Basil Blackwell, 1988), 33–34.Google Scholar Schmidt lists nine different definitions of appeasement.

83 Robbins (fn. 82), 33.

84 Schmidt (fn. 36), 45–46,191–92.

85 Space does not permit a discussion of all these policies. Thus, the question of whether Britain should grant colonial concessions to Germany is not treated here. The discussion in the Cabinet shows that there was never any question of returning colonies to Germany without a prior resolution of the political conflicts between London and Berlin. Moreover, the Cabinet as such never reached a decision on the issue of offering Germany the colonial concessions. See CAB 23/90, Cabinet conclusions, November 24,1937; CAB 23/96, Cabinet conclusions, November 16,1938; Crazier (fn. 73), esp. 181–83, 196–204, 229–30, 236–39, 248, 271–72; Wendt (fn. 21), 457–58; and Newman, Simon, March 1939: The British Guarantee to Poland: A Study in the Continuity of British Foreign Policy (Oxford: Oxford University Press, 1976), 55Google Scholar, 58–59, 63–66. I also do not consider the industrial talks conducted in 1938 and 1939 between representatives of German and British industries—encouraged by their respective governments—which led to an agreement in March 1939. On the British side, concerns about Britain's trade balance and international financial credibility motivated the negotiations. Even Ashton-Gwatkin argued that “we would certainly be much concerned if we thought that they [the negotiations] were going to lead to a surrender of any part of our commercial position (with which our political influence is so closely bound up).” For a discussion, See Newton, Scott, Profits of Peace: The Political Economy of Anglo-German Appeasement (Oxford: Clarendon Press, 1996), 99–100CrossRefGoogle Scholar; Newman, 79–82; and MacDonald (fn. 21), 126–27.

86 Rock (fn. 22), 43.

87 The agreement obligated Germany to use 55 percent of the sterling it earned from exports to Britain to buy British and colonial goods. This arrangement was clearly in Britain's economic interest and was not linked to German political concessions. Schmidt (fn. 36), 167,195; and MacDonald (fn. 44), 118.

88 MacDonald (fn. 21), 116–17; and Wendt (fn. 21), 466, 478.

89 MacDonald (fn. 44), 80; and Wendt (fn. 21), 478.

90 MacDonald (fn. 21), 116; and idem (fn. 44), 80.

91 Scott Newton argues that the British threat of suspension was designed by the government's chief economic adviser, Sir Frederick Leith-Ross, to help Schacht gain the upper hand against Nazi extremists and thus to reinforce his “struggle against economic isolationism.” His source for this interpretation, however, is MacDonald, who merely notes that “Leith-Ross had threatened to suspend the Payments Agreement and institute unilateral clearing before Germany agreed to compromise on July 1,1938. The German surrender under threat of strong economic action was generally claimed to parallel the surrender under threat of strong political action during the May crisis.” Newton (fn. 85), 63; MacDonald (fn. 21), 116.

92 Wendt (fn. 21), 467,469,476,478; also MacDonald (fn. 21), 116. The interest rates on the German loans, set in 1924 and 1930, were much higher than the interest rates in Great Britain in 1938. Though the 1938 agreement reduced the interest rates on both the German and Austrian loans, they were still higher than the rates in Britain. See Wendt (fn. 21), 468, 476.

93 Although British trade with the Balkans amounted to a little over 2 percent of its total trade, British business put pressure on the government to preserve trade with the region. Newman (fn. 85), 38; and MacDonald (fn. 21), 115.

94 Kaiser, David E., Economic Diplomacy and the Origins of the Second World War: Germany, Britain, France, and Eastern Europe, 1930–1939 (Princeton: Princeton University Press, 1980), 286Google Scholar-89; Newton (&. 85), 87–89; and MacDonald (fn. 21), 118–119.

95 MacDonald (fn. 21), 119.

96 Newman (fn. 85), 45–48.

97 Ibid., 40–41.

98 MacDonald, citing Bernd-Jürgen Wendt, argues that the prevention of complete integration was one motive underlying Leith-Ross's proposal. MacDonald (fn. 21), 118–19; also Newman (fn. 85), chap. 3. In contrast, Newton argues that Chamberlain was prepared to recognize German economic predominance in southeastern Europe, which may suggest that this could not have been an important motive. Newton (fn. 85), 88–89.

99 Kaiser (fn. 94), 287; and Newman (fn. 85), 50, 52.

100 Newman (fn. 85), 41–42.

101 Ibid., 44–45. Germany had agreed to buy four hundred thousand tons.

102 Ibid., 43–44, 56–57. For other proposals to increase British economic and thus political influence in the Balkans, see ibid., 49–52.

103 Ibid., 82–84; Newton (fn. 85), 91–93; and MacDonald (fn. 21), 121,127.

104 MacDonald (fn. 21), 121; Newman (fn. 85), 84; and Newton (fn. 85), 93.

105 The Mining Association of Great Britain and the Rheinisch-Westfalischen Kohlensyndikats concluded a coal agreement in January 1939. As Wendt points out, without participation from other European exporters, however, the agreement would have been of little consequence. Wendt (fn. 21), 548.

106 The German Economic Mission in Great Britain to the Foreign Ministry, November 7, 1938, DGFP, D, vol. 4, no. 263 (emphasis in the original); and Documents on British Foreign Policy, 3d series, vol. 4,138 n. 1. Whereas the ratio of British to German coal exports had favored Britain 5:3 in 1933, the ratio was 1:1 in 1937.

107 MacDonald (fn. 21), 119–20. The British mining industry in 1936 had rejected the export ratio (50 percent) allocated to Britain that became part of the 1939 coal agreement. Wendt (fn. 21), 546. In this sense, the agreement constituted a concession to Germany.

108 Newton (fn. 85), 98; The Ambassador in Great Britain to the Foreign Ministry, January 28, 1939, DGFP, D, vol. 4, no. 303; and Memorandum by an Official of the Economic Policy Department, February 7,1939, DGFP, D, vol. 4, no. 310.

109 Schmidt (fn. 36), 194.

110 MacDonald (fn. 44), 18, 23, 26, 29–30; and Newman (fn. 85), 54–55.

111 Schmidt (fn. 36), 209; and Schroder (fn. 21), 85.

112 Schmidt (fn. 36), 202 n. 494, 206, 209,213.

113 MacDonald (fn. 44), 18, 23.

114 Ibid., 128–31, 137; and Parker, R. A. C., Chamberlain and Appeasement: British Policy and the Coming of the Second World War (London: Macmillan, 1993), 195-96CrossRefGoogle Scholar.

115 In an interview with the Parliamentary Lobby correspondents on March 9,1939, Chamberlain said he was considering calling a European arms-limitation conference. If such a conference were successful, its scope could be expanded to include agreements on economic questions and colonies, although “any Colonial offer made by Britain would, of course, be part of a general European settlement.” Newman (fn. 85), 85–86. This suggests that Chamberlain was still not prepared to make economic concessions in advance of a German disarmament and a general political settlement.

116 MacDonald (fn. 44), 165; Newman (fn. 85), 87; also Reynolds (fn. 24), 8.

117 Schmidt (fn. 36), 93, also 146–47.

118 Crozier (fn. 73), 257.

119 A general settlement would, of course, also involve the resolution of disputes over economic policy.

120 For a thorough review of the debate regarding economic interdependence, see Stein, Arthur A., “Governments, Economic Interdependence, and International Cooperation,” in Tetlock, Philip et al. , eds., Behavior, Society andInternational Conflict, vol. 3 (New York: Oxford University Press, 1993)Google Scholar.

121 Papayoanou, Paul A., “Interdependence, Institutions, and the Balance of Power: Britain, Germany, and World War I”, International Security 20 (Spring 1996), 51.CrossRefGoogle Scholar

122 See Skålnes (fn. 8).