The European War and Our Foreign Trade


By RAYMOND B. STEVENS, Chairman of U. S. Tariff Commission

Delivered over the radio, New York City, April 24, 1940

Vital Speeches of the Day, Vol. VI, pp. 460-461.

I PROPOSE to give a brief summary of the effect so far of the European War upon our national economy, and to analyze the different factors which have influenced the flow of foreign trade. I shall give as few figures as possible. What you are interested in is—the effect the war has had, and is likely to have, on our national prosperity and security.

It was apparent when the war in Europe flared up last September, that it was bound to have disturbing effects on our foreign trade. Our trade with England and its British Empire, France and its Empire, and Germany, was practically half of our total trade with all the world.

The immediate effect of the war was the disappearance of about all our trade with Germany; England had control of the seas and the German merchant marine vanished from all the seven seas. This loss of practically one-quarter of a billion dollars of trade has been more than counter-balanced by the increase in our trade with other countries.

The United States total exports to all countries was 35 per cent greater, and the total imports were 28 per cent greater, in the first 6 months of the war, than the corresponding months of the previous year. This is a substantial increase, and without any analysis, would indicate that at least for the time being, war trade had been of benefit to the United States.

In fact, a study of the main commodities affected, and the direction of trade flow, discloses that abnormal war demands dislocate our normal trade. For instance, the considerable increase in our exports to Europe, including both belligerents and neutrals, represented chiefly manufactured articles, such as munitions, direct and indirect war supplies. This obviously benefited certain lines of industry. Other lines were adversely affected. Also, there has been a sharp decrease in many agricultural exports, and agriculture has been for some years one of our most difficult problems because of our production in excess of demand.

Exports to South American countries have shown a sharp increase due to the fact that commodities formerly purchased in Germany and England could no longer be secured there—an advantage that may cease when the war ends.

Many other instances could be cited. Trade in general may have been increased, but the benefits will prove temporary, and the dislocations of our domestic economy will later, when peace comes, produce serious problems.

The effect, so far, has been less than was generally expected, because of the change in military problems resulting from construction of the Maginot and Siegfried lines, and the developments of air fleets. The difficulty and danger of launching a major land offensive under these conditions has influenced the belligerents so far to adopt blockade and siege tactics. A war of siege permits the belligerents to devote a considerable part of their resources to normal production and trade.

Further changes in our foreign trade depend upon the program of hostilities in Europe. I shall not attempt to prophecy what that will be. We may, however, foresee what is likely to happen in our foreign trade, and its effect upon our domestic economy, if that development takes certain courses.

As long as the European War continues on its present scale, and is largely confined to hostilities by sea and air, it is unlikely that there will be a marked change in present trends although those trends will undoubtedly increase.

If, on the other hand, the war should spread to other continental countries, and if the belligerents should conduct large scale operations on land, as well as in the air and on the sea, the waste of man power, munitions, and war supplies would be enormous. This situation would have rapid and grave results in our foreign trade. It would create great demand for supplies from the United States, not only to the belligerents, but to the neutrals. Our capacity to meet such demands is very great. We have large accumulations of idle capital, millions of unemployed men, unused plant capacity in many industries, and large surpluses in agricultural products. The limiting factors in meeting such an increased war demand would be the means of transportation, and the means of payment—ships and money.

Shipping.—The shipping available at the beginning of the war was substantially greater than in 1914—68 million tons compared to 43 million. The total losses of merchant ships of all countries have amounted so far to about one and a half million gross tons, or a little over 2 per cent of the world's shipping. This is not a serious loss. Unless the German submarine and air attacks on Allied and Neutral shipping become more effective than hitherto, it does not seem likely that a lack of shipping will become a controlling factor in our foreign trade.

Means of Payment.—In the world war the export surpluses from the United States to Europe were paid for by the sale of gold and American securities—a total of over 3 billion dollars. The balance was covered by borrowings in the United States, amounting to about 9 billion dollars. The Neutrality Act passed early in November 1939, provides that all purchases by the belligerents must be paid for in cash on delivery, and the Johnson Act also forbids borrowing from the United States by countries that have defaulted on their war debts to this government. Consequently, the Allies must pay for their purchases in the United States by thesale of goods, gold, and by liquidation of their investments for assets in the United States and other neutral countries.

It is estimated by the Federal Reserve Board that the Allies' holdings of gold and investments amount to about 10 billion dollars. This looks like a large sum but the expenditures of modern war are enormous, and these reserves while adequate for substantial purchases in the near future may be insufficient for a long war.

There are, however, so many aspects to this problem that all that can be said with safety is that it appears likely that in a long and intensified war the means of payment will prove to be a serious limiting factor in our foreign trade.

There is no real benefit, no profit, and no advantage to the United States in any increase in its foreign trade due to abnormal war demands. Our unemployment may be decreased for the moment and certain industries may be expanded. The benefits, however, are transient and limited in scope; and the more our foreign trade is increased by war the greater, more prolonged, and more costly the dislocations that will come when the war ceases.

The economic policies adopted by many countries including our own after the World War did not make us or other countries more prosperous—quite the contrary.

If this war is also followed by a prolonged period of unrestrained economic warfare with all its interferences with normal trade flow, by quotas, embargoes, subsidies, exchange control, and ever higher tariffs, we will again have strikingevidence that the cynical philosopher was right when he declared—"We learn from history only that mankind learns nothing from history."

The American people desire, above all things, peace and prosperity. Fortunately, our geographic position and our economic and military power makes it impossible for any other country to force or drag us into this war as a belligerent. This decision rests entirely in our own hands. It is the will of our people and the policy of its Government, not to become a belligerent in this war.

In the sphere of economics, we have been, we are, and we will continue to be, affected by the war. We cannot escape by any possible course, we cannot segregate the Western Hemisphere or our own Continent from the rest of the world. Any attempt to do so would bring economic consequences even more serious than those that may be produced by the war in Europe.

The flow of our foreign trade will affect the belligerents, and the course of the war, and the war and its conduct by the belligerents will affect our prosperity and domestic economy. We have the duty and the right, and can, fortunately, with safety to ourselves, see that the course of our trade and our trade policies is in accord with our essential longtime national interests.

The future may seem appalling, but let us not forget that of all the great powers we live on the brightest and safest spot on earth, and that our peace and prosperity lies not in isolation or seclusion, but in courageously facing the dangers and difficulties before us.