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Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Market integration is not a single measure of how “globalized” the world is. Trade integration tracks goods crossing borders; financial integration tracks links between investors and asset markets. Both weakened during the interwar years, including the Great Depression, but tariff barriers and retaliation were only part of the trade collapse. Measures based on equities and prices tell related, not interchangeable, parts of the story.
What does market integration mean?
Market integration describes how closely markets in different countries are connected. The answer depends on what is being measured:
- Trade integration concerns cross-border flows of goods, including their quantities and prices.
- Financial integration concerns cross-border investment and how closely asset returns in different countries respond to one another.
- Purchasing-power-parity (PPP) evidence compares price levels after accounting for exchange rates. It can indicate connections among prices, but it is not a direct measure of all trade or financial links.
Because these measures capture different connections, a finding about equity returns cannot by itself establish how much goods trade was integrated. Comparisons also depend on the countries sampled, the period studied, and the policy environment.
How did integration change from before 1914 to the modern era?
Two studies using different financial-market measures find a pronounced interwar decline. Taylor’s PPP analysis and Bekaert and Mehl’s equity-market study both identify the interwar period as a low point, but their methods and country samples differ. Neither supplies a universal score for integration across all markets.
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| Study and measure | Sample and period | Finding |
|---|---|---|
| Alan M. Taylor, NBER Working Paper 5742 (1996): PPP and real exchange rates | 20 countries; analysis beginning in the late nineteenth century | Broad support for stationary real exchange rates is mixed, while weaker evidence of cointegration among common-currency price levels is supportable. Taylor identifies the interwar period, particularly the Great Depression, as the nadir of capital-market integration in this measure. |
| Geert Bekaert and Arnaud Mehl, IMF conference paper (September 2017): equity-market integration | 17 countries; sample ends in 2014 | The measured pattern is a “swoosh”: integration was high before 1913, lower in the interwar period, and higher after 1990. The paper finds the post-1990 level exceeded the pre-1913 level in its measure. |
These results do not mean that every market followed the same path. Taylor’s price-and-exchange-rate evidence and Bekaert and Mehl’s equity-return evidence describe distinct dimensions of financial connection; neither directly measures the full volume of world trade. The latter paper’s endpoint is 2014, so its post-1990 finding is not a measurement of current conditions.
Did Smoot-Hawley cause the collapse in trade?
It contributed, but the estimates do not support treating the tariff as the sole cause of the Great Depression-era trade collapse. Douglas Irwin’s 1996 quantitative analysis estimates that Smoot-Hawley itself reduced U.S. imports by 4–8 percent, holding other factors constant. That is a study estimate for the tariff’s effect, not an estimate of the whole decline in imports.
Irwin’s counterfactual attributes nearly one quarter of the observed 40 percent decline in U.S. imports to the rise in effective tariffs. The analysis includes the way specific duties and deflation raised effective tariff rates. Its result therefore concerns the combined effect of those changes in that model; it does not show that Smoot-Hawley alone caused the full import decline or the worldwide collapse in trade.
Retaliation also affected U.S. exports
The effects were not confined to U.S. import duties. In a 2021 study using a 99-country interwar bilateral-trade dataset, Kris James Mitchener, Kirsten Wandschneider, and Kevin Hjortshøj O’Rourke report that U.S. exports fell 15–22 percent to countries that protested the 1930 act, and 28–33 percent to countries that retaliated. These are estimates for the study’s sampled markets and comparisons, not a single global estimate of trade-war damage.
The findings show why the episode is better understood as a combination of economic shock, protectionist policy, and cross-border response than as a one-cause story. They do not establish that tariffs explain every fall in trade during the Depression.
What changed in U.S. trade policy after Smoot-Hawley?
Congress passed the Reciprocal Trade Agreements Act in 1934, delegating authority to the president to negotiate tariff-reduction agreements. Irwin’s account argues that the Depression, as an international phenomenon, motivated that delegation. He also argues that economic changes more closely associated with World War II helped reduce Republican opposition and secure the policy’s survival after the war. The agreements later culminated in the General Agreement on Tariffs and Trade (GATT) in 1947.
This was a shift toward negotiated tariff reductions, not proof that trade barriers disappeared or that all countries and markets became equally integrated. A longer retrospective on interwar policy, reproduced in an NBER-hosted chapter on commodity-market integration, quotes the League of Nations’ 1942 retrospective: “the international conferences unanimously recommended, and the great majority of Governments repeatedly proclaimed their intention to pursue, policies designed to bring about conditions of ‘freer and more equal trade’; yet never before in history were trade barriers raised so rapidly or discrimination so widely practised”. The contrast captures the gap between stated ambitions and policy outcomes in that period.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the history does—and does not—show
- Financial-market measures show a substantial interwar trough, but they do not provide a complete measure of trade integration.
- Protection and retaliation worsened trade conditions in the estimates cited, while the total collapse had multiple causes.
- The 1934 law established a framework for negotiated tariff reduction that fed into the postwar trade system, without making integration uniform or irreversible.
So, was the Great Depression a turning point for globalization? It was a clear low point in the cited measures of financial integration and a period of sharply rising trade barriers and retaliation. But the evidence does not support reducing the history of global trade to Smoot-Hawley alone, or treating one market measure as a verdict on every kind of integration.
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