Impact of Tariffs on Industries and Prices in Finland during the Interwar Period

Abstract

While there has been some analysis of the role of tariffs in Finland during the interwar period, quantitative estimates of the benefits and drawbacks are quite rare. This article examines the impact of tariffs on industries value added and prices during the interwar period calculating the effective rate of protection as well as using an input-output price model. The basis for both calculations is an input-output table describing the Finnish economy in 1928. It is argued that the Finnish tariff policy was basically a contra-price-fall policy, directed merely towards agricultural and food products. The focus was on securing the domestic supply of food products. The results also suggest that tariffs did not provide sufficient protection to new industries – contradicting the infant industry argument repeated in some of the earlier studies.

Keywords:

• Great Depression
• effective rate of protection
• foreign trade
• input-output

Acknowledgements

While writing this article, the author was affiliated with the Department of Social Science History at the University of Helsinki. The author would like to thank two anonymous referees for their very helpful comments.

Notes

¹Feinstein, C., Temin, P. & Toniolo, G., The European Economy between the Wars. Oxford: Oxford University Press 1997, 146–165.

²Lamberg, J.-A., Taloudelliset eturyhmät neuvotteluprosesseissa. Suomen kauppasopimuspolitiikka 1920–1930-luvulla. Bidrag till kännedom av Finlands nature och folk 154, Helsinki: Finska Vetenstep-Societeten 1999, 37–39; see also Lamberg's footnote 136 on the Finnish level of protection; Heikkinen, S. & Kuusterä, A., 1990s Economic Crisis, The Research Programme on the Economic Crises of the 1990s in Finland: Down from the Heavens, Up from the Ashes, The Finnish Economic Crisis of the 1990s in the Light of Economic and Social Research. Eds J. Kalela et al. Helsinki: VATT –julkaisuja 27:6, Valtion taloudellinen tutkimuskeskus 2001, 34–35, 382–388; Official statistics SVT 1A, 1920–1940.

³See, e.g., Appleyard, D. R. & Field, A. J., International Economics, 3rd edn. Boston, MA: McGraw-Hill/Irwin 1988.

⁴Heikkinen, S., Suomeen ja maailmalle, Tullilaitoksen historia. Helsinki: Tullilaitos 1994, 392.

⁵Hjerppe, R. & Lamberg, J.-A., Changing structure and organization of foreign trade in Finland after Russian rule, in Economic Change and the National Question in Twentieth-century Europe, Ed. A. Teichova, H. Matis, & J. Pátek. Cambridge: Cambridge University Press 2000, 395.

⁶Jutila K. T & Konttinen, J. H., Maatalouspula Suomessa vuosina 1928–35 sekä toimenpiteitä ja tuloksia sen torjumisessa. Porvoo: WSOY 1936, 11–15, 19, 83–84.

⁷Kalela, J., Pulapolitiikka, Valtion talous- ja sosiaalipolitiikka Suomessa lamavuosina 1929–1933. Tutkimuksia 13, Helsinki: Työväen taloudellinen tutkimuslaitos 1987, 19, 72–89, 135–136.

⁸Viljanen, V. M. J., Piirteitä itsenäisen Suomen tullipolitiikasta. Helsinki: 1931, 6, 21–25.

⁹Ahvenainen, J. & Vartiainen, H. J., Itsenäisen Suomen talouspolitiikka, in Suomen taloushistoria 2, Eds. J. Ahvenainen, E. Pihkala & V. Rasila. Helsinki: Tammi 1982, 181–182.

¹⁰Lamberg, Taloudelliset eturyhmät neuvotteluprosesseissa, 134–152.

¹¹For studies applying the concept of ERP, see, e.g., Basevi, G., The United States Tariff Structure: Estimates of Effective Rates of Protection of United States Industries and Industrial Labor, Review of Economics and Statistics, vol. 48, no. 2, 1966: 147–160; Witthans, F., Estimates of Effective Rates of Protection for United States Industries in 1967, Review of Economics and Statistics, vol.. 55, no. 3, 1973: 362–364; Capie, F., The British Tariff and Industrial Protection in the 1930s, Economic History Review, vol. 31, no. 3, 1978: 399–409; Kitson, M., Solomou, S. & Weale, M., Effective Protection and Economic Recovery in the United Kingdom during the 1930s, Economic History Review, vol. 44, no. 2, 1991: 328–338. The concept of the ‘effective rate of protection’ has been also diffused into textbooks on international trade (see, e.g., Appleyard & Field, International Economics).

¹²Calculation of the effective rate of protection relies on the assumption that the country concerned is a small open economy. The critical assumption with the effective rate of protection is that companies have full market power to transfer rises in world prices to domestic prices. The change in relative prices only affects the share of production that has been sold domestically, and the proportion exported does not gain from the impact of customs duties. Adjustment has been made to take into account only the proportion of domestic sales. This was done in the practical application by weighting the nominal tariff according to the proportion of domestic sales by industry.

¹³When the price model is used, it is assumed that all conditions of full competition are fulfilled.

¹⁴Detailed description of methods and sources used for compiling the input-output table, as well as model descriptions, are presented in: Kauppila, J., The Structure and Short-term Development of Finnish Industries in the 1920s and 1930s: An Input-output Approach , 246. Helsinki: Statistics Finland 2007.

¹⁵Maddison, A., Monitering the World Economy 1820–1992. OECD: Paris, 2003.

¹⁶Hjerppe, R., Den stora depressionen och Finland, in Strukturernas dynamik. Kontinuitet och förändring i ekonomisk historia. Festskrift till Olle Krantz, Ed. L. Andersson-Skog & M. Lindmark (Occasional Papers in Economic History 8). Umeå: Umeå Universitet 2004, 15–17.

¹⁷Veikko Halme calculated that the correlation coefficient between GDP and exports was as high as 0.97 during the years 1926–1952 (Halme, V., Vienti Suomen suhdannetekijänä vuosina 1870–1939. Suomen Pankin taloustieteellisen tutkimuslaitoksen julkaisuja, Sarja B:16. Helsinki: 1955, 339).

¹⁸Kauppila, The Structure and Short-Term Development.

¹⁹Halme, Vienti Suomen suhdannetekijänä, 216–233.

²⁰Hjerppe, Den stora depressionen, 18.

²¹Ahvenainen, J., Suomen paperiteollisuuden kilpailukyky 1920- ja 1930-luvulla. Acta Forestalia Fennica, vol. 151, 1976: 36–45.

²²Halme, Vienti Suomen suhdannetekijänä, 231–243.

²³Hjerppe, R., Finnish Economy, 1860–1985: Growth and Structural Change. Kasvututkimuksia XIII, Helsinki: Bank of Finland publications1989, 155–156; Halme, Vienti Suomen suhdannetekijänä, 241–242.

²⁴KOM 15:1919; Jutikkala, E., Omavaraiseen tullipolitiikkaan, in Ahvenainen et al., Suomen taloushistoria 2, 215. Social democrats in particular opposed subsidies for agriculture as they were paid by the most low-income members of the society’ (Kalela, Pulapolitiikka , 87).

²⁵International studies have found that the tariff level has not been an explanatory factor in long-term economic development (see, e.g., Kitson et al., Effective protection and economic recovery; Hawke, The United States Tariff and Industrial Protection).