90 Years young and going strong: Gottfried von Haberler’s International Trade today

Ninety years ago, in 1936, Gottfried von Haberler left Austria permanently at the age of 36 to join the Economics Department at Harvard University. Holding the Galen L.bStone chair in international trade, he spent the next 35 years at Harvard until he retired in 1971.

Many of his groundbreaking works, expanded in the 1933 German edition of his book “Der internationale Handel”, gained so much attention that, in 1936, just as he emigrated to the United States, a revised English edition was quickly published, reaching the global audience his works on trade deserved.

Since its inception, the book has superbly provided a set of tools for international economic relations that would also help avoid major economic policy mistakes today, particularly the costly protectionism that is popular again nowadays. Hence, it is time to celebrate. Not only does it clearly expose a well-grounded theory that virtually revolutionized international economics, but it also illustrates its relevance by drawing on a great many examples and experiences from economic history that have largely been forgotten in current policy debates and policy measures. Furthermore, it shows how far one can go with the Austrian school of economics when applied consistently, including in today’s trade policy discussions. Rather than using abstract models that can hardly be reconciled with Austrian economics anyway, von Haberler’s approach, as presented in his book, is based on understanding, backed up by economic history and policy experience.

Though the English edition of the book is entitled “International Trade”, it actually comes in two parts. The first part focuses more on theoretical concepts, though not exclusively. The second part is devoted entirely to trade policy issues. One might be surprised, however, to find that the first part is divided into two chapters. The first chapter addresses “The Monetary Theory of International Trade”, followed by the “Pure Theory of International Trade”. The division into monetary and real aspects of international economic relations is also common in many contemporary books, usually with the order reversed though. From this viewpoint, the book seems rather roundabout in its approach to the heart of the matter.

However, upon closer inspection, the approach makes perfect sense. Consider the current discussion of trade balances and the policies supposedly designed to “correct” or “treat” deficits (or surpluses, for that matter) in international trade, both in national accounts and bilaterally. The approach shows that interpreting trade deficits as a sign that some countries are taking advantage of others (or even that there is a “rip off”) fails to consider the trade balances’ intertemporal nature. Essentially, unbalanced trade is trading today’s goods for tomorrow’s (or vice versa): it allows to consume and invest more today than what is produced locally in exchange for promises to deliver goods and services at a later point in time, with the bilateral pattern of trade the result of buying those goods and services today at the cheapest. In a market economy, it is thus the outcome of (individual) preferences (or individual values for that matter) and countries specializing according to comparative advantage in the production of either today’s goods or those more innovative, that is, which need more of an investment today before breaking even. As such, it is not different from any (individual) business or consumer within a country. There, however, nobody would claim that subsistence is an economically superior way to deal with the problem of scarce resources.

The ability to borrow and to lend is considered efficient, and for good reason. Internationally, the associated net capital imports and exports which make specialization possible also across time and place straddle different currencies. Nevertheless, it is specialization, which means, it is essentially a trade issue driven by comparative advantage – with a payoff to be shared. In his book, von Haberler goes through all of this in almost all variants of monetary exchanges and regimes, those with flexible as well as those with fixed exchange rates between currencies (and,
historically, the gold standard).

While von Haberler’s clarity in the exposition of the underlying trades is unsurpassed, the basic insights are actually rooted in the works of two members of the so-called second generation in the tradition of the Austrian school of economics, Eugen von Böhm-Bawerk (1851-1914) and Friedrich von Wieser (1851-1926), with von Wieser the successor of Böhm-Bawerk at the University of Vienna and one of the teachers of von Haberler before Haberler’s career took off internationally.

“Capital movements must finally take the form or a transfer of goods and services.”

 

In the closing section of the “monetary” part, von Haberler summarizes how the adjustment takes place when gains from specialization are discovered across time and place, with net capital flows expanding investment and consumption possibilities today in exchange for tomorrow. In his words: “Capital movements must finally take the form or a transfer of goods and services.” (p.64), that is, they have to show up as deficits (imports of goods and services larger than exports) mirroring surpluses (exports of goods and services larger than imports) in other countries.

In doing so, he draws from a lively discussion in the context of the so-called German transfer problem, namely the question of how net transfers of goods and services after World War I were actually achieved internationally and the role of relative prices therein. It was him, who clarified the discussion in the early 1930s: from the perspective of the capital-importing country, relative prices must change in favor of internationally tradable goods so as to shift demand towards them. In the capital-exporting country, it is the other way round. The same change in relative prices makes it more profitable to produce domestic goods in the first country, while in the second, producers turn to the international market. Consequently, countries specialize in different goods, and internationally tradable goods are transferred alongside with the borrowing and lending of capital.

While embedded in a specific historical context, his contribution also illuminates why tariffs on imports in order to curb (or in popular rhetoric, “correct”) supposedly imbalanced trade, will largely fail: if imports over exports in goods and services would tend to fall short of net capital imports because of tariffs tending to choke imports, the respective country’s exchange rate would tend to appreciate: the change in the exchange rate makes imports more attractive, despite tariffs being imposed. At the same time, exports are stifled, resulting in continued trade deficits. Notably, that does not mean that tariffs are “irrelevant”. Far from it. As relative prices are distorted and thus prices not signaling any longer scarcities and adversely affecting the information about (opportunity) costs, they are costly, but not necessarily affecting imports over exports in goods and services as long as international investors remain sufficiently confident in the capital importing country. The bilateral pattern of imports over exports might change; bilateral deficits and surpluses might be different, but not necessarily each country’s sum of imports over exports as capital flows continue.

Tariffs aimed at reducing net imports of goods and services will fail, unless they reduce a country’s attractiveness to foreign investors – to the disadvantage of both sides of the (potential) trade: investment projects cannot be carried out, growth rates are lower, consumption cannot be adjusted, and there are no payoffs to be shared. Of course, protectionist and erratic trade policies might be “successful” in lowering net capital imports as well, but if so, the consequences are clear: misallocation of resources and fewer consumption possibilities over time. The same is to be expected when protectionism around the world puts pressure on exchange rates lowering expected returns for international investors. Trade deficits (and surpluses) are inextricably linked to capital flows from one country to another. Insofar, trying to “talk down” a country’s exchange rate supposedly in order to promote exports and curb imports might be successful, but with a clear price tag attached for all.

It is a different matter, though, when net capital flows and the associated imports of goods and services are not the result of individuals bearing the costs as well as the benefits in a market economy, but rather the consequence of government deficits driving up interest rates. In case of government expenditures beyond revenue and with costs of policy mistakes eventually borne by taxpayers, it is less clear whether funds are spent efficiently, that is, invested to deliver a corresponding real rate of return. Continuing to pile up budget deficits might reach a point at which investors become increasingly skeptical about returns. However, deficit spending by governments is another topic and an issue very different from “unfair trade practices” or some countries taking “undue advantage” of others. Moreover, it is basically each nation’s government’s responsibility to raise and spend funds wisely, rather than the outcome of unfair trade policies of others or even one country’s citizens being ripped off by everybody else.

Von Haberler’s book definitely offers many more insights in the “monetary” section above and beyond these points. From today’s policy perspective, the most notable and valuable ones, however, might be how specialization is achieved over time and in various monetary regimes, often involving triangular (or multilateral) trade.

In this, but even more so in the second part, entitled “The Pure Theory of International Trade”, he shows how wide a concept comparative advantage is when consistently formulated, making this approach one of his most significant contributions to international economics. Although comparative advantage is nowadays common talk, it is seldom fully grasped or understood and appreciated. Most notably, his approach is firmly rooted in the methodological individualism and subjectivism of the Austrian School of Economics. Accordingly, costs are not a given or tied to particular inputs or resources. Rather, they are the outcome of individuals’ subjective evaluations. In this perspective, it is the forgone opportunities that matter. By freeing relative cost comparisons from labor unit requirements in early approaches to the thought of comparative advantage, he demonstrated the strength of the concept. Accordingly, what matters is not any particular cost component considered objectively measurable, but rather how forgone alternatives are being evaluated, regardless of the inputs used. Therefore, this logic applies even in today’s complex world, where the production of goods often involves numerous intermediaries.

Moreover, in using an elegant trick, he considerably widened the insights: instead of the traditional exposition limited to two goods, he introduces the concept of a chain of comparative advantage on the supply side by ranking an indefinite number of goods and industries according to relative costs. When adding the implicit demand side from the monetary part of the theory section, where it states that everything must add up, his toolset reveals a common misconception: trade is not a zero-sum game in which some countries gain market share at the expense of others. Even if some countries catch up technologically with industries expanding while others lose some of theirs, it does not yet mean that the latter’s citizens are worse off. Prices of those goods are lower than otherwise, raising incomes in real terms. Moreover, rising costs in advancing economies open up market prospects for producers elsewhere. Clearly, not everyone benefits equally, but this is how competition works. It ensures that scarce resources are used economically according to people’s preferences, including the discovery of new, more efficient, processes and new products. Compared to other methods, trade policy is a costly way to address matters of income distribution or provide a safety net. Other than what the heading “The Pure Theory of International Trade” thus might suggest, von Haberler’s contributions are not just a more theoretical chimera; they are of practical relevance.

In the second part of the book, he specifically turns to trade policy issues. Carefully discussing all arguments in favor of tariffs, he reveals their misconceptions and costliness, including so-called “Emergency Tariffs” (p. 289). The same applies to other protectionist devices, as they carry a tariff equivalent that distorts relative prices, no matter how sophisticated they are designed. They often even fail to achieve the stated goals. Sound theory thus made him also a strong proponent of free trade, flexible exchange rates, and a staunch advocate of a liberal multilateral trading order.

Focusing on trade policy regimes, he devotes a whole section to the Most Favored Nation (MFN) principle, showing that the unconditional variant is the primary regime compatible with the multilateral character of trade and a natural pillar of a liberal trading order. Accordingly, countries should not discriminate among trading partners in their trade policies: any “concession” in tariff rates or other policy measures granted to one trading partner country is to be automatically extended to all others no matter whether they offer similar in return. Apart from the fact that lowering tariffs and other trade barriers is not a concession but a sensible way to deal with scarce resources, a narrow, reciprocal trade policy that conditions one’s own policies on the behavior of others is a recipe for interest groups to drive up protectionism rather than tame it. The
fact that this kind of policy was not uncommon historically, at least up until the early 20th century, does not yet prove its success. As he brilliantly demonstrates, any attempt to introduce conditionality effectively renders the Most Favored Nation principle ad absurdum by opening it up to arbitrary interpretation. This is a phenomenon that is all too familiar these days. Rather than tying “concessions” to other countries’ trade policies by whatever measure – which is a narrow concept of reciprocity – the Most Favored Nation principle rests on the notion of diffuse reciprocity: in the long run, and across trading partners, it provides benefits to all. As such, it aligns with the multilateral nature of international trade. Committing to the unconditional Most Favored Nation principle has its merits when it comes to dealing with interest groups pushing for protection. This does not preclude retaliation when enforcing a liberal trade policy regime.

As he points out, an even narrower and more specific interpretation of “reciprocity” that aligns tariff rates with those imposed in specific countries’ industries fails to recognize that import restrictions generally target different industries in different countries. Furthermore, this approach completely abandons the Most Favored Nation principle in whatever form as a proper guideline for trade policy. As a matter of fact, much of the progress in multilateral trade liberalization after World War II was actually achieved by starting from the status quo and understanding reciprocity in a marginal rather than in an absolute way. The focus was not on absolute equality, as for instance, equal tariff rates. Rather, it was about taking incremental steps, which could differ in form and amount by partner countries, thus lowering the risk of negotiations getting stuck. Both in trade policy and in theory, his book on International Trade – published 90 years ago – remains as relevant in 2026 as ever.