Trade doesn’t always promote peace: What could go wrong was observed and outlined 80 years ago

India’s big question is how best to adapt to the evolving global arrangements, with the worrisome prospect of rising protectionism, militarism and regionalism. The government is busy trying to close a trade deal with the US and has voices within that want the country to join at least one of the regional free-trade agreements that we have assiduously stayed out of. Are there any relevant lessons from the past?

In that context, one book written at the end of World War II deserves to be read again. The theme of Albert Hirschman’s National Power and the Structure of Foreign Trade (1945) is inseparable from his early political life.

Before becoming one of the 20th century’s most original political economists, Hirschman played an active role in resistance to Nazism. A German-born Jew who fled Hitler’s Germany, he fought in the Spanish Civil War, then worked with the French Resistance against fascism. He helped smuggle hundreds of anti-Nazi intellectuals and artists out of Vichy France.

He is one of the central characters in a 2023 Netflix series, Transatlantic, on the underground operation to sneak refugees out of Europe. His experiences shaped his understanding of how political power operates through channels far more subtle than armies alone. When Hirschman later turned to international trade, he viewed it not as a neutral economic relationship between two countries, but as a potential instrument of coercion. His message resonates today.

In the abovementioned book, Hirschman challenges the dominant view that trade is always mutually beneficial, symmetrical and peace-promoting. Instead, he argues that trade relationships can become asymmetric: one country may depend disproportionately on another for imports, exports or access to markets.

The two key mechanisms are what Hirschman calls “supply effects” and “influence effects.” If a country relies heavily on a single trade partner, it becomes vulnerable to its threats, incentives or sudden withdrawal of trade. Even without explicit coercion, the dependent state may adjust its behaviour to align with the stronger one’s interests, goaded by what Hirschman calls “commercial fifth columns.”

Hirschman devotes one part of his book to explain how Nazi Germany used a foreign trade strategy to increase its leverage in Eastern Europe, which is quite separate from the better known story of its marching armies. The Nazis constructed a network of bilateral trade agreements, clearing arrangements and commodity-specific deals that locked smaller economies to its east into relationships of dependency.

Germany achieved a stranglehold over its smaller neighbours by becoming the primary purchaser of their agricultural produce and their main supplier of industrial goods. These smaller countries increasingly oriented their production, financial systems and even domestic politics to suit the German economy. This process did not require overt threats; their structural dependency itself generated political accommodation. Trade became a weapon of national power.

Two clarifications need to be mentioned. First, Hirschman does not argue that there are no gains from trade, but makes the more nuanced point that these gains are sometimes asymmetric. Second, using trade as statecraft is more than the mercantilist strategy of exporting more than importing. A large country may gain leverage by running trade deficits that make other countries dependent on its domestic demand.

Hirschman asks what smaller countries can do to protect their autonomy in an asymmetric world. His recommendations are strikingly relevant to our times. First, nations should diversify their trading partners to avoid a crushing reliance on any single dominant power. Second, they can build domestic capacity—industry, infrastructure or alternative suppliers—to reduce exposure to coercive shortages.

He developed this theme in greater detail in his subsequent work as a development economist, especially the importance of forward and backward linkages in any industrialization strategy.

Regional cooperation among small states can counterbalance the influence of larger ones, creating a unified market less susceptible to domination. And multilateral institutions can help prevent the coercive leverage that bilateral trading relations may promote.

It is now fashionable to run down the multilateral trading system, but the symmetry that is fundamental to its design—as evident in the principle of ‘most favoured nation’ which provides equal trade opportunities for all countries—is a response to the dangerous asymmetries that arose in the era of imperial powers. International trade should liberate rather than shackle countries.

Hirschman’s early confrontation with totalitarianism taught him that economics is inseparable from politics. National Power and the Structure of Foreign Trade reveals how asymmetries in commerce can evolve into asymmetries in sovereignty. The book was written in a particular historical context, but has useful clues on how countries can negotiate trade turbulence in the Trump era.

The author is executive director at Artha India Research Advisors.