Haberler’s essay is a critical survey of trade theory, historical evidence, and development policy concerning the terms of trade, especially for primary-producing and underdeveloped countries. It aims less to present new data than to discipline a debate Haberler regards as too pessimistic and too ready to justify protectionism.
The present essay tries to elucidate various connections between the terms of trade and economic development.
The opening conceptual move is to separate different meanings of “terms of trade.” Commodity terms of trade, factorial terms of trade, and income terms of trade do not carry the same welfare implications. A fall in export prices relative to import prices may be offset by productivity gains or larger export volume; an improvement may be bought at the cost of reduced trade and lower welfare. For Haberler, the relevant question is not whether a country can force its price ratio upward, but whether trade policy raises real income once elasticities, quantities, productivity, and import capacity are considered.
In view of these circumstances, it is altogether natural that much attention is paid to the terms of trade as one of the factors affecting the supply of badly needed imports.
This concern is legitimate because developing countries depend on imports of machinery, capital goods, and technical inputs. Yet Haberler argues that the debate often treats price ratios as if they were self-interpreting. They are not. A change in the terms of trade must be read alongside changes in domestic productivity, foreign demand, transport costs, quality, trade volume, and the offer curves behind the observed movement. Otherwise, statistical movements become the basis for misleading welfare judgments.
The essay’s central polemical target is the doctrine of secular deterioration in the terms of trade of primary producers. Haberler distinguishes the empirical claim from its explanation, extrapolation, welfare meaning, and policy use. He challenges the evidentiary foundation, especially the reliance on British commodity terms-of-trade series as a proxy for the experience of underdeveloped countries generally.
It is well known that the hypothesis under consideration is based entirely on the annual index of the United Kingdom's commodity terms of trade.
He also doubts the standard explanations. Monopoly wages in manufacturing countries, Engel’s Law, and claims about unequal bargaining power may explain particular movements, but they do not establish a historical law of worsening primary-product prices. Nor does the opposite Ricardian-Malthusian fear—that diminishing returns must make food and raw materials ever dearer—offer a reliable guide. Both pessimistic and anti-pessimistic certainties exaggerate partial tendencies.
Haberler’s policy conclusion is correspondingly cautious. The static optimum-tariff argument is analytically valid but limited: it depends on present elasticities of foreign demand and supply, not on forecasts of inevitable long-run deterioration. A tariff may improve the commodity terms of trade, but only up to the point where falling trade volume outweighs the price gain.
The larger these elasticities, that is to say, the larger the percentage reaction of foreign demand and supply to a given percentage change of the prices charged, the sooner this point is reached, and the lower is the optimum tariff.
The essay then turns to cyclical instability. Haberler concedes that primary-product prices often fluctuate more sharply than manufactured goods, so developing countries may face worsened terms of trade in depressions and improved terms in booms. But he again insists on qualification: patterns differ by commodity, country, period, freight costs, and export composition. The Great Depression should not be converted into a universal model.
Against sweeping commodity agreements, generalized buffer stocks, or permanent protection, Haberler emphasizes macroeconomic resilience: prudent fiscal and monetary policy, reserve accumulation during booms, use of reserves or international credit in downturns, and avoidance of inflationary or hyperprotectionist responses. He assigns major responsibility for preventing severe world depressions to industrial countries, while urging developing countries to frame their own policies in terms of productivity, employment, and adjustment rather than unverifiable historical pessimism.
The essay’s enduring contribution is methodological. Haberler does not deny that terms-of-trade shocks matter for development. He denies that they can be interpreted apart from productivity, quantities, elasticities, quality change, transport costs, and macroeconomic conditions. His alternative to the secular-deterioration thesis is a conditional framework in which trade can constrain development, but policy must rest on specified mechanisms rather than on broad narratives of inevitable decline.
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