Reciprocal Trade Agreements in the World Economy 9780231889261

Table of contents :
Acknowledgments
Contents
I. Basic Principles of Present American Commercial Policy
II . United States Experience with Reciprocal Trade Treaties and Agreements Prior to 1934
III. Development of United States Foreign Trade and Equality of Treatment
IV. Relation Between Mass Unemployment, Multilateral Trade, and Autonomous Restrictions
V. The Reciprocal Trade Agreements Act of 1934
VI. Effects of the Reciprocal Trade Agreements
VII. Domestic and Foreign Criticisms Considered
VIII. Implementing the Trade Agreements in a Divided World
IX. Concluding Observations
Appendix
The Committee on International Economic Policy

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T H E

C O M M I T T E E

O N

I N T E R N A T I O N A L

ECONOMIC

POLICY

in cooperation with THE

C A R N E G I E E N D O W M E N T FOR INTERNATIONAL

PEACE

BOARD OF DIRECTORS WINTHROP ROBERT L . WILLIS H . JOHN W . J.

W . ALDRICH,

GULICK, JR.,

Chairman

Secretary-Treasurer

BOOTH

DAVIS

CLIFFORD FOLGER

ROBERT M .

GAYLORD

ERIC A .

JOHNSTON

FRED I.

KENT

ROBERT

LEHMAN

PHILIP D .

REED

ALGER HISS

JAMES T .

PAUL G .

EUGENE P .

HOFFMAN ELIOT

ROBERT L .

WINTHROP

COMMITTEE

BOOTH,

GULICK, JR.,

MELVIN J.

THOMAS

WADSWORTH

EXECUTIVE WILLIS H .

SHOTWELL

Chairman

Secretary-Treasurer

Fox, Special Consultant

W . ALDRICH

FRED I.

ALGER HISS

KENT

PHILIP D . JAMES

T.

SHOTWELL

(For list of members see page 83)

REED

I

AJIT-T30

RECIPROCAL TRADE AGREEMENTS IN THE WORLD ECONOMY By

J. M. LETICHE Department of Economics University of California, Berkeley, California Formerly with the Council on Foreign Relations, New York

KING'S C R O W N PRESS M O R N I N G S I D E HEIGHTS, NEW

1948

YORK

COPYRIGHT

1948

BY

C O L U M B I A U N I V E R S I T Y PRESS PRINTED IN T H E UNITED STATES OF AMERICA

KING'S CROWN

PRESS

is a division of Columbia University Press organized for the purpose of making certain scholarly material available at minimum cost. Toward that end, the publishers have adopted every reasonable economy except such as would interfere with a legible format. The work is presented substantially as submitted by the author, without the usual editorial attention of Columbia University Press.

PUBLISHED IN GREAT BRITAIN AND INDIA B Y GEOFFREY C U M B E R L E G E ,

OXFORD UNIVERSITY

LONDON AND BOMBAY

PRESS

ACKNOWLEDGMENTS

I cannot express adequately my intellectual indebtedness to Professor Jacob Viner and Professor Theodore W. Schultz. While much of what follows has been influenced by their teachings and writings, it is a pleasure for me to take full responsibility for its contents. The following friends, colleagues, and government officials have made helpful suggestions and have offered information which otherwise would have been unavailable to me: Professors P. Neyboe Andersen, B. H . Beckhart, John B. Condliffe, Malcolm M. Davisson, Howard S. Ellis, William J. Fellner, William A. Fowler, Robert L. Gulick, Robert J. Kerner, Arthur H . Leigh, and James T. Shotwell. Most of the diagrams used in this study were drawn for me by the Institute of Economics at Berkeley. To my wife I am indebted for general assistance and literary criticism. J.M.L.

CONTENTS Page I . B A S I C P R I N C I P L E S OF P R E S E N T A M E R I C A N

COMMERCIAL

POLICY II. UNITED

I STATES

EXPERIENCE

T R E A T I E S AND A G R E E M E N T S

WITH

RECIPROCAL

TRADE

PRIOR TO 1 9 3 4

2

The Growth of Protection Reciprocal Trade under Protection III.

DEVELOPMENT

OF U N I T E D

STATES

2 3 FOREIGN T R A D E

AND

E Q U A L I T Y OF T R E A T M E N T

6

Strong Bargaining Position and Conditional Treatment . United States Bargaining Position Weakens Changing Role of the United States in World Economy Adoption of Unconditional Most-Favored-Nation Clause IV.

RELATION

BETWEEN

MASS

UNEMPLOYMENT,

MULTI-

L A T E R A L T R A D E , AND AUTONOMOUS R E S T R I C T I O N S V. THE

RECIPROCAL T R A D E AGREEMENTS A C T

OF

. . .

1934

13 .

Objectives Provisions Administrative Machinery Bargaining Devices New Rules for Procedures VI.

E F F E C T S OF T H E R E C I P R O C A L T R A D E A G R E E M E N T S

24

D O M E S T I C AND FOREIGN C R I T I C I S M S C O N S I D E R E D

. . .

Continuity of Policy Industrially Underdeveloped Areas Tariff Adaptation vs. Tariff Elimination Wartime Experience Tariff Reductions and "Full Employment" VIII.

IMPLEMENTING

THE

TRADE

16

16 16 18 20 22

Concessions Obtained by the United States Concessions Granted by the United States Imports: A Strong Bargaining Weapon in International Trade VII.

6 8 8 10

AGREEMENTS

IN A

WORLD

26 29 33 36

36 36 38 40 42 DIVIDED 45

Trade Relations between Diverse Economies vii

48

Page The Position of the U.S.S.R Trade Relations between Comparatively Free and Mixed Economies Long-Range Domestic and Foreign Responsibilities . . IX.

50 57 60

CONCLUDING OBSERVATIONS

64

APPENDIX

67

DIAGRAMS

I. Weight of U.S. in World Economy, 1946-47

ii

II. Development of United States Foreign Trade, by Economic Classes, 1851-1940

8

III. National Income and Imports of a Number of Countries, 1930

25

IV. The Trading World, 1938 V. Weight of U.S. inWorld Economy

26 31

V I . Weekly Earnings, 1939, Protected, Domestic, and Export Industries

40

V I I . Nations Having Signed Reciprocal Trade Agreements, January 1, 1948

46

VIII. The Trading World, 1946

58

TABLES

I. United States Foreign Trade, by Economic Classes, Average 1851-60 and Five-Year Average, 1861-1945 . . .

7

II. Average Import Duties in a Number of Countries, 1913 and 1925, Expressed in Percent of the Prices of the Commodities

10

III. Decline in Dollars Supplied and Dollars Used, 1929-1939

14

IV. United States Trade with Trade-Agreement Countries and with All Other Countries, 1938-391 Compared with 2

1934-35

vm

7

Page V . Trade in Agricultural and Non-Agricultural Commodities with Trade Agreement and Non-Agreement Countries .

30

V I . Proportion of Each Additional Dollar of National Income Spent on Imports, 1920-38

32

V I I . Percentage Decline of U.S. Merchandise Imports, 1925-38

33

V I I I . Imports from the United States in 1939, on W h i c h Concessions of Primary Interest Were Made by Listed Countries in the General Agreement on Tariffs and Trade

45

IX. United States Imports in 1939, Total and by Kind, and Extent of Concessions Made in the General Agreement on Tariffs and Trade

47

X. Part I: Geographic Distribution of World Exports and Imports, 1946 Part II: Development of Distribution of U.S. Exports and Imports, 1946 as Compared with 1936-38

56 57

XI. Bilateral Trade Agreements between European Countries, 1947

59

XII. Nations Having Signed United States Reciprocal Trade Agreements, January 1, 1948

67

XIII. United States Foreign Trade and National Income, 1913 and 1919-45

68

X I V . Imports from Trade Agreement Countries on W h i c h Concessions Were Made and on W h i c h N o Concessions Were Made, 1939

69

X V . United States Imports of Selected Feed Grains 1939-44 •

7°

X V I . United States Treaties and Executive Agreements Providviding Conditional Most-Favored-Nation Treatment . .

71

X V I I . Bilateral Agreements between Countries of Western Europe and Scandinavia

72

X V I I I . Bilateral Monetary and Other Financial and Economic Agreements of the United Kingdom

74

IX

Page XIX. Agreements of Contracts for the Purchase of Food Products by the United Kingdom

75

X X . Bilateral Agreements between Countries of Western Europe and Scandinavia and Countries of Eastern and Central Europe

76

XXI. Bilateral Agreements between Countries of Western Europe and Scandinavia and Countries of the Mediterranean and Iceland

78

XXII. Agreements between Countries of the Mediterranean Area and Iceland

79

XXIII. Agreements between Countries of Eastern and Central Europe

80

X X I V . Agreements between Countries of Eastern and Central Europe and Countries of the Mediterranean and Iceland

82

x

I . B A S I C P R I N C I P L E S OF P R E S E N T A M E R I C A N C O M M E R C I A L

POLICY

The Reciprocal Trade Agreements embody the basic principles o f American commercial policy—principles which have guided the United States in the Bretton Woods Agreements, the Anglo-American Loan Agreement, the General Agreement on Tariffs and Trade, and the Havana Charter for an International Trade Organization. These principles may be stated briefly as follows: first, that movement toward freer and multilateral trade is beneficial to all nations that participate in it. Second, that equality of treatment or the "unconditional most-favored-nation clause" should be accepted, on both economic and political grounds, as a governing principle in the economic relations between separate nation states. And third, that an expanding volume of trade with a minimum of direct governmental regulation, and with a substantial reduction of tariffs on a reciprocal and mutually advantageous basis, is vital for peace and prosperity.1 But much apprehension has been voiced both at home and abroad with respect to our trading program. Foreign countries have wondered whether Congress may decline to extend the Reciprocal Trade Agreements Act; particularly in view of the fact that: a) the program was initiated by a Democratic Administration which has not displayed unqualified and understanding enthusiasm for it; b) the majority of the Republicans in both Houses voted against the Act which authorized the President to negotiate reciprocal tariff reductions without specific reference to Congress; and c) the Republicans are now in a majority in both Houses of Congress. To appraise realistically the operation and effects, the available alternatives, and the place of the Reciprocal Trade Agreements in a divided world, it will be necessary to summarize concisely the experience of the United States with reciprocal trade. i For the application of these principles see the General Agreement on Tariffs and Trade, Vol. i, "Final A c t Adopted (by 2 3 countries) at the Conclusion of the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment," on October 30, 1947 (4 vols.; United Nations; Lake Success, 1947); and the Havana Charter for an International Trade Organization (Havana, Cuba, March, 1948).

I

I I . U N I T E D S T A T E S E X P E R I E N C E WITH R E C I P R O C A L T R E A T I E S AND A G R E E M E N T S PRIOR TO

TRADE

1934

The Growth of Protection As early as 1793, Thomas Jefferson suggested that the United States negotiate reciprocal trade treaties, 1 but with few exceptions (such as the reciprocity treaty with Canada from 1854 to 1865) we followed until the turn of the twentieth century an independent, autonomous, non-bargaining tariff policy. Moreover, from about the second quarter of the nineteenth century, our tariff policy has been predominantly protectionist. From 1789 to 1815 the tariff laws of the country had been shaped chiefly by the fiscal needs of the Government: the need for revenue had determined the custom duties imposed and the desire to provide protection for industry had been a minor consideration. Custom duties provided approximately 90 per cent of the Federal Government's revenue. Beginning, however, with the Tariff Act of 1816, special interest groups became increasingly concerned with the exclusion of foreign competition as a means of monopolizing the home market. Much stress was laid on instances of British dumping; and "infant industries" became vested interests, lobbying for ever-higher tariffs. In 1828 a strange political combination led to the adoption of a tariff so extreme and so ill-advised as to cause a reaction. The South was particularly offended by it, and in 1833 it was replaced by a tariff which went far in the direction of freer trade. There followed a gradual reduction of duties, ending in 1842 with a brief period of very low duties. In the four years 1 8 4 2 - 4 6 we again had a strong application of protection. And in 1846 began what is often called a period of free trade, but was in reality one of moderated protection. In 1857 the protection was further moderated, and for a few years there was as near an 1 "Some nations, not yet ripe for free commerce in all its extent, might still be willing to mollify its restrictions and regulations for us, in proportion to the advantages which an intercourse with us might offer. Particularly they may concur with us in reciprocating the duties to be levied on each side, or in compensating any excess of duty by equivalent advantages of another nature." (From Jefferson's Report to Congress, as Secretary of State, December 16, 1 7 9 3 , on " T h e Privileges and Restrictions on the Commerce of the United States in Foreign Countries," in Writings, ed. Paul Leicester Ford [New York: G . P. Putnam's Sons, 1895], Vol. V I ( 1 7 9 2 - 1 7 9 4 ) , p. 479.) See also ibid., pp. 481 et seq. For an interesting treatment of the relation between commercial policy, tariff systems, and political diplomacy in early modern history, see Jacob Viner, " T a r i f f s , " Encyclopedia of the Social Sciences; and U . S. Tariff Commission, Reciprocity and Commercial Treaties (Washington: Government Printing Office, 1 9 1 9 ) , pp. 2 1 - 4 8 .

2

approach to free trade as the country had experienced since 1816. But after 1861 the general trend was one of increasing protection, defended on the ground that higher tariffs were required: a) to stimulate American industries so that they could take advantage of the economies of largescale production; b) to protect American labor from the competition of less highly paid foreign labor; c) to diversify social life and industrial opportunities; and d) to assure military and political security. These arguments in favor of increased protection were manifestly those of high-tariff proponents.2 Reciprocal Trade under Protection The statistical evidence concerning the influence of these high tariffs on national prosperity is necessarily inconclusive. But experience suggests that our policy of excessive protection occasioned foreign retaliation. In 1890 the Republican Secretary of State, James G . Blaine, championed reciprocity as a means of opening Latin American markets to United States farm products. In the same year Congress wrote into the McKinley Tariff provisions empowering the President to regulate specified tariff duties on the basis of "reciprocity." This was our first comprehensive program for tariff bargaining. But the McKinley Tariff contained no substantive reciprocity provisions. Indeed, they may have been the reverse. The President was authorized to suspend the free admission of coffee, tea, hides, sugar, and molasses from countries imposing unequal and unreasonable duties on products from the United States, and to impose thereon a stated list of penalty duties. This was obviously a penalty rather than a concession type of bargaining.3 2 T h e reader may wish to consult the good, detailed account of the growth of protection by F. W . Taussig, Tariff History of the United States (8th ed., N e w York: Putnam, 1931), especially pp. 1-24, 60-75, " 5 et seq. 3 Cf. Section III of the Act. In the main the Republican Party identified itself with increasingly protective duties, while the Democrats often advocated duty reductions. T h e McKinley Tariff in effect raised the duties on primary products like sugar, molasses, tea, coffee, and hides. It is interesting to note, however, that in his last speech President McKinley said: " . . . We must not repose in fancied security that we can forever sell everything and buy little or nothing. . . . Reciprocity is the mutual outgrowth of our wonderful industrial development. . . . T h e period of exclusiveness is past. T h e expansion of our trade and commerce is the pressing problem. . . . A policy of good will and friendly trade relations will prevent reprisal. . . . If perchance some of our tariffs are no longer needed for revenue or to encourage and protect our industries at home, why should they not be employed to extend and promote our markets abroad?" (Speech at Buffalo, September j , 1901, reprinted in the American Monthly Review of Reviews, Vol. X X I V [October, 1901], pp. 432 et seq.)

3

Ten reciprocity treaties were concluded under this law from 1891 to 1892. The penalty duties were only moderately effective, both as a means of retaliation, and as a means of securing some tariff concessions. There was a decrease in the imports of sugar from penalized countries, and tariff concessions were obtained in return for a free market for sugar in the United States. Exports to reciprocity states increased, while exports to other countries fell off. But on the whole, the results were understandably meager. And, as might have been expected, the negotiations were not conducive to international comity. In 1894 a new duty was placed upon sugar, nullifying the former treaties and arousing resentment and retaliation. The second attempt at trade reciprocity was made by the Republican Party in the Dingley Tariff of 1897. Section III of the Act expressly authorized the President to seek reciprocal trade agreements, and to make them effective without Senate approval. These concessions were restricted, however, to minor duty reductions on argols, brandies, champagne and all other sparkling wines, still-wines, and vermouths, paintings and statuary. The President was authorized to reduce duties on these articles only when coming from countries making equivalent concessions to the products of the United States. In addition, the President was empowered to secure concessions in return for the pledge to withhold retaliatory duties on such free-list articles as coffee, tea, and tonquin. Under this section of the Act, several insignificant tariff agreements were concluded.4 Section I V of the Dingley Tariff authorized the negotiation of trade treaties of a wider scope, involving duty reductions up to 20 percent on any product. The Act required, however, that the treaties be ratified by the Senate and approved by Congress. Staunch protectionists immediately opposed the treaties negotiated under this section; and, failing to obtain Senate ratification, they came to naught. In fact, despite the efforts of President Taft and Theodore Roosevelt, none was ever reported out of the Senate Committee on Foreign Relations. In 1909 the then-existing reciprocity agreements with most countries were canceled. The Payne-Aldrich Tariff of that year rejected the policy of seeking favors by granting reciprocal concessions, and two tariff 4 T h e Agreement with Cuba was distinctly a preferential accord. Generally, the Dingley Tariff provided for increased protection "when," as Taussig pointed out, "the general trend of the country's development made a liberal policy at once easier and more inviting." op. cit., p. 358.

4

schedules were adopted: the maximum and the minimum. The maximum schedule was supposedly the general tariff, so that in form, the policy was one of concession. But in fact, the minimum rates were applied in the majority of cases, and the maximum rates were merely held as a club to be imposed as penalties against unequal treatment of American products. The maximum-minimum schedules had inherent bargaining disadvantages even when craftily used. They limited the range of concessions, and disclosed in advance the full range of tariff reductions which the negotiators were authorized to make. Our experience with them was not a happy one. In 1913, by way of the Underwood Tariff, we reverted to an autonomous, non-bargaining tariff policy. This Underwood Tariff represented a bold and forthright attack upon increasing protection through the unilateral reduction of our own tariffs, but most of the effect was lost in the economic chaos attendant on World War I. The attempts which were made at the turn of the century to secure tariff concessions from foreign countries through reciprocal trade treaties and trade agreements therefore failed. There were two predominant reasons for this failure. First, it was found virtually impossible to obtain Senate ratification of the trade treaties negotiated under the Tariff Acts of 1890 and 1897. (In this connection it will be recalled that a two-thirds majority is required in the Senate for the ratification of a [trade] treaty.) The United States has signed about 25 such trade treaties in the last one hundred years, which required approval of either the Senate or the House of Representatives, or both. Only three of these treaties have been put into force, those being with Canada, Hawaii, and Cuba, areas with which the United States has particularly close political ties. Second, the range of commodities which fell under the jurisdiction of reciprocal trade agreements, and therefore did not require Congressional ratification, was exceedingly small. With the failure of reciprocity provisions in our tariff laws to bring about a lowering of trade barriers, and with the unlikelihood that any substantial tariff reductions would be made by unilateral action, it followed that the only remaining opportunity for lower tariffs was by means of a tariff law which would authorize tariff reductions by executive action, without specific Congressional ratification. In effect, there was left no available alternative but Reciprocal Trade Agreements based upon equality of treatment to all countries entitled to it.

5

I I I . DEVELOPMENT OF U N I T E D STATES FOREIGN TRADE AND EQUALITY OF TREATMENT

Strong Bargaining Position and Conditional Treatment American commercial policy from about 1815 to 1913 was, generally speaking, based on increasing protectionism, combined with "conditional" equality of treatment. This conditional most-favored-nation clause was first introduced in our commercial treaty with France in 1778. Under it, each contracting party agreed to extend to the other, in return for "equivalent compensation," any concessions in commercial matters which it had granted, or would subsequently grant, to any third country. But when England signed the Cobden-Chevalier Treaty with France in i860, which marked her full acceptance of the principle of free trade, the "unconditional" most-favored-nation clause was a cardinal point of the treaty, i.e., equality of treatment of imports and of exports without regard to their source or their destination. Such unconditional clauses had existed in commercial treaties at least since the sixteenth century; and after i860, they were adopted by most European countries. From 1870 to 1914 through their operation the lowest tariff rate conceded by each European country to any other country became, with few exceptions, the rate extended 'without compensation to all other countries. The American conditional and the European unconditional pledges were found to be incompatible in the same treaty system, for a conditional pledge by the United States to another country was a pledge to extend freely what had been given freely to any other country. Thus, if the United States signed a single unconditional treaty, and then granted a concession to some other country on the basis of equivalent compensation (conditional), it would be obliged to grant the same concession freely to the country with the unconditional treaty. The United States would then be in the position of having granted the concession freely to one country and would therefore be obligated to extend the same concession freely to each of those countries with which she had a conditional most-favored-nation agreement. The equivocal interpretation of these pledges led to acrimonious diplomatic controversy. 1 1 A list of United States treaties and executive agreements providing conditional most-favored-nation treatment is appended. (See Appendix, Table X V I . ) For an account of the development and application of the most-favored-nation clause see Jacob Viner, " T h e Most-Favored-Nation Clause in American Commercial Treaties," Journal of Political Economy, Vol. X X X I I (February, 1924), pp. 1 0 1 - 1 2 9 ; and, by the same author, " T h e Most-Favored-Nation Clause," Index (Svenska Handelsbanken,

6

The virtues of each system were estimated in relation to the circumstances of each country which practiced it. The chief argument for the conditional or American pledge was that it is unfair that a country should be obligated to grant, without compensation, concessions which other countries have secured only by giving concessions in return. This sounds equitable, but it worked badly in practice. It was impossible to ascertain the exact meaning of "equivalent compensation." Actually, prior to TABLE

I*

U N I T E D S T A T E S FOREIGN T R A D E , B Y ECONOMIC C L A S S E S ,

l 8 y i - 6 o AND FIVE-YEAR AVERAGE,

Percent of Total Importsa

Period

Food Crude SemiStuffs Mate- Manurials factures

1851-60 1861-65 1866-70 1871-75 1876-80 1881-85 1886-90 1891-95 1896-1900 1901-05 1906-10 1911-15 1916-20 1921-25 1926-30 >931-35 1936-40 1941-45

9.6 27.1 31 • 7 14.1 33 • 2 1 1 . 7 34-2 16.2 39-7 1 8 . 6 34.0 20.0 32-3 2 2 . 6 36.6 23.6 3 1 . 0 *9-5 25-3 33-4 22.8 34.6 25-4 34-9 28.4 4 0 . 1 2 4 . 1 37-4 22.4 36.8 2 9- 3 28.9 27-3 3 3 - 1 27-4 33-5

12 •5 13 .6 13 •9 5 4 12. 4 H. I H' i •9- 3 10. 2

Finished M23 17.8 14.9 1 S•3 14.9 14.9 16.4 15.6 21.3 24.1 27.1 30.7 39.6 36.3 45-3 42.6 52.4 70.6

*Source: Computed from U.S. Department of Commerce, Statistical Abstract of the United States, Washington, 1947, p. 898. »General imports through 1932; imports for consumption thereafter.

1890, the concessions which the United States obtained with her conditional practice were trifling; and after 1890, we failed to obtain as favorable tariff treatment from continental European countries as England obtained with her unconditional pledge. Foreign countries comStockholm), Vol. V I (January, 1 9 3 1 ) , pp. 2 - 1 7 . For further details see N . Ito, La Clause de la Nation la Plus Favorisée (Paris: Editions Internationales, 1930); and League of Nations, Equality of Treatment in the Present State of International Commercial Relations: The Most-Favored-Nation Clause, II, Economic and Financial, 1936. II. B.

7

plained that since they extended the reciprocal tariff reductions which they negotiated with the United States freely to all other countries, they received no privilege from our conditional pledge. We, they argued, obtained all the advantages of the unconditional treatment, but paid nothing for it. We achieved this alleged favorable position through our strong bargaining position in international trade. United States Bargaining Position Weakens In the middle of the nineteenth century 83.7 percent of United States exports consisted of foodstuffs and crude raw materials—meats, grains, raw cotton, tobacco, timber products, etc. ( T A B L E I): Foreign countries could not do without these products, and in their own interests they either admitted them freely or at low duties, irrespective of American treatment of their own products. But as United States enterprise developed and as plant and equipment became relatively more abundant, our structure of production gradually changed in favor of manufactures. By the turn of the century, our exports of foodstuffs and crude materials had dropped to 64.6 percent of our total exports, while semi-finished and finished manufactures had jumped from 16.3 to 35.4 percent. These exports of manufactures were subject to serious injury by foreign tariff discrimination. Furthermore, our agricultural exports were facing increasing competition from foreign producers, while our own economy had not become an important market for foreign products. Undeniably, our bargaining position in world trade had worsened. We found it exceedingly difficult to negotiate new treaties on the basis of the conditional pledge or to secure the renewal of old ones. Foreign countries threatened to adopt the conditional pledge themselves and thereby eliminate the alleged bargaining advantage of the United States. The inherent nature of the conditional pledge encouraged an intensification of international economic discrimination. As tariff schedules became more complex, the problem of "equivalent compensation" became hopelessly insoluble. In effect, the conditional pledge had proved to be an instrument leading to international friction and ill will. 2 Changing Role of the United States in World Economy It gradually became apparent that because of changes in the domestic industrial picture, as well as changes in America's position in the world 2 It is to be regretted that the lessons of this experience have not been more generally recognized. Argentina has recently reopened the issue b y espousing the conditional as against the unconditional treatment.

8

economy, conditional equality of treatment was not to the economic and political interest of the United States. By the end of World War I American industrial technology had advanced to such a stage that the bulk of our exports of manufactured goods could compete successfully abroad on the basis of unconditional equality of treatment, and no longer required the special protection afforded by our high tariff wall. Indeed, it became manifest that the chief difficulty with our tariffs was not their failure to assist in the economic development of "infant industries" but their tendency to persist long after they had served their purpose. Even the most zealous protectionist had to face the fact that the increase in world trade from approximately $2.8 billions in 1840 to $40.4 billions in 1913 established an overwhelming presumption that the commodities obtained from foreign countries in exchange for exports were so secured at a lower economic cost than that which the domestic production of their equivalent would have entailed. If this had not been so, they would not have been imported, even under free trade. " N o one," said Henry Clay, a leading advocate of protection, "at the commencement of the protective policy ever expected that it was to be perpetual. We hoped and believed that temporary protection extended to our import manufactures would bring them up and enable them to withstand competition with those of Europe." 3 Many protected industries were never "brought up"; others, by means of political pressure, were able to perpetuate the tariffs which served as bulwarks for their monopoly prices. Our needs, as the twentieth century approached, indicated ever more forcefully the advantages to be derived from tariff reductions which would enable our own producers to purchase crude materials at the lowest possible prices and would aid in the expansion of our exports. As is shown in Diagram II, the United States was even at this time becoming a heavy importer of crude raw materials; imports of these products had increased from 9.6 percent of our total imports in the middle of the nineteenth century to 33.4 percent at the turn of the twentieth. But as long as Senate ratification was required to obtain effective reductions in our tariffs, nothing could be done. With our own tariffs at a level higher than that of most countries ( T A B L E II), it was practically out of the question for the United States to grant the "equivalent concessions" called for in a conditional most-favored-nation treaty as the terms upon which we could enjoy the minimum tariffs of other countries with which we had 3 Cited in Alfred Marshall, Industry and Trade (London: Macmillan and Co., Ltd., 1 9 2 1 ) , p. 780.

9

TABLE

II*

AVERAGE IMPORT DUTIES IN A NUMBER OF COUNTRIES, I 9 I 3 AND I 9 2 J , EXPRESSED IN PERCENT OF THE PRICES OF THE COMMODITIES

Country U n i t e d States Spain Argentine Austria Canada Czechoslovakia France Hungary Australia Italy Sweden Germany Denmark Switzerland Belgium India Netherlands Poland United Kingdom

im • . . . . . . . . . . . . . .

. . .

• . . . . . . . . . .

All Articles 1925 29 44 26 12 16

• . . . . . . . . . .

33 33 26 18 18 18 18 18 (17) 17 16

• • • . . . . . . . . . . . .

(12) 9 7 6 4

• • •

3

14 4

.

0

(4)

. .

Manufactured 2«J S ctin. eÍ««^ 3 S û? M»

\r

I I

s< ^ S i*

toward increased self-sufficiency throughout the world, bindings and anti-discrimination clauses were important in helping to maintain American exports. Roughly 60 percent of United States foreign trade was conducted with trade-agreement countries in 1938 and 1939. 4 B y that time more than 3,000 concessions had been granted to us, covering approximately 75 percent of our exports of agricultural products, and about 50 percent of our exports of industrial products. On the average, for the years 1938-1939 as compared with the years 1 9 3 4 - 1 9 3 5 , total exports to trade-agreement countries increased 62.8 percent while exports to nonagreement countries increased only 31.7 percent. (See Table IV.) TABLE

IV*

UNITED STATES TRADE WITH TRADE-AGREEMENT COUNTRIES AND WITH A L L OTHER COUNTRIES,

I938-39

COMPARED WITH

I934—3 5

(Values in Millions of Dollars) Change 1938-39