IX.Reciprocal Trade Agreements

IX. RECIPROCAL TRADE AGREEMENTS The United States Reciprocal Trade Agreements program is one of the rare cases in which government is removing restrictions on private enterprise. War Debts and Tariffs, 1914-1930 During World War I United States exports expanded rapidly with the aid of our loans to the Allies. The prosperity of our farmers in particular came to depend more and more on these foreign markets. To repay these loans and to continue buying from us these European nations had to sell us goods in return. In 1922, however, the United States raised its tariff rates to the highest level in our history, a level exceeded only by that of Spain. European nations likewise, erected new trade barriers during the next several years under several pretexts: 1. Nations who now owed us money were obliged to reduce their imports, while maintaining or increasing their exports, in order to pay their debts to us.

2. The fact that our tariffs restricted their sales to us made necessary an additional cut in their purchases from us. 3. England and France also said they must protect themselves against German goods made cheap by the depreciation of the German mark. 4. Newly formed nations, like Poland, said they wanted to build their own industries so as to be more independent of Germany, Austria and Russia from whom they had been separated. To maintain our exports in the face of these new barriers our government encouraged private agencies in the United States to make new loans to foreigners, especially to Italy, Germany and various Latin American countries. These loans were justified on the ground that they helped the foreign nations build new industries or make old ones more efficient. It was argued that this would enable them to increase their exports, despite the trade barriers, and thus get the means to repay us their borrowings and to buy more of our goods.

These artificial credit props were withdrawn from our foreign trade when the stock market collapsed in 1929.

78 DO WE WANT FREE ENTERPRISE? The Hawley-Smoot Tariff Act, 1930 As the years pass it becomes harder to excuse those responsible for increasing United States tariffs again in 1930. Called together in special session to do something for the farmers, Congress in 1929 fell into a shameless orgy of logrolling for special privilege. The following table of tariff increases on imported watches shows why this Tariff Act of 1930 had worldwide repercussions: Class of Watch Movements No. 731 No. 751 No. 737 No. 757 No. 159 No. 258 No. 879 Cost Net U. S. A. $1.41 2.24 1.68 2.41 7.06 5.20 8.33 Duty Tariff 1922 $0.75 2.00 0.75 2.00 2.00 2.00 3.50 Duty Tariff 1930 $3.75 4.35 4.25 5.85 7.10 7.10 8.50 Rate classifications were made so detailed as to aim specifically at products of particular nations or of individual foreign concerns. This made our tariffs appear discriminatory. Large rate increases were made on articles which were insignificant in relation to our total trade but which were vital to producers in other lands.

These increases in our tariffs came at a time when sound policy called for decreases. 1. We were insisting that foreign loans made by the United States must be repaid. Yet these repayments could be made only in goods. Even if the payments were made in gold most foreign countries, not producing gold at home, had to sell their goodsabroad to get the gold. 2. Our most distressed domestic industry was agriculture which needed prosperous foreign markets. 3. Every nation was suffering more or less from falling prices and rising inventories. Increased freedom for traders to search out new markets was the best way to check this decline. (See above, pp. 68-69, 72-74.) 4. International goodwill had been increasing up to that point and political leadership throughout the world was more pacific and liberal than for many years. The political trend abroad was distinctly towards freer trade and closer international cooperation.

During the making of this tariff official representatives of 38 leading nations made formal protest. Popular indignation in these nations rose to fever heights when these protests were ignored.

RECIPROCAL TRADE AGREEMENTS 79 News of our proposed rate increases were front page items in foreign newspapers. Chambers of commerce and producer associations in foreign countries held protest meetings and demanded preparations for retaliation by their own governments. Tariff Retaliation and Its Effects on Our Trade* The Hawley-Smoot Tariff Act of 1930 started the worst tariff war of all time. In the following 12 months there were 60 major tariff revisions by the world's leading nations, most of them aimed particularly at excluding United States goods. Four days after the Hawley-Smoot Act was signed, Mussolini announced that Italy in future would buy no more from the United States than we bought from Italy. (We had been selling twice as much to Italy as we bought from her.) Within two weeks greatly increased duties were levied on American products. For example, the duty on the cheapest Ford car was raised from $350 to $815 per car. As a result, the United States lost its position as leading exporter to Italy and Germany took our place.

Agencies for American cars were closed out by November. The day after President Hoover signed the Hawley-Smoot bill the Spanish government announced it planned a revision of its own tariff. Even Spanish exporters were calling for higher tariffs on American goods. Five weeks later the new Spanish tariff went into effect. Increases in duties on commodities which Spain had been buying from the United States ranged from 100 to 700 per cent, with special rates still higher on imports from "non-European" countries. Spain also repudiated the mostfavored-nation policy towards the United States and immediately began negotiations with France and Italy to reduce rates to the old levels for goods from those nations. The Swiss people organized effective boycotts of American goods and cancelled contracts for the showing of American automobiles in their Industrial Exhibition. As a result, while total Swiss imports in 1930 declined 5 per cent, imports from the United States fell 30 per cent, with almost all of this decrease coming in the second half of the year. In 1931 the Swiss government imposed numerous tariffs and quotas against the United States, often mentioning American products by name. At the same time she initiated a series of reciprocity agreements with other nations.

Similarly Canada and England, our chief foreign markets, retaliated with major tariff increases. Shortly afterwards, through the system of "imperial preferences" and through trade agreements with other nations, United States exporters were made to feel the chief burden of these tariff increases. *Cf., J.M. Jones, Tariff Retaliation, University of Pennsylvania Press, 1934.

80 DO WE WANT FREE ENTERPRISE? France, long ultra-protectionist, in 1927 had begun to move towards a more liberal policy. She agreed to give the United States mostfavored-nation treatment in return for our promise for a "most friendly" examination of her claims for reduced duties on French exports. Following our 1930 Act, however, France repudiated this mostfavored-nation agreement with us and set quotas limiting imports of American goods. Meanwhile she negotiated trade agreements to reduce tariffs on goods from nations other than the United States. All nations lost as a result of these new trade restrictions, but the United States lost most. Our exports fell as fast as imports and our share of world trade rapidly declined. Imperialistic and militaristic parties were greatly strengthened and became dominant in Germany, Italy and Japan. Mass unemployment and depression destroyed representative government and economic liberty. Invasions of Ethiopia and Manchuria and the rise of Hitlerism are in large part attributable to the stupidity of the 19301932 tariff war which we began.

Sir Arthur Salter, English economist, proved a true prophet when he termed this act "a turning point in world history." It turned the world from increasing international cooperation to a new era of growing nationalism, trade wars, imperialism, armament races and war. Reciprocal Trade Agreements Under the 1930 Tariff Law the President was given power to raise or lower duties by 50 per cent, or less, on recommendation of the United States Tariff Commission. This provision proved to be of little use in reducing even prohibitive tariffs as long as the aim of tariff policy was "to equalize costs of production." 1. Difficulties of determining differences in costs are usually, if not always, insurmountable. 2. The whole idea of basing tariffs on the principle of equalizing costs of production is nonsensical. Tariffs which "equalized costs of production" would stop all foreign trade. The only reason for buying a foreign-made article is that it is cheaper.

Whenever foreign commodities come in it is because the tariff has failed to "equalize costs of production." The flexible provision of the 1930 law was also of little value as a weapon to prevent discrimination against the United States. Our tariffs had risen so high that threat of further increases had little deterrent effect on other nations.

RECIPROCAL TRADE AGREEMENTS 81 The Reciprocal Trade Agreement Act of 1934 permits the flexible provision to be used for obtaining concessions in rates from other nations. It adds nothing to the President's tariff-making powers. Instead, it limits this power in three ways: 1. Tariff reduction for any commodity must be made first in the agreement with the chief supplier of that article. 2. Compensating concessions in tariffs on American goods must be granted by the foreign nations with whom agreements are made. 3. Opportunities must be provided for public hearings for those likely to be affected by the agreements. The Trade Agreements Committee in charge of the program is composed of representatives of the Departments of Agriculture, Commerce, Treasury and State, as well as the Tariff Commission. Each of these agencies has a voice in the making of these agreements. Indicating the difficulties involved in negotiating agreements and the care exercised, is the fact that the time taken for negotiating the first 18 agreements has ranged from 6 to 35 months, with 16 months as the average.

Agreements made under this Act may be terminated upon 6 months' notice. In case of discrimination against the United States by a nation with which we have entered into an agreement, our Government may suspend the agreement immediately. Trade agreements must also follow the "unconditional most-favorednation" principle. The "MostFavored-Nation" Principle This principle, which might better be termed "equality of treatment," was formally incorporated into United States commercial policy in 1923 by President Harding and Secretary of State Hughes in response to a demand by Congress expressed in the (Republican) Tariff Act of 1922. In this Act Congress directed that the United States Government demand unconditional equality of treatment from all other countries, and empowered the Executive to impose penalty duties, if necessary, on the goods of countries refusing to accord us equality. Obviously to secure this equality treatment from other nations we were obliged to give it to them in return.

The need for this policy arose from the fact that foreign nations were making agreements with one another providing special concessions in tariff rates on one another's commodities. By means 82 DO WE WANT FREE ENTERPRISE? of such agreements they were gradually excluding American goods from their markets. All advantages from any agreements we might make with them or any concession we could obtain, could be offset by new agreements which they later made with other countries. This injured trade and was the source of much international illwill. Among nations which have accepted this "equality of treatment" principle, the negotiation of a new trade agreement between any two of them becomes a matter for all-round cooperation, because each one benefits from every new agreement. Benefits to the United States from acceptance of this principle are illustrated by the results of our reciprocal trade agreement with Canada, which ranks second only to the United Kingdom among our customers.

Prior to our Trade Agreement with her, Canada had made numerous treaties giving special rates to various foreign nations other than the United States. When we made our new agreement with her under the Reciprocal Trade Agreements Act we secured the benefits of all of these treaties in addition to the other concessions which we secured. Altogether this one factor reduced Canadian duties on 700 different American products besides the reductions on various specific products mentioned in the agreement. Should Congress Pass Upon Trade Agreements? Agreements made under this Act do not require Senate ratification. During the past 150 years the United States Government has entered into over 1000 such executive agreements with foreign nations, covering matters such as commercial and consular relations, patents, trademark and copyright protection, postal conventions, navigation, radio and aviation agreements, and settlement of claims. The courts have upheld the constitutional validity of such agreements whenever the question has been raised.

Congress still retains its full right to make tariffs. Therefore, it may in effect veto or repeal any trade agreement. Moreover, Congress outlines the principles under which the reciprocal trade agreements program shall be administered. It seems reasonable that an administrative body should set tariff duties for particular commodities for the same reasons that administrative bodies fix railroad rates or administer price controls—if we must have discriminatory tariffs. That representative bodies are not well fitted for such tasks is demonstrated by the unholy mess which our own Congress has made of tariffs from 1816 to 1930. Representative bodies in most RECIPROCAL TRADE AGREEMENTS 83 other nations, e.g., France, have done no better in this matter. Whenever a representative body begins handing out public favors to particular trades, classes or individuals, the public interest is endangered by logrolling for special privilege.

Results of the Program The trade of the United States, from 1935 to 1939, expanded much more rapidly with the trade-agreement nations than with the others. Our exports to the trade-agreement nations have increased somewhat faster than imports from them. This probably does not indicate that we "out-traded" them by getting greater reductions in their tariffs than we made in our own. But at least it is an answer to the opposite charge—that the United States made the greater "concessions." The idea that a nation makes a "concession" to others when it reduces its tariffs arises from the fallacy that the gain from foreign trade comes from exports, rather than from imports. In fact, however, imports are the only sound economic reason for exports, for the same reason that what a producer gets in return for his labor is his economic reason for working. Furthermore, the only sound reason for exchanging our services is that we thereby get things more cheaply than if we produced them for ourselves.

Therefore, the gain from reducing or removing a trade barrier, such as a tariff duty, goes primarily to the importing nation which is thereby enabled to get its goods more cheaply. The gain to the exporting nation comes indirectly through increased power to buy in return, but only when that purchasing power is exercised to increase imports is there any gain from increased exports. A reduction in United States tariffs benefits us as well as the rest of the world. The gain is still greater, however, when foreign nations also reduce their tariffs, as they do under the Reciprocal Trade Agreements program. Frequent complaints are heard concerning threatened or actual loss to home producers from Reciprocal Trade Agreements. That was to be expected. What is surprising is the insignificant amount of damage that has been done to any group and the large gains accomplished in stimulating trade for many leading lines of American agriculture and industry.

Vested Interests Often Resist Progress Any method for cheapening commodities requires changes on the part of competing producers. "Adapt or die" is a law of life no people can safely ignore.

84 DO WE WANT FREE ENTERPRISE? Improvements by one producer or opening of cheaper sources of supply compel other producers to do one or more of the following: a. suffer decreased incomes; b. adopt the new methods; c. change to other occupations. These changes are more or less distasteful or costly. At best they make it necessary for producers to give up other things they would like to do with the time and energy necessary to avoid loss. At worst they cause serious loss of income, unemployment, or bankruptcy to the less inventive, enterprising and adaptable producers. Producers threatened by cheapening of their commodities find it easy to believe that the change is injurious to the nation as well as to themselves. Therefore they often organize to prevent the change. Successful opposition to cheapening of commodities is all the easier when the gains consist of small decreases in price for thousands or millions of consumers.

The cost of protecting United States sugar producers in 1938 was estimated by the Department of Agriculture at $350,000,000 a year. Total value of sugar cane and sugar beets produced in the United States was about $70,000,000 a year and customs receipts on imported sugar amounted to less than $45,000,000. Total net cost to the United States, therefore, was over $200,000,000 per annum without counting in what the sugar growers could have produced in other lines. This cost, however, amounted only to about $1.50 per customer. As against this small per capita cost is the fact that average subsidy payments to sugar beet growers in 1937-1938 were $365 per annum, or $23 per acre of harvested beets in addition to gains from higher prices brought about by the quota system. Few consumers would consider it worth while to contribute money for a campaign to save themselves $1.50 a year through repealing the uneconomic sugar tariffs and subsidies. Domestic sugar producers, on the other hand, can afford to make sizable contributions to fight for its continuance.

Under these circumstances the public interest is protected only by courageous and farsighted leadership, particularly leadership of business enterprisers. What Hurts Consumers Hurts Business! Businessmen must realize that as a class they have more interest in the consumer's prosperity than in maintaining the profits of businessmen in other lines.

RECIPROCAL TRADE AGREEMENTS 85 Slogan of the American Knights of Labor was "the heart of labor beats with a common throb." The economics of this was no better than its physiology, but it had wide popular appeal. Many businessmen fall into a similar error in supposing that what helps any business helps all. Business concerns compete for the consumer's dollars as wageearners compete for jobs. When one business, through monopoly or tax subsidy, takes more money from consumers, other lines of business get that much less. Business concerns in one line have a common interest with concerns in other lines in increased production. Each benefits from the success of his suppliers and his customers in reducing costs and expanding output. However, they have conflicting interests in price policies. Each loses as the other is successful in getting more dollars for a given output. Subsidies and restriction of imports for the benefit of high-cost lines injure the more advantageous industries: 1. by depriving them of markets at home and abroad; 2. by raising their costs of living and costs of materials.

So widespread is the injury from our present tariff barriers that many American producers whose costs are now higher than those of foreign competitors are losing more than they gain from our protectionist system. They lose more from restriction of the domestic market and from increased costs of the goods they buy than they gain from higher prices on their own products. The Gain from Foreign Trade The gain from trade, foreign or domestic, lies in the saving of labor. Trade is a labor-saving device which promotes prosperity in the same way as> labor-saving machinery. That is, both trade and labor-saving machinery make goods cheaper and more abundant. They free labor and purchasing power for increased production and purchase of other good9. Increased freedom for foreign imports usually stimulates exports. By these exports we pay for the increased imports. But the gain in exports is not the real gain to the nation from increased foreign trade. The gain is in the imports and this gain would be still greater if we were given these imports free of charge.

86 DO WE WANT FREE ENTERPRISE? Let us suppose that 1000 workers have been producing for home consumption 1000 tons of glass marbles per annum at a total cost of $1,000,000. Now let us suppose that a foreign nation found a way of supplying these marbles to us at a cost of only $100,000. What is the gain from accepting the foreigner's offer? The gain is not in the $100,000 of exports which would go to pay for the new import, or in the employment of 100 new workers in the exporting industries. Instead the gain would consist in the $900,000 which consumers saved in purchase of marbles. That money is now available AT HOME for buying new, home-produced articles for which otherwise there would have been no market. The gain in labor consists in 900 workers now freed to produce the new commodities.* The gain from foreign trade is to be measured in terms of the cheapness of the imports as compared with the costs of home production.

The cheaper they are, the greater the gain. Sunlight is a very cheap service coming not only from a foreign country but from another sphere. Would we be more prosperous if we boarded up our windows and refused to profit from the cheapness of free sunlight? Industries supplying artificial lighting might gain new business, although even this is doubtful. But certainly the nation as a whole would lose. Increased freedom for trade builds new industries for the very reason that it enables consumers to satisfy former wants with less money and less labor. This explains why fears that trade may result in over-specialization of a nation's industries are groundless. Trade promotes prosperity and the more prosperous a nation becomes the greater is the diversification of its occupations. Postwar Opportunities in Foreign Trade Reciprocal trade agreements offer a most effective means for promoting freedom of enterprise, prosperity and international cooperation after the war.

1. The war and preparations for war have greatly multiplied re•However, importing foreign goods so that we may transfer our own workers to newindustries is very different from importing foreign laborers who have to look for jobs inexisting industries. Tariff duties depress wage levels by raising costs of living. Immigration restrictions raise wage levels by reducing competition for jobs.On the other hand, immigration restrictions also differ from restrictions on employment, such as exorbitant trade union initiation fees. Restriction of immigration reducesthe nation's total labor supply relatively to demand. Employment restrictions for one'sfellow citizens merely shove workers out of one occupation into others leu attractive,or else force them into the ranks of the unemployed..

RECIPROCAL TRADE AGREEMENTS 87 strictions on private traders throughout the world. These can be most effectively attacked by the give-and-take methods of trade agreements. 2. Many industries in all countries have built capacities far beyond probable domestic requirements. Opening of foreign markets will help many of these to avoid drastic deflation. 3. European and Asiatic nations, devastated by war, will need food, machinery and raw materials for rehabilitation. Their only hope for buying these lies in foreign trade. 4. Hopes of United Nation workers for a better world after the war, including high wage levels, can be fulfilled only by utmost efficiency in use of labor. This means: a. mass production, b. specialization of labor and machinery in lines for which they are best fitted, and c. trade, including foreign trade. 5. United Nations leaders have maintained that all people should have equal access to the world's sources of raw materials. This can be accomplished only through creating corresponding equality of opportunity for all peoples to sell their goods to the owners of these raw materials. A large share of the sources of these materials are owned by United States citizens. That means we also must open our markets to foreign nations so that they can buy from us goods which they can hardly produce themselves.

Civilized peace means cooperation between free peoples. And the most important form of cooperation is economic cooperation. This means exchanging services for the purpose of making scarce and desirable things ("economic goods") more plentiful. As nations grow in power to produce they also grow in power to cooperate, that is, in power to trade. Development of such powers of production and trade is the basis for economic prosperity and for all human progress. The danger of war may never be removed. Insofar as it persists, certain restrictions on enterprise, both in foreign and domestic relations, may be necessary for national defense. For example, the United States probably will deem it wise for some years to come to maintain a certain amount of synthetic rubber production at home, no matter how cheap natural rubber may become relatively to the synthetic product. We may also decide to conserve certain exhaustible resources through embargoes on exports.

88 DO WE WANT FREE ENTERPRISE? Nevertheless, these restrictions should be recognized for what they are—part of the price of national defense—not as promoters of "employment" or "prosperity." They should, therefore, be kept down to the minimum necessary for national defense and constant attention should be given to reducing them where possible. In some cases private enterprise or government may maintain stockpiles of imported materials needed for war production. In addition, through subsidies or favorable government contracts, a nucleus of the domestic industry may be kept going in peacetime. In wartime the stockpiles may be used to tide the nation over the interval necessary to expand this industrial nucleus to wartime needs. Such a policy may promote national security better than a protective tariff which would raise costs for all domestic users of the critical materials and thus restrict peacetime progress. Trie first battles and campaigns of a war are won by the nation which is better prepared. But the final victory usually goes to the nation with the greater industrial capacity. This industrial superiority is not built by a policy of huge armaments and self-sufficiency, but by mass prosperity based on specialization and trade.

The future strength and security of the United States depend on: 1. great industries to produce high levels of welfare for all the nation in time of peace and superiority of armaments in time of war; 2. the friendship and cooperation of foreign nations. Foreign trade must play an ever-expanding role in building these foundations of national greatness and world peace.