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These artificial credit props were withdrawn from our foreign trade when the stock market collapsed in 1929.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