Foreign Trade in the Public Interest
WHEN the Roosevelt Administration first came into power in 1933, it adopted for many months the attitude of alternately blowing hot and blowing cold on our foreign trade. The President himself possessed a long and intelligent acquaintance with the plain facts, as well as with many of the remoter intricacies of international trade in its effect upon the lives of ordinary Americans. The Secretary of State, Mr. Cordell Hull, was the ablest student of the tariff in political life, a proponent of its downward revision, and a fervent believer in international security by means of a general economic disarmament. The platform demanded measures ensuring the recovery of our foreign commerce. The largest surpluses accumulated in the modern history of our agriculture gave point to that demand, and the lowest farm prices in more than a generation heavily underscored it in terms of lost markets abroad.
Yet the Administration’s two most conspicuous courses of action in 1933 brought our foreign trade to the point of lowest prestige since long before the war. The trained personnel of our foremost foreign-trade-promoting agency, the Bureau of Foreign and Domestic Commerce, was singled out to become the first victim of the policy of economy. Though created by President Wilson, this exceedingly efficient unit, which never received more than five million dollars annually of the taxpayers’ money, had become regarded as Mr. Hoover’s particular offspring. Its outgoing director had never been reticent about its virtues, nor had he refrained from using this fact-finding bureau as a vehicle for justifying the high tariff; and a reform, possibly a sound rebuke, was in order. But the punishment was so swift and so immoderate that the Bureau has not yet recovered from its demoralization. With the abrupt dismissal of almost half its foreign staff when no other nation was reducing the services of its trade personnel abroad, the incident acquired a significance far beyond the two or three million dollars saved from the government’s expenses. And when this same government thereupon poured out, not millions, but four billions on the swollen giant of the NRA for recovery at home, in which only one subsection out of hundreds prescribed for our foreign trade, the conviction became exceedingly plausible that, along with the gold standard and the stabilization of the currency, foreign trade had become a stepchild of the Administration.
Even more disturbing during this first summer of discontent was the failure that was allowed to come upon the Monetary and Economic Conference at London. Here again it was not merely the outcome of that unhappy conference that was significant. The conference might never have succeeded, but a currency and tariff truce might at least have redeemed its failure. But its continuance for any useful purpose was absolutely doomed when Secretary Hull, on July 3, 1933, read to it these words from the President of the United States: —
‘I do not relish the thought that insistence on such action [stabilization] should be made the excuse for continuance of the basic economic errors that underlie so much of the present world-wide depression. . . . The sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other nations.’
These were indeed truisms, but they should have been said, if at all, six months before the conference met. Their inference that distrust of the rest of the world and isolation of the United States in its own monetary system were ruling policies in the United States was completely devastating to a conference largely called by American initiative. And so Mr. Hull, bowing coolly to Mr. Moley as his all too probable successor in guiding the President’s policy, gathered up its scattered fragments and came home.
Mr. Hull, however, still retained his conviction that no fundamental inconsistency lay in promoting the recovery of both domestic and foreign trade at the same time and within the same policy. The first sign of his determination to fight out the issue along these lines was when Mr. Moley somewhat inexplicably left the State Department. Mr. Hull then courageously undertook another foreign mission and this time crowned an unmistakable personal success at the Pan-American Conference in Montevideo by giving form and substance to the Good Neighbor policy. With more nearly the respect and friendship of Latin America than at any time since we evacuated Cuba, Mr. Hull then embarked upon the mature development of his programme, which was focused in the Trade Agreements Act of June 1934. Its passage as the enabling act for the subsequent Hull agreements attested at last that the Democratic Party, the party which has produced so much that will endure in American foreign policy, had found a working method consistent with its preëlection promises for promoting the recovery of our foreign trade. The complete support President Roosevelt gave the programme from its inception slowed down the trend of this country toward isolation quite as forcibly as his policy in the exceedingly confused conditions of the year before had seemed to accelerate it.
Foreign trade is not a partisan issue, and it might easily have been straddled, with a strong minority support from the farm groups and the protectionists, by the time-honored method of some well-chosen tariff revisions upward. The difference between that solution and the trade agreements programme is the difference between foreign trade for special interests and foreign trade in the public interest. It proposed to support the recovery of our share of world trade by the only means that Mr. Hull deemed possible, by definite and tangible remissions in our tariff rates and other barriers to commerce, in exchange quid pro quo for equivalent reductions and moderations in the rates and practices of other nations.
This programme had the advantage from the outset of having been long favored by the American business, manufacturing, and shipping community engaged in foreign trade. Even after fourteen agreements have been negotiated, with countries with whom we conduct more than a third of our entire foreign trade, it still possesses the endorsement of the Chamber of Commerce of the United States, the Automobile Manufacturers Association, and many other gilt-edged groups who have far from habitually sponsored the acts of the Roosevelt Administration. It has proved acceptable to the business community in general and to a sufficiently large number of Republicans to have produced, in the platform adopted at Chicago, that extraordinary plank, bearing glaring internal evidence of conflicting views, which closed with the promise ‘to adjust tariffs with a view to promoting international trade, to stabilization of currencies, and to the attainment of a proper balance between agriculture and industry.’
The Republican plank opened, however, with these forbidding and final words: ‘We will repeal the present Reciprocal Trade Agreement Law. It is futile and dangerous. Its effect on agriculture and industry has been destructive. Its continuance would work to the detriment of the wage-earner and the farmer.’ And so on to the favorite political solution (in party platforms) of broadening the powers of the Tariff Commission and restoring the principle of the flexible tariff. And so further, for another twelve long years perhaps, to point to a ‘flexible’ reduction downward on live quail and paintbrush handles!
Immoderate and inconsistent as the Republican platform is on the subject of foreign trade, it does make certain discreet omissions. It does not, for example, accuse the Democrats of having been ‘destructive’ of our export trade. That would be somewhat difficult in the circumstances, for the figures show that between the fiscal year 1932-1933, when they came into power, and the fiscal year recently closed the value of our exports has recovered by 70 per cent. It does not speak scathingly of other nations outstripping us in export recovery. That would be awkward too, since our increase in exports for 1936 over 1935 has been at two and one-half times the rate of the rest of the world, or by about 13 per cent compared with a little over five per cent as the general average of other nations. The ‘destructive flood of imports’ might likewise have engaged their attention, had they not, up to the beginning of August, been less than one per cent in excess of our exports.
Indeed, the outward and palpable indexes of our foreign trade, during the last three years of the Democratic administration, reveal the strong beginnings not only of genuine recovery but even of something like a minor boom. The volume of our finished manufactures going abroad is again close to that attained in the key years 19231925, and close to 70 per cent of the high-water mark in 1929. Prices are still lower than before 1932, but in spite of all the trade barriers about us our exports of cotton were three quarters of the pre-depression average in volume during the last cotton season, and they are higher so far this season. Our exports of tobacco are once more as great as they were before the depression, and those of fruits and canned foods, most important modern products of our agriculture, are within 10 per cent of pre-depression volume and now exceeding 100 million dollars a year in cash yield from foreign buyers. We are not exporting grains or meat products, partly because shortages due to drought alone have reduced our production by more than twice the volume of our former exports. But our farm exports are not stagnant. They have increased by close to 10 per cent this year, and to the countries with which we have made reciprocal trade agreements they have increased 15 per cent.
These accomplishments have taken place in a world of rising trade, and our trade agreements policy is still but a relatively small part of the actuating mechanism that makes world trade possible for private enterprise. But that part has not been a futile one; far from it. Though there have been a large number of products, in the trade with each country with which we have negotiated an agreement, that have been unaffected by new provisions or changes, yet so far it is incontestable that with each country our trade in both directions has increased substantially following the operation of the agreement. Exceptions to this rule may readily be understandable, for many other factors affect the course of trade beside agreements between governments; but none are discernible at present.
It is, however, the domestic workings of the agreements that Americans find most interesting, and on which they must ultimately be judged. Their operation is made possible by reliance on three cardinal principles of tariff making, which in their present combination are altogether new to the American system. One is the practice of adjusting tariff schedules in negotiation with other nations on a reciprocal basis. This has been accepted in principle in the past by both parties, but only three agreements, of relatively small importance, survived for any length of time the attacks of the politicians and the protectionists. McKinley advocated it and Taft attempted to put it in operation in his famous fight for reciprocity with Canada. But the present application is the first serious and substantial attempt to negotiate basic tariff schedules in partnership with those with whom we buy and sell.
The second principle is that the agreements are made by powers delegated to the President and are negotiated and signed by him directly without review by the Senate. This is more contentious ground, but without such powers American practical politics are such that no tariff concession, however justifiable, could ever be certain of passage through the Senate. No disrespect to the Senate is intended or has been taken by this reservation; the past tariff history of the country supplies abundant proof of its necessity if anything like binding bargains within a reasonable period with other nations were ever to be accomplished.
The third principle is the application to all agreements of the most-favorednation clause in its unconditional form, extending the benefits of concessions to all other nations. This simply means the continuance of the old American practice of a single tariff schedule for all nations. It is preferred by the International Chamber of Commerce, the Economic Section of the League of Nations, and every other disinterested international body that has ever taken it under consideration. The conditional form, requiring that for each nation receiving a trade concession some equivalent concession must be returned, is more a matter of legal reservation or neighborly accommodation than broad usage; and even England, which still reserves this right, has never applied a higher tariff rate to the United States than to any other foreign nation.
Such are the essential ingredients of the Hull system. During the more than two years since the enabling act has been in effect, the inflexible character of the processes that were first set up has been greatly stretched in practice and has been adapted and matured to meet unexpected needs and insistent criticism. The most vigorous criticism has come, of course, from manufacturers and producers who do not want their protection diminished for any reason or under any circumstances. When it is considered that in the past they dictated many of these schedules themselves through logrolling minorities combining for a common interest before a highly vulnerable Congress, their disapproval of the present method may be imagined. They now appear before a fact-finding body of experts called the Committee for Reciprocity Information, consisting of official delegates from the Tariff Commission, the Departments of State, Commerce, the Treasury, Agriculture, and the Agricultural Adjustment Administration. This group of seasoned administrators of tariff questions take their testimony, digest it, and pass it on with their recommendations to the Trade Agreements Committee in charge of the actual negotiations with the foreign country. The method is not boisterous enough for many Americans accustomed to tariff wranglings in the past; but it has this advantage far outweighing its defects: the adjustment of tariff rates under this system is more nearly a matter of national action and responsibility in the most competent hands possible, and less the prerogative of interested groups and sections, than ever before in American history. It has achieved a genuine protection too seldom accomplished in American political life, protection against the organized minority.
Another serious and insistent bone of contention has been the observance of the most-favored-nation doctrine in its unconditional form. Here Mr. Hull has become steadily less inflexible as experience with actual trade problems involved in the agreements led the way. In the Belgian agreement an ‘escape’ clause provided that if any third nation secured trade advantages exceeding those of the contracting nations by reason of reduced tariff rates applied to its trade, the tariff reduction in question could be canceled at thirty days’ notice. This brings up the point that in each agreement the products on which duties are reduced are almost always those products of which each nation is the principal supplier, or fairly nearly so, of the other. The bargains are therefore bargains of mutual advantage in which third nations may share, but to a considerably less extent.
The work has been so well done up to now that no escape clause has as yet been invoked. But it has not been found possible to maintain the unconditional most-favored-nation treatment in its purest form. We have a two-column tariff in spite of ourselves, and two nations, Germany and Australia, are in the offending class. It is hoped that in the case of Australia this will be a technical and temporary expedient, but with Germany, which has flagrantly discriminated against American trade for a long time past, there was no other choice. Consequently, German wine does not get the low rate applied to France, — and Italy, — nor do German chemicals obtain the concessions accorded to Switzerland. Furthermore, when it became clear that Germany was using her flexible export currency as an agency for subsidizing the sale of her products in this country, Mr. Hull was able to reply with countervailing duties high enough to stop that practice after six weeks of negotiation. And when Japanese cotton goods could not be properly regulated in their admission to this country by the Japanese manufacturers themselves, an increase in the tariff was granted of 42 per cent and more was promised if the invasion continued in volume in kindred lines.
The Hull system provides means for aggressive retaliation, therefore, as well as for friendly bargaining for the maintenance and extension of American foreign trade. Nor are mere tariff rates on merchandise the limit of the prerogative of the agreements. The Canadian agreement was the instrument of Canada’s promise to abandon her method of arbitrary valuations of American imports, which did more to hamper our trade than all her high rates put together. Now the Canadian tariff is calculable to Americans; and it is an old rule that it is not the moderate height of a tariff that encourages trade nearly as much as the assurance of its stability at one place from month to month and from year to year. France has abolished the double taxation of Americans; Brazil has lent government sanction to a refunding plan on behalf of American blocked funds; and Canada has admitted free circulation throughout the Dominion of American magazines and periodicals.
Contrary to the expectations of the American foreign-trade community the agreements have not facilitated any procedure for the settlement of defaulted bonds or other debts except in the limited case of Brazil’s refunding plan for purely commercial blocked balances. The reason given has been that financial negotiations are carried on by different parties and under different circumstances than are commercial arrangements, and that the relation between a debtor and a creditor is altogether different from that of two parties on the same footing at a commercial conference. Business men and bankers in this country have replied that, though this is true, Great Britain has succeeded in combining the two phases of discussion, as in the Runciman-Roca agreement with Argentina, without sacrificing anything of the amicable spirit between the two countries. It is a point to be considered, since with Cuba, Brazil, Colombia, Nicaragua, and several other countries, Americans who are private creditors to those governments are getting nowhere, and a sound financial settlement must eventually be made before trade can be substantially and permanently revived.
The agreements provide for a maximum adjustment in the tariff of 50 per cent; and so far this has not been a handicap on the negotiations. We have also been able to ‘bind’ on the free list many products both of imports and exports that have guaranteed the continuance and security of trade. But we cannot place an article on the free list by the agency of these agreements, and some way will have to be found to restore that anomaly through the proper use of the adjudicating functions of the Tariff Commission. And a just criticism, though hardly fair perhaps in an election year, is that the rates that have been reduced, probably nearly a thousand in old and new classifications by now, have still left the average schedule of the American tariff very little below the Smoot-Hawley rates that put a Chinese wall round this country during the depression.
Dr. Taussig undoubtedly speaks the mind of all tariff students when he declares, as the United States Tariff Commission’s first chairman, that the Hull system has accomplished the most scientific and workmanlike tariff job ever done in this country. For this reason it cannot please the politicians, not even all the Democrats. But it should please the American people, who have had good reason to believe in the past that no rules ever governed the tariff except those made by its beneficiaries.