Benjamin Franklin once said, “No nation was ever ruined by
trade.” As America’s most savvy commerce expert and the
man who negotiated the nation’s first commercial agreement,
Franklin possessed the wisdom to render such a judgment.
He had observed his land’s trade policies under three distinct
governments and gained insights from their successes and
failures. Throughout the centuries after his passing, the
United States has continued to embrace the spirit—if not always the practice—of his philosophy concerning the goodness of trade.
Trade Policy and the Colonial Experience
As feudalism declined in Europe in the period after the Renaissance, the ideology of mercantilism quickly replaced it.
Striving for economic self-sufficiency and a favorable balance
of trade through the influx of bullion and the establishment
of overseas colonies, most of the European great powers allowed their colonies little freedom in matters of foreign trade.
England and its colonies proved an exception. Civil and international wars as well as haphazard colonization initially
left England’s politicians with little time for or interest in regulating the trade of the British colonies. Although American
colonists, like all British subjects, were barred from challenging the East India Company’s monopoly on trade with Asia,
no legal restrictions prevented them from trading with the
French West Indies, the Dutch West Indies, the British West
Indies, or the Spanish West Indies. Legal barriers prevented
the colonists from conducting trade with adversarial nations,
but these restrictions seldom proved effective. In fact, much
of the currency circulating in the American colonies came
from trade with forbidden areas, with the tacit consent of
many royal customs officers.
The 12 years between 1660 and 1672 saw the first etchings
of a British trade policy in the American colonies as Parliament passed the Acts of Trade and Navigation. Reflecting the
dominant mercantilist ideology in that era, the acts created a
list of enumerated articles legally traded only with Britain.
Initially, the enumerated goods included tobacco, sugar, and
cotton, but between 1705 and 1722, Parliament expanded the
list to include rice, molasses, furs, and naval stores. The enumerated articles list continued to expand until the beginning
of the American Revolution, at which time salt fish was the
only significant nonenumerated good.
Such laws did not prevent America’s trade relations with
the Indian tribes to the west. These tribes served as some of
the earliest trading partners of the American colonists, and
regular trade became established throughout the sixteenth
and seventeenth centuries. The Narragansett Indians in particular prized European-style manufactures and tools for
their utility, superior design, and value as status symbols. The
Narragansetts initially exchanged furs for the goods. Such
trade proved lucrative for both sides while furs maintained
their tremendous popularity in Europe, but many tribes
found themselves stuck with an unfavorable balance of trade
when the value of their furs plummeted but their dependence
on European goods remained steady. Other tribes traded
heavily with Massachusetts colonists for firearms, ammunition, and alcohol both before and after the colony passed a
law in 1633 that fixed the penalty for selling arms to Indians
at £10 per gun, £5 for powder, and 40s. for shot.
The outbreak of King Philip’s War (1675–1676) between
colonists and Indians drastically changed the nature of trade
with the native peoples. Colonial leaders, desperate for a
means of generating revenue to fill the coffers emptied by the
war, began to tacitly permit the practice of selling captured
Indians into foreign slavery in 1675. At first, this slave trade
satisfied colonial leaders’ needs; the market rate for captured
natives averaged £3 per Indian, and Massachusetts’s colonists
alone obtained a remarkable £387.13 for 188 Indian slaves
sold to foreigners. Even Indians living peaceably in colonial
hamlets often found themselves “captured” by their colonist
neighbors and sold into slavery. Although never fully legal,
the practice of selling Indians into slavery ceased only as a result of market forces: As foreigners heard New Englanders’ allegations that the Indians of King Philip’s War were “subtle,
bloody, and dangerous,” they feared the risk of owning them;
ultimately, Indian slaves became almost entirely unmarketable.
Although the American colonies eventually could not
trade in Indian slaves, the African slave market persisted
throughout the colonial period. American ships obtained
West Africans, and shipmasters sold them as slaves in the
West Indies. With the profits from their cargo, the shipmasters purchased molasses and sold it upon their return to New
England. New Englanders converted this molasses into the
rum that was used to purchase more slaves in the West
African market, thus continuing the triangular trade. By 1750
half of the 340 ships in Newport, Rhode Island, were engaged
in the slave trade.
To understand the potential magnitude of this trade, it
should be noted that in 1750, Massachusetts alone contained
63 rum distilleries producing 12,500 hogsheads (757,500
gallons) of rum. The cost of a man in West Africa equaled
115 gallons of rum. The market for rum proved so vast that,
in 1752, a Yankee captain who wanted to fill his sloop with
rum before traveling to West Africa five weeks in the future
was told by his agent that the demand for rum so exceeded
its supply that it would be at least three months before the
liquor would be available. The British colonists’ rum choked
out their French competitors’ alcoholic products in West
Africa.
The end of the Seven Years’ War between the French and
the British forced England to reconsider its treatment of the
American colonies in terms of their foreign trade. The war
had depleted the royal treasury, and the colonies had done little to help out financially. Parliament began to regulate
strictly America’s trade. It tightened customs collections,
which had previously been considered especially lax, and
found long lists of items in the Acts of Trade and Navigation
that could produce revenue for the Crown. Parliament also
ruled that American exports to the European continent first
had to be cleared through a British port, which swelled shipping costs beyond any hope for profit.
Ironically, perhaps the worst blow to American trade actually came from a lowering of tax rates. The import tax on
non-English molasses had previously stood at 6d. per gallon,
but customs officers had always collected a much lower rate.
Parliament cut the official rate to 3d. per gallon on paper but
warned of strict enforcement—and this combination of
events drove the taxes to twice their previous rate in practice.
All this effectively restricted molasses imports to that obtained from the British West Indies alone. Cash reserves
melted away, and the export market slowed dramatically.
The restrictive trade acts became collectively known as the
Sugar Act.
Parliament followed the Sugar Act with another tax, the
Stamp Act, which called for a duty on a variety of paper
items in the colonies. Opposition to the Stamp Act flared
among the colonists, who resented the fact that Parliament
had not recognized their objections to the new tax. Further,
after the implementation of the Sugar Act, many colonists
had already begun to reject the theoretical notions of British
sovereignty over the colonies. The Stamp Act hastened the
spread of such ideas.
On the eve of the Revolution, in protest against the Sugar
Act and other restrictive trade acts against the colonies, 900
American merchants agreed to boycott British imports until
Parliament repealed the Stamp and Sugar Acts. Scared
British merchants forced an irate Parliament to take action,
and by 1766 the Stamp Act became void and the molasses tax
fell to insignificant levels. However, the colonists remained
angered over Prime Minister William Pitt’s requirement that
all colonial exports had to pass through British ports, and
anger turned into outrage over a new order that the New
England colonies could only trade with England or the
British West Indies. Then, in 1773, Parliament noticed that
the popularity in the colonies of imported tea from Britain
presented an opportunity for revenue growth. Parliament
levied a tariff on tea imports, incorrectly assuming that the
colonists would not mind the duty because it allowed the
price of British tea to remain at levels below those of smuggled Dutch tea. Opposition to this act proved overwhelming
and resulted in the Boston Tea Party as well as other forms
of opposition that made a clash between Britain and its
American colonies inevitable.
Trade Policy from Independence to 1815
Early on, the federal government took a lax attitude toward
trade regulation. The Articles of Confederation, operational
from 1781 until 1789, forbade Congress from concluding any
commercial treaty that would limit the states’ rights to customs duties. In effect, Congress avoided rendering decisions
on foreign trade policy matters. Foreign nations wishing to
conduct commerce with the former American colonies now
found that they had to negotiate individual trade treaties with
each of the newly empowered American states, a process that
proved cumbersome for foreigners and discouraged international trade. In 1789 the ratification of the Constitution drastically changed the direction that the Articles of Confederation had set for America’s trade policy. The Constitution
clearly permitted Congress to levy and collect taxes, and the
first Congress quickly imposed a customs tariff to collect revenue for the fledgling government.
In the 1790s the U.S. economy boomed, and foreign trade
became a source of American optimism. By this decade Virginia and the Carolinas recovered their prewar volume of exports in tobacco, naval stores, and rice. Additionally, a poor
harvest in France provided a favorable grain market for the
middle states. England demonstrated its willingness to become an American rice and tobacco marketplace as trade between the two nations flourished. Restless Jamaican and Barbadian citizens aided American shipmasters as they smuggled
goods onto those two islands. No longer forbidden to trade
with Asia by the monopoly powers of the British East India
Company, northern shipowners participated in a booming
trade with Calcutta, India, and Canton, China. In 1789 America conducted more trade in these two cities than any other
nation save for Britain.
As foreign trade became increasingly important to the
new nation, Treasury Secretary Alexander Hamilton issued
the “Report on Privileges and Restrictions on the Commerce
of the United States in Foreign Countries” to detail America’s
current foreign trade relationships and proffer to Congress a
trade policy. At this time, the largest U.S. exports were breadstuffs, tobacco, rice, and wood. Great Britain purchased more
American exports than any other nation, taking in approxi-
mately twice as many American goods as French items and
more than four times as many products as Spain or Portugal.
However, America’s imports from these nations lacked proportion with its exports; the U.S. import relationship with
Great Britain rose to 7 times as much as that with France and
50 times as much as that with Spain (see Tables 1 and 2).
The “Report on Privileges” showed that American firms
faced barriers to trading with European nations and especially with their colonies. These countries imposed heavy barriers to trade in Europe and prohibited much of America’s
commerce with their colonies. The Jefferson administration’s
recommendations to remedy this situation included promoting free trade through friendly agreements or, if necessary, by
imposing countervailing tariffs and barriers against these
countries.
Jefferson removed the excise tax on distilled liquors to
make them more affordable relative to imports, but this action had the undesirable consequence of making the federal
government even more dependent on tariff revenues. As aggressive European powers in the early nineteenth century
continued to discriminate against American commerce and
violate U.S. claims to neutral commercial rights, Jefferson
and his successor, James Madison, both experimented with
trade sanctions, including embargoes and nonintercourse, to
remedy the problem. (The nonintercourse sanction meant
that America would not trade with England or France but
would trade with everyone else. Also, America would resume
trade with the first of these two countries to promise to respect America’s rights as a nation, and then it would declare
war on the other country.) However, the federal government’s dependence on customs income and the subsequent
decline in foreign trade before the War of 1812 caused national leaders to resort to bolder measures for the restoration
of foreign trade and neutral rights.
Trade Policy from 1815 to the Civil War
The Anglo-American Commercial Treaty of 1815 ended the
British policy of discriminating against U.S. ships in British
markets. This accursed barrier removed, the United States
could return to the course of expanding foreign trade that its
leaders had pursued before the war. Thus, President Madison
shocked the nation when he rallied for a protective tariff in
February 1815.
American foreign trade policy began to shift markedly
from its free trade leanings before the War of 1812 to the origins of the American System in the years immediately after it.
A national consensus emerged that demanded the development of a manufacturing base diverse enough to secure
American independence from foreign military and trade
conflicts. As long as mercantilist systems prevailed throughout the world, the leaders of the United States in this era believed that the nation had to pursue a similar policy.
The Democratic Party promoted a higher tariff policy to
protect and facilitate American manufacturing. Henry Clay
and John C. Calhoun, congressional leaders in the years after
the War of 1812, also pressed for heavy protective tariffs for
manufactured goods, even though both men represented
states that surely would have benefited from increased foreign
trade. Politicians viewed the tariff not as a device for overcharging American consumers in the short term but instead
as a means of stimulating investment in the United States and
reaping the full benefits of production and consumption at
home. That tariffs during this era also provided the government with a steady stream of revenue must have been viewed
as a boon to such politicians.
In 1816, as a result of these and other arguments in favor
of trade restrictions, Congress passed the nation’s first protective tariff. Duties of 30 percent on iron products and 25
percent on cotton and woolen goods were set in place. President James Monroe advocated broad tariff increases in his
message to Congress in 1822, and Henry Clay also helped to
persuade Congress to raise tariffs again in 1824. Then, the
Tariff Act of 1828, also known as the Tariff of Abominations,
raised tariffs to their highest rates in American history.
Under this act, average rates on durable goods hovered
around 61.7 percent.
The Tariff of Abominations opened up a debate between
advocates of free trade and proponents of protectionism that
would continue throughout the century. The South Carolina
nullification crisis induced Clay to engineer a tariff reduction in 1833 that cut tariff rates to 20 percent over ten years.
This tariff deviated from the hitherto dominant protectionist philosophy, but the depression of 1837 caused a swing
back to a more protective tariff in 1842. In the 40 years from
1821 to 1861, the high-tariff position generally dominated
that of free trade.
Nevertheless, in the decades between the War of 1812 and
the Civil War, both exports and imports flourished despite
the high tariffs. Cotton exports soared 1,300 percent, and tobacco exports doubled. At the same time, the expectation that
tariffs would stimulate internal investment came to fruition
as private investment in textiles and other import-competing
industries increased greatly.
A greater exporting prowess in the South and a changing
sentiment toward lower tariffs in the 1840s induced Democrats to shift their party position in favor of tariffs for revenue
purposes only, a position close to the free trade stance in the
1800s. In 1854 Democrats negotiated a Canadian reciprocity
treaty that allowed for limited free trade. However, because
Table 1 Exports to various nations, 1789–1790
Spain and its dominions $2,005,905
Portugal and its dominions 1,283,462
France and its dominions 4,698,735
Great Britain and its dominions 9,363,416
United Netherlands and its dominions 1,963,880
Denmark and its dominions 224,415
Sweden and its dominions 47,240
Table 2 Imports from various nations, 1789–1790
Spain and its dominions $335,110
Portugal and its dominions 95,763
France and its dominions 2,068,348
Great Britain and its dominions 15,285,428
United Netherlands and its dominions 1,172,692
Denmark and its dominions 351,364
Sweden and its dominions 14,325
that treaty covered only raw materials, Canada increased its
import duties on U.S. manufactures, and American fishing
and lumber industries suffered. Democrats also obtained
highly biased treaties that provided Americans with virtually
unlimited trading privileges in the nations of Japan and
China as well as in the Middle East and Africa.
Thus, the debate over tariffs and free trade also served to
divide the nation between the free trade, agrarian South and
the protectionist, manufacture-driven North. The last president elected before the outbreak of the Civil War, Abraham
Lincoln, advocated a high tariff. He believed that free trade
would inevitably lead to low wages and financial ruin. After
the Civil War began, Secretary of the Treasury Salmon Chase
encouraged Congress to double customs duties to pay for the
expense of the war.
Trade Policy from the Civil War to World War I
Immediately after the Civil War, the United States experienced a tremendous economic expansion that again changed
the nation’s attitude toward foreign trade. Finished manufactures, which made up half of all imports before the Civil War,
fell to less than a third of all imports 20 years later. American
exports became increasingly prevalent in the world markets.
The people were convinced that selling, buying, and investing
in foreign markets would prove crucial to the economic
wealth and development of the nation. More specifically,
Americans felt that overproduction and unemployment,
which became all too familiar during the severe depressions
of the 1890s, could be prevented by opening up foreign markets to American agricultural and manufacturing surpluses.
Foreign commerce became a symbol of national power, the
navy and the foreign service industry expanded to protect
business interests, and citizens called for an imperialist and
activist foreign policy.
Latin America became fertile soil for businesses seeking to
exploit the desire of Americans for greater foreign trade. Bananas were especially popular at home after the Civil War,
and entrepreneurs found Latin America to have ideal growing conditions for that crop. Although most were never
legally American colonies, the nations of Central America,
South America, and the Caribbean kowtowed to extremely
powerful businesses backed by the American government.
Companies such as United Fruit and Standard Fruit negotiated land concessions, tax exemptions, the use of national resources, and the free import of numerous products with host
governments. These companies also imported their own
labor forces, constructed company towns, and built the entire
infrastructure for modern communities in the areas that they
dominated.
Soon, the United States had acquired an informal empire
in this region, based on economic and political control rather
than colonial annexation. American companies controlled
the tariff revenues, budgets, foreign debts, and internal investments of a plethora of Latin American countries. Although bananas and coffee often would account for 80 percent of the exports from Central American countries at the
time, U.S. conglomerates owned almost all of the concession
taxes and import rights on these products. This Central
American trade became so important that in 1913, when the
Senate Finance Committee debated the proposed
Underwood-Simmons Tariff, it found that a meager $.05 tariff on bananas would generate $1 million a year for the federal government. However, the public backlash against taxing
these Central American imports proved so strong that Congress removed the banana tariff from the tariff bill.
America’s imperial experience in Asia lacked the power
that it had in Latin America. England became a prospective
colonizer of China long before the United States had the capacity to dominate the region, and by the late nineteenth century, most European empires had carved a sphere of influence for themselves in China, to the exclusion of U.S.
interests. Although ambitious American traders profited
greatly as opium-peddling middlemen between the warring
Chinese and English in the mid-eighteenth century, legitimate American businesses saw that they had been shut out of
China in the years following the Civil War. To combat this
combination of barriers, President William McKinley’s expansionist secretary of state, John Hay, issued the first “Open
Door note,” which committed America to free trade in Asia
and urged all European nations to follow suit.
Hay feared that China’s antiforeigner Boxer Rebellion of
1900 would give foreign powers a reason to overturn the
Open Door notes and strengthen their spheres of influence in
China, so the United States justified sending military forces to
China under the Open Door policy. Later, as Russia and
Japan fought the Russo-Japanese War for Chinese territorial
conquest, President Theodore Roosevelt feared that the belligerents would disrupt American commerce in China. Roosevelt used the Open Door notes as motivation to bring the
warring parties to the peace table.
In 1909 Roosevelt’s successor, President William Howard
Taft, supplemented the Open Door notes with the policy of
“dollar diplomacy,” which increased U.S. trade abroad by
supporting American enterprises and investments in China.
Also in 1909 Japan and Russia violated the Open Door policy
without U.S. retaliation, and U.S. commercial enterprises
began to reduce their investment in China. By 1913 President
Woodrow Wilson’s preoccupation with isolationism and the
European conflict caused him to abandon the Open Door
policy.
Despite the widely held belief that America should rely on
foreign trade to increase its world power and domestic economy, laissez-faire sentiments fell into disfavor again after the
Civil War. Indeed, in the waning years of the nineteenth century, high protectionism garnered some of its most fervent
support in American history. In the 1880 election, tariffs became the sole divisive issue between the high tariff Republican candidate James Garfield and the free trade Democratic
candidate Winfield S. Hancock. Garfield’s narrow victory ensured that tariffs would continue to increase; indeed, high
tariffs caused Treasury surpluses every year from 1866 to
1888. President Grover Cleveland, the first Democrat elected
after the Civil War, thought the Treasury surplus was highly
undesirable for the American people and sought to reverse
the postwar trend of escalating tariffs. But Congress proved
unwilling to lower tariffs, and Benjamin Harrison’s defeat of
Cleveland in the 1890 election made the passage of the
McKinley Tariff inevitable. Protectionists dropped the pretense that fledgling industries required high tariffs for protection. Instead, they argued that high tariffs would reduce
the Treasury surplus by making imports unbearably costly
for the American public.
At the turn of the twentieth century, tariff revisionist
groups began to form and attempt to lobby the government
for a change in trade policy. These organizations generally
supported tariffs based on reciprocity and urged the federal
government to create a commission to oversee the process in
a scientific manner. The National Tariff Commission Association (NTCA), the lobbying organization that worked for the
creation of the Tariff Board and strove to see it modeled after
the German tariff commission, was the most influential of
these groups. Presidents Theodore Roosevelt and William
Taft both supported the revisionists in their quest for lower
rates. Indeed, Taft so vehemently supported the PayneAldrich Tariff of 1909, the first act addressing tariff rates since
the Dingley Act of 1897, that he agreed to the Sixteenth
Amendment (which provided for a national income tax) just
to gain the Democrats’ support for the tariff reduction.
World War I accelerated the growth of America’s international commerce. European and Asian warring states all
sought access to U.S. resources. Exports to the Allies quickly
began to soar, rising from $825 million in 1914 to $3.2 billion by 1916. Trade between the Central Powers and the
United States fell off dramatically after Britain blockaded
Germany in the beginning of the war. Germany cried out for
the United States to stop selling munitions to England and
complained that Washington showed a bias toward the Allies
in its extension of war loans. U.S. officials curtly replied that
a reduction in trade with the Allies would not compromise
America’s neutrality, a position that reflected President Wilson’s disapproval of America simply being the well-paid arsenal of the Allies.
Virtually all trade with the Central Powers ceased with the
October 6, 1917, passage of the Trading with the Enemy Act,
which forbade commerce with enemy nations or their associates. The act gave the Wilson administration the power to impose an embargo on imports from enemy nations, and the
War Trade Board became authorized to prevent trade with
the enemy. Congress clearly intended to use this act against
the Central Powers. The act also authorized censorship of
foreign newspapers.
Trade Policy in the Interwar Period
After World War I, the exporting prowess that the U.S. had
gained during the war endured, and American products
proved competitive in world markets beyond what had
seemed possible only years before. U.S. trade during the war
enriched the nation, and its continuation after the war made
possible the Roaring Twenties. Europe desperately struggled
to rebuild, and American goods made that goal possible.
World War I had rendered the United States a creditor nation, with many more goods flowing from America into Europe than vice versa. Relatively high tariffs intensified the
imbalance of payments between the Continent and the
United States.
An unfavorable balance of trade between Europe and the
United States, coupled with increased competition from
goods flowing out of Asia and Latin America and agricultural
production slumps, signaled problems for American exports.
A depression began in the late 1920s, and in 1930 Congress
intensified America’s foreign trade slump by passing the
Hawley-Smoot Tariff Act. This piece of legislation raised tariffs to their highest level since the Tariff of Abominations over
100 years before, with agricultural and some manufacturing
goods receiving the greatest tariff increases. Congressional
motives for this increase stemmed from a “beggar thy neighbor” policy, as governmental leaders who desired to stop the
economic slump domestically cared little for the effects of the
tariffs on the economies of other nations. However, other
countries soon levied reciprocal tariffs against American
goods, which further depressed world trade.
President Franklin D. Roosevelt waited until 1934 to ask
Congress for legislation to allow negotiation with other
countries for lower tariffs. He received the Reciprocal Trade
Agreements Act in the summer of 1934. Secretary of State
Cordell Hull believed that this precursor to the 1948 General
Agreement on Tariffs and Trade (GATT) would reverse the
high-tariff policies that he thought had wreaked havoc on
American exporting.
As a severe depression developed at home, President Roosevelt set about tackling America’s problems abroad. Between 1935 and 1941, Congress passed what became known
as the Neutrality Acts, which imposed an arms and loan embargo against all warring states. Roosevelt, strongly supportive of the Allies but aware that the American public wished
to avoid direct involvement in a war, allowed trade policy to
dictate foreign policy by attempting twice in 1939 to persuade Congress to repeal the Neutrality Acts and allow for
economic intermediation with the Allies. Congress grudgingly acceded on the second attempt and removed the arms
embargo but added the stipulation that arms be sold on a
“cash-and-carry” basis only. On August 2, 1940, Roosevelt
signed an executive order to trade destroyers for military
bases, and on March 11 of the following year, Congress authorized a lend-lease proposal after Britain could no longer
come up with the cash necessary to purchase American
weapons for war. Twenty-six days later, Congress authorized
its first lend-lease package, earmarking $7 billion for the Allies. Roosevelt froze all Axis assets in the United States in
June 1941.
Just as Germany lost its battle with England for a share of
wartime trade with America, Japan, too, found that U.S.
trade policy was a dangerous substitute for foreign policy. In
the pre–World War II era, Japan remained utterly dependent
upon the United States for much of the products it required
to pursue its belligerent policy in Asia. After going against
U.S. wishes and pressuring France to allow Japanese troops
to enter French Indochina, Japan found itself the target of an
American embargo on U.S. iron and steel. In July 1941 Japan
further extended its troops in Asia, forcing the United States
to freeze all Japanese assets and implement an embargo
against the island nation on all products except for food and
cotton. Without trade with countries under the U.S. economic sphere of dominion, Japan lost access to 66 percent of
its export market and 39 percent of its imports. Far more
significantly, Japan imported 84 percent and 80 percent of its
oil from the United States in the years 1938 and 1940, respectively. Without U.S. oil, Japan anticipated exhausting its
supply in one and a half to two years. The Japanese prime
minister, Tojo, considered the embargo an act of war because
a lack of oil would destroy the imperial navy even as it rested
in port. In his diary, he described America’s high post–World
War I tariff policies and the pre–World War II economic
blockade as inflicting a mortal blow to Japan.
Trade Policy from World War II to the Present
Roosevelt’s fear of the revival of the protectionism and high
tariffs that contributed to the depression and war in the first
half of the century led him to take preventative measures. In
1947 and 1948, the administration of his successor, Harry S
Truman, helped develop the GATT, which further liberalized
trade by gradually reducing and eliminating tariffs, subsidies, quotas, and other trade barriers. In October 1962 Congress passed the Trade Expansion Act at the behest of President John F. Kennedy, allowing the president to cut tariffs by
up to 50 percent over five years and to remove many tariffs
altogether on goods traded between Western Europe and the
United States. This act gave the executive branch leverage in
the Kennedy Round of GATT negotiations, which ran from
1964 to 1967, and it also served as an extension of U.S. foreign policy in its pressure on the Soviet Union. The Kennedy
Round modified GATT rules and allowed for the lowering of
rates across the board instead of on a product-by-product
basis. The United States lowered its tariffs on a variety of
products. European nations failed to reciprocate by lowering
their trade barriers, and in many cases, they increased rates
through less visible but equally potent forms of trade restrictions. The most recent round of GATT negotiations, the
Uruguay Round (1986–1994), cut tariffs by 34 percent on
average (see Table 3). The Uruguay Round agreement revised the rules regarding dumping and export subsidies, and
it eliminated voluntary export restrictions (VERs) and extended intellectual property rights internationally. Finally,
the Uruguay Round ended the GATT and created in its place
the World Trade Organization (WTO), which now supervises the implementation of trade agreements and settles
trade disputes.
Members of both the GATT and WTO organized around
the liberal economic principles of nondiscrimination and fair
national treatment of imports. The goals of these two organizations focused on lowering trade barriers and enacting a
rules-based trading system. The GATT and WTO did, however, allow for conditions under which trade restrictions remained permissible. Today, member nations can discriminate against nonmember nations, retaliate against unfairly
trading member nations, and establish preferential trading
areas that provide trade benefits in excess of the terms of
GATT and WTO. Further, certain escape clauses or safeguards permit the temporary exemption of some industries
from the rules of trade restrictions.
It was not simply a desire to return to normalcy that led
American leaders to encourage trade. The emergence of a
bipolar postwar world and the conflict between the communist Soviet Union and capitalist United States meant that
America again needed a strong economic base. When Mao
Zedong declared China a communist state, President Truman
resisted becoming involved in mainland Asian affairs. But the
outbreak of the Korean War caused the United States to stress
Taiwanese trade and economic development as another Asian
check to communist designs in the region. The United States
became Taiwan’s biggest trading partner until the 1970s,
when Taiwan diversified its commercial relations.
China viewed the exchange of military systems between
the United States and Taiwan as an extension of a hostile U.S.
foreign policy. It struggled to remain closed to U.S. trade until
1999, when entrance into the WTO induced Chinese leaders
to open their market to the United States and lower tariffs in
Table 3 Average tariffs on industrial products (in
percentages)
Pre–Uruguay Post–Uruguay
Round Round
By country/region
| Developed countries’ imports from: World |
6.2 | 3.7 |
| North America | 5.1 | 2.8 |
| Latin America | 4.9 | 3.3 |
| Western Europe | 6.4 | 3.5 |
| Central and Eastern Europe | 4.0 | 2.4 |
| Africa | 2.7 | 2.0 |
| Asia | 7.7 | 4.9 |
| Developing countries’ imports from: World |
20.5 | 14.4 |
| North America | 23.2 | 15.7 |
| Latin America | 27.6 | 18.5 |
| Western Europe | 25.8 | 18.3 |
| Central and Eastern Europe | 18.4 | 15.1 |
| Africa | 12.3 | 8.0 |
| Asia | 17.8 | 12.7 |
| By product All industrial products |
6.3 | 3.8 |
| Fish and fish products | 6.1 | 4.5 |
| Wood, pulp, paper, and furniture | 3.5 | 1.1 |
| Textiles and clothing | 15.5 | 12.1 |
| Leather, rubber, and footwear | 8.9 | 7.3 |
| Metals | 3.7 | 1.4 |
| Chemicals and photographic supplies | 6.7 | 3.7 |
| Transport equipment | 7.5 | 5.8 |
| Nonelectric machinery | 4.8 | 1.9 |
| Electric machinery | 6.6 | 3.5 |
| Mineral products and precious stones | 2.3 | 1.1 |
exchange for support of China’s WTO bid. Both countries
reached an agreement to phase out quotas on Chinese textiles
by 2005.
After World War II, America helped reconstruct the
Japanese economy as a capitalist bulwark against Soviet ambitions in Asia. Japan remained the biggest trading partner
of the United States for several decades. Although America
held a favorable balance of trade with Japan during the early
postwar years, by the 1970s this trade balance had shifted.
America, which had proved a willing dumping ground for
Japanese products while asking little in return, suddenly demanded that Japan rescind its highly stringent import regulations and open its markets to American goods. The Japanese government found that it could placate the United States
by implementing voluntary export restrictions against the
products that America wished to restrict. In 1971 Japan enacted VERs against textiles, followed in later years by steel
and chemicals, then against consumer electronics, automobiles, metal-working machines, and, most recently, against
computer chips.
Voluntary export restraints benefited Japan on a deeper
level than simply appeasing the United States. VERs essentially represent a collusion between two governments, and
Japan stood to gain much economically by implementing
them with Washington’s consent. Had the United States simply levied a tariff against the Japanese goods that threatened
U.S. businesses, the federal government would have received
the tariff revenues, which would have amounted to the difference between the world price and the U.S. tariffheightened market price. But by voluntarily restricting the
supply of their goods, the Japanese theoretically could contract the world supply and effectively drive up the world price
for those goods. Japanese manufacturers would effectively
absorb the higher profits created by their government’s collusive agreement with the United States. This approach would
work particularly well in postwar Japan, whose government
remained dominated by the interests of government and
large business partnerships known as zaibatsu. The close relationship between government and industry in Japan made
VERs a viable response to U.S. pressure.
The VERs proved effective, helping the yen to appreciate
relative to the dollar and causing the Japanese trade surplus
with the United States to fall. But they also created long-term
difficulties for the United States. In addition to causing the
sacrifice of potential tariff revenues to the Japanese government, the VERs also lowered the opportunity cost of the foreign industries for diversifying into another type of manufacture. When they agreed to restrict the export of small
automobiles, Japanese businesses found it profitable to begin
exporting midsize cars and trucks. Although U.S. trade negotiators pursued short-term U.S. interests, the U.S.-requested
VERs have created more problems for domestic industry in
the long run.
Nevertheless, Japan’s red tape and its outright ban on certain American imports still angers many Americans. Although Japan remains the largest importer of certain U.S.
farm products, not until 1991 did it allow the importation of
U.S. beef and citrus products. Enormous tariffs, such as a 70
percent tariff on American beef, still hinder foreign trade between the two nations. U.S. firms clamor against regulations
such as the so-called Big Store Law, which prevents large
chain stores from operating in Japan, as well as the “closed
system” under which the Japanese government exerts protectionism with the consent of domestic big business. These artificial barriers to trade extend monopoly-like powers to domestic industries at the expense of foreign competitors and
are seen by many as an unfair restriction of free trade.
The European Union (EU) has proven to be a barb in
postwar trade relations between Europe and America. Since
1989 the EU has banned the import of bananas and
hormone-treated beef and has not heeded U.S. and WTO objections. In 1999 the United States took action, levying retaliatory tariffs of 100 percent against 15 EU products. As Europe and the United States continue to compete with one
another for global trade power, the further liberalization of
trade between the two regions remains uncertain.
Although Canada and Mexico are America’s largest and
third-largest trading partners, respectively, no serious effort
at integrating trade between the three partners has existed
since efforts were made toward the Canadian reciprocity
treaty of 1854. In 1989 the widely hailed Canada-U.S. Free
Trade Agreement (CUFTA) began the process of eliminating
all bilateral tariffs either immediately or in equal annual
steps. Momentum encouraging free trade generated the
North American Free Trade Agreement (NAFTA) of 1992,
which created a free trade zone between Mexico, Canada, and
the United States. Since it began the 15-year process of eliminating tariffs between the three partners in 1994, NAFTA has
created a free trade area rivaling the EU in terms of GDP and
population encompassed. Although some difficulties still
hamper the implementation of the agreement, the transition
has generally been smooth.
Such cooperative trade agreements represent a worldwide
trend in the postwar era toward the liberalization of trade. In
casting off many of the conservative trade ideologies of the
past and paying little heed to Marxist critiques, industrialized
nations are seeking to reduce most trade barriers with their
biggest trading partners. Some of this reduction in protectionism may have resulted from governments’ increased
awareness that protection may force costs on society and even
on the domestic industries receiving protection. In addition
to the previously discussed flaws of VERs, all forms of trade
protection may result in the misallocation of factors of production into industries in which they are utilized less efficiently. Further, industries believing that a government may
be willing to extend protection will see potentially great gains
in diverting otherwise productive resources into lobbying efforts against the government. Finally, as economists Neil
Vousden and Neil Campbell argue, industries characterized
by little competition often will not make the effort to succeed
in their fields, a phenomenon known as x-efficiency.
What of the future of American trade liberalization in the
Western Hemisphere? In 1995 a group of 34 trade ministers
from North, South, and Central America met to create a free
trade area of the Americas (FTAA), which would be developed
through an evolution of the continents’ many subregional
trade agreements. If realized, this trade liberalization effort
would be the most ambitious example of economic cooperation to date. Additionally, the United States, through participating in the Asia Pacific Economic Cooperation Forum
(APEC), has worked toward achieving free trade in the AsiaPacific region by the year 2020. These goals, if accomplished,
would fundamentally change the way America conducts trade
through the first quarter of the twenty-first century.
—Josh Pratt
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