THE word "cartel" is enjoying an extraordinary and somewhat curious vogue in the United States. Its meaning, like that of many more or less technical words adopted for popular use, has become more vague while at the same time becoming more portentous. And the overtones are definitely sinister. If international finance is somehow more to be feared than the domestic variety, how much more so is this true of international cartels. People either are for cartels or against them. Very little of the recent literature is devoted to careful description or cool appraisal of their activities. Those opposed have relied on such words as conspiracy, monopoly, Fascism and treason; while, on the other side, people like Lord McGowan of Imperial Chemical Industries describe cartels as a means of assuring orderly marketing, planned expansion of international trade, elimination of cutthroat practices and all that is admirable and reasonable. It must be said that the anti-cartel people have been much more successful than the pro-cartel people in getting their favorite connotations accepted, at least in this country.

Cartels, in the narrow and proper sense of the term, are agreements between firms in the same branch of trade limiting the freedom of these firms in the production and marketing of their products. Cartel agreements aim typically at the restriction of output or sales by the member firms, at an allocation of market territories and a fixing of the price of products. Such restrictive agreements are, of course, illegal between firms engaged in domestic trade in the United States. But American firms can form export associations which, on occasion, have entered into international cartel arrangements with associations or firms in other countries. These American export associations are formed under the Webb-Pomerene law, which contains certain limitations now being tested in a series of anti-trust cases.

As stated by Wendell Berge, present Chief of the Anti-trust Division, export associations are not permitted under the Webb law to enter into international agreements which, "(a) restrain trade within the United States; or (b) restrain the export trade of any domestic competitor or association; or (c) enhance or depress prices within the United States, substantially lessen competition within the United States, or otherwise restrain trade therein." Despite these limitations, American firms have in a number of cases entered into full-fledged international cartels fixing prices and allocating markets. Unless the Webb-Pomerene law is more strictly enforced, they may be expected to enter such cartels still more extensively in the postwar period.

Although cartel, in the strict sense of the word, means a marketing agreement between private firms, in current usage its meaning has been greatly broadened. It is used to include patent and process exchange agreements between firms in different countries, such as those consummated with foreign interests by DuPont, Standard Oil, and International General Electric. Frequently, patent exchange arrangements contain marketing agreements; indeed, the market agreements may be the real reason for exchange of patents and processing knowledge. This type of cartel arrangement is, perhaps, the one which primarily concerns American firms. Since, however, the market control features depend mainly on the patent rights which are exchanged, the nature and extent of the restrictions on international trade which they involve become technical patent questions which it is not our purpose to discuss here. The phrase international cartels is also interpreted to include joint ownership of foreign affiliates by potential competitors, e.g., the Latin American Duperial companies jointly owned by DuPont and Imperial Chemical Industries.

International cartels are sometimes formed under governmental auspices and with government participation; indeed some of the best-known -- most notorious, if you will -- international cartels have been negotiated by governments. This was true of the prewar tin and rubber cartels. Government-owned enterprises also frequently participate in what are, in other respects, private international cartels. As government participation increases -- as it may well do in the postwar period -- the international cartel, which in its pure form is an agreement between private firms, takes on the character of an international commodity agreement. The United States Government has entered into commodity agreements for wheat and coffee; agricultural interests are pressing for broader participation after the war. If other governments sponsor and participate in international cartels in industrial materials and manufactured products, not only will a considerable part of the international trade of the world be brought under a high degree of commodity control, but the distinction between cartels and commodity agreements will become progressively less meaningful.

Before proceeding to a consideration of some of the problems which a policy toward cartels must take into account, two facts bearing on the formation of cartels should be emphasized: first, that most of the important international cartels have arisen out of situations in which it could be plausibly argued that a serious lack of balance existed between productive capacity and current consumption of the products in question; and second, that a functioning international cartel has usually required the effective prior "organization" of producers in the domestic market.

The formation of international cartels in rubber, tin, nitrates, steel and many other important products was preceded by situations in the participating countries which politically important producing interests considered unsatisfactory. Productive capacity was greater than the world market could absorb at prices sufficient to maintain the producers in the style to which they had become accustomed. In some cases the number of workers employed was large, and falling world market prices had seriously influenced wage rates. In others the exports in question were heavily relied on for government revenues and foreign exchange. When producing groups are confronted with declining or inadequate markets, they turn naturally to methods of controlling output and price. If private action proves inadequate, appeal is made to the state; and if the producers are politically influential, it usually is not made in vain.

Relief from excess capacity may be provided by limiting imports, either directly or by protective tariff, by export bounties, by production subsidies, and in many other ways. Among these other ways is the formation of an international cartel which will "adjust supply to demand" (i.e. restrict output), which will provide for "orderly distribution" (i.e. allocate market territories) and which will "stabilize prices" (i.e. raise prices). In the postwar period, partly as a result of war-expanded output, we may expect to be confronted by excess capacity in many countries and on a large scale. The only successful remedies will be the maintenance of a high level of income in the principal countries of the world and a shift from these industries to others. Yet we may expect other remedies to be suggested, including restriction of imports, export subsidies and international cartels with or without government participation.

This will be particularly true in countries in which domestic industries are already well organized or, if one prefers another term which is almost a synonym, monopolized. The members of international cartels are ordinarily either very large firms controlling a predominant share of the export of the cartellized product from a given country, or associations including the principal exporters of such products. Restriction of output or exports, a typical cartel activity, frequently requires an allocation of the restricted quantities between the member firms. If such allocation is to be effective, it may require control measures by the export associations. Unless export business is completely separated from domestic production, effective cartellization for exports is difficult without considerable control of the domestic market. English participation in the European steel cartel, for example, was impracticable as long as the tradition of competition between steel producers ruled the domestic market; and when English exporters were finally brought into the cartel, this action was accompanied by a substantial cartellization of the domestic market, at government insistence.

Extensive American participation in cartels would likewise presumably require a considerable measure of coöperation between firms in the domestic market. But since the United States is rather enthusiastically committed to an anti-trust policy at home, such participation appears unlikely, at least in those industries in which exporting firms are not only numerous but also engaged in production for the domestic market. Our antipathy to monopoly, however, is not shared by other countries. Many European countries will look favorably on international cartels, along with import restrictions, export bounties and other measures, as a means of coping with excess production.

II

A discussion of the effects of international cartels may fairly center on the following three aspects of cartel practice: (1) Trade barriers. Cartels are said to involve privately imposed limitations on the free flow of commodities of international trade. (2) Security. The participation of American firms in international cartel arrangements is alleged to have involved restriction of the production and development of products and processes necessary to the war effort, and the use of American connections for enemy espionage purposes. (3) Political. International cartels are said to promote a relationship between private enterprise and the state which may involve the use of the power of the state to further the purposes of private interests, and the use by the state of business enterprises as instrumentalities of public policy.

There are also various cartel problems which might be treated under the general heading "economic warfare." International cartel connections have posed certain difficulties for blacklisting and other economic warfare policies, due to ambiguities of ownership and the mobility of assets involved in such connections. But these problems are not limited to cartels and will not be of much significance in the postwar period.

Cartels as trade barriers. There can be little doubt that international cartels on the whole restrict the total volume of world trade and divert its channels. Their primary purpose being to restrict the freedom of participating firms and associations to compete on the world markets, they would not long continue to exist if prices and outputs were not more satisfactory to participating members than they would be if competition were unrestrained. Instances are numerous in which tariff reductions have not produced an expected increase in imports because market allocations by cartels have prevented foreign producers from selling outside of assigned territory. On occasion, it is true, cartel restrictions may have increased the total volume of world trade. High cartel prices have frequently brought productive capacity into the market, as well as a greater volume of exports than would have otherwise existed. If an international cartel prevents the installation of domestic productive capacity by threatening to cut prices in a particular country, imports into that country may be maintained and, along with them, world trade. This result has been achieved on more than one occasion in Latin American countries. Such expansion of trade, however, is not likely to be adduced as a merit of cartellization.

The influence of cartels on the diversion of trade from normal competitive channels is undoubtedly greater than is their influence on the total volume of trade. International cartellization tends to divide the world into spheres of commercial influence by allocating to the nationals of particular countries exclusive selling rights -- apart from outsiders -- in specific territory. In cartel arrangements American firms are normally assigned the United States market, sometimes the whole of North America and, on occasion, parts of South America. British firms have special claims to Empire territory. In the period before the war, the growing strength of German firms in a number of cartels won them increasingly large areas of European territory. In the period between the wars, mandated areas were frequently reserved by cartel agreement to the firms of the country holding the mandate.

Although, in general, international cartels tend to restrict the volume of world trade, it does not necessarily follow that restriction is in all cases undesirable nor that, under the competitive conditions facing American firms, American participation in such cartels would lessen our foreign trade.

After the war, an international security organization may restrict the exports of strategic materials to the nations recently guilty of aggression. If so, a fairly serious restraint of foreign trade will be involved. Unrestricted competition between the nationals of various countries may lead to the rapid exhaustion or the wasteful exploitation of irreplaceable resources. If so, the case for regulation and restriction will be a strong one. In some branches of commerce which have the character of a public utility, such as shipping, air transport and international communications, competition between the nationals of the countries concerned is not likely to produce desirable results, and agreements limiting the freedom of the competing interests are probably necessary. The immediate postwar period will see a number of industries expanded beyond the needs of civilian consumption. Temporary control of international competition pending a conversion of facilities and a shift of manpower into other employment is perhaps desirable.

Are private cartels the appropriate restricting and regulating agency in areas of foreign trade in which a restriction of competition may serve broader interests than those of the producers immediately involved? If an international agreement restricting trade is necessary in the public interest of several states, the agreement should presumably be consummated by public bodies rather than private business enterprises. The word "presumably" is used advisedly, since the intervention of the state in foreign trade introduces a possibility of political conflict which may be more dangerous to the maintenance of peace than conflict between private cartel interests. The other side of the picture is that a tradition of governmental agreements on specific and relatively minor matters is probably a necessary prelude to broader international agreements on the vital questions of war and peace.

It does not follow that because international cartels restrict trade American participation in them will restrict American trade. Where a goodly part of world trade had already been cartellized, it has been argued, American participation would be necessary in order to maintain or increase our exports. It is said that by local price cutting, monopolization of distributing outlets and other practices, some fair, some unfair, foreign cartels can effectively deny certain foreign markets to certain American products, whereas if American firms were members of the cartel, access to these markets would be secure. This argument is difficult to document and, on its face, not very plausible. High cartel prices abroad offer excellent competitive opportunities to American enterprise, and cartel practices have in all probability resulted in the loss of more business to American competition than they have gained.

A more serious danger to our exports rests in the influence which foreign cartels on occasion exert on the governments of their national participants. Through this influence, tariff barriers may be raised against our products and our exports impeded by other forms of state action. While American participation in international cartels might lessen these barriers, the price would probably be a smaller share of the foreign market than might be won by outright competition. Moreover, it is within the power of the American Government to deal with trade barriers by the usual international bargaining processes. There is, however, truth in the contention that if the trade of the rest of the world is cartellized and our own exporters excluded from cartel participation, we shall purchase our imports at monopoly prices and sell our exports on world markets at competitive prices. The "terms of trade," in technical language, may be turned against us by foreign cartel activities. Again, however, this is probably a matter to be handled through the bargaining powers of the American Government.

In general, it may be said that private cartel restrictions constitute a definite type of trade barrier, that the seriousness of this trade barrier is greatly increased by government support of cartel practices, and that neither world trade nor American trade is likely to be increased through American participation in cartels, regardless of how widespread are cartel ramifications in other countries.

Security Aspects of Cartels. The fierce light of Congressional investigation and anti-trust prosecution has recently beaten on certain American firms which in the prewar years entered into patents and processing arrangements, mainly with German firms, involving market agreements extending considerably beyond legitimate patent rights. The committee hearings and the antitrust prosecutions have been surrounded by effective publicity, and the implications of the agreements have, in consequence, lost nothing in the telling. Out of the facts revealed (the most complete compilation is in the Bone Committee reports) have grown various generalizations, ranging from a description of the American participants as dupes and their firms as cogs in a "German master plan" to a characterization of international cartels as essentially Fascist institutions. There evidently has been no doubt in the minds of the accusers that American participation in international cartels is highly dangerous to American security.

Anti-trust cases against American firms whose agreements with German firms hampered their freedom to develop or produce useful war materials were effective in eliminating these restraints and thereby releasing American production. The much-publicized cases of magnesium, beryllium, military optical instruments and synthetic rubber are too well known to require further comment. Whether the patents and processing agreements between American and German firms have, on balance, hampered American war production, is, however, an open question. To answer it we would need to know the value of the technical knowledge disclosed by each side to the other and the uses to which this knowledge has been put. To date only one side of this story has been told. There can be little doubt that the Nazi Government exercised much more careful supervision over the disclosure of technical knowledge having potential military usefulness than did the American Government; and it is clear that on occasion the disclosure of information to American firms was accompanied by restrictions framed with an eye to the military ends of the Nazi state. It would be very difficult for the American Government to exercise that degree of supervision without a pretty serious alteration of our political and economic traditions. No doubt the exchange of technical information by American firms holding important Army and Navy contracts will have to be scrutinized more carefully in the future, but it is more than doubtful whether the exclusion of these firms from an international exchange of patents and processing knowledge, even of the prewar type, would benefit this country either in war or in peace.

International cartel connections have been used by nationals of our present enemies for espionage purposes and, particularly in Latin America, for political propaganda and psychological warfare. It is hard to see, however, that these activities raise questions peculiar to cartels. Foreign affiliates and foreign agencies can and do serve much the same purpose. The intimate relations between nationals of different countries involved in the exchange of laboratory and processing information may be peculiarly suited to such purposes; but these arrangements do not necessarily involve participation in cartels.

There is, of course, a widely spread doctrine that the foreign economic interests of monopoly capitalists are a primary source of war and that, since the interests of such capitalists are frequently served through international cartels, cartels must be in some sense a menace to peace. "The internationalism of international cartels is the most dangerous type of internationalism." In so far as cartel participants enlist the support of their respective governments, thus bringing the interests of the state into what would otherwise be the concern of private enterprise, there may be some truth in this thesis. The danger, however, lies primarily in substituting state conflict for the conflict of private interests, not in the attempt of business interests to lessen international competition by private cartel agreements.

One of the most ominous attempts of organized business groups to obtain state support for international restrictive arrangements -- an attempt which, had it succeeded, would almost certainly have produced extreme international friction -- was the Düsseldorf discussion undertaken by the leading British and German industrial associations shortly before the war. A joint communiqué declared: "Both organizations are fully aware that the advantages of agreements between the industries of two countries or of two regions could be frustrated by the uneconomic competition of the industry of another country refusing to join the agreement. In such cases it might become necessary for the organization to ask for the support of its government. Both organizations agree to ask for such support if the need arises."

Political Aspects of International Cartels. Examples are not lacking in the use of international cartel connections to avoid legitimate obligations to government, such as the payment of customs duties and compliance with domestic legislation and administrative rulings. But the important political questions have to do with state action in the interests of cartel participants and the use by the state of the cartel as an instrument of public policy.

The American Government, in keeping with the strong American anti-trust tradition, has pursued a policy of dealing at arm's length with business associations both in domestic and foreign trade. Its attitude in this has been unique among industrial nations. The British Government went very far in prewar years in encouraging business control of output and prices in the domestic market and the participation of British industries in international cartels through export associations. State assistance in the formation of cartels and the policing of cartel regulations was a common feature of continental industry and governmental support in international cartel negotiations had become almost standard practice.

The granting of tariff protection to increase the bargaining position of their nationals in cartel quota allocations was a regular policy of many European governments. As Sir Alfred Mond, organizer of the British Imperial Chemical Industries, observed: "In negotiation, the man behind the tariff wall always has something with which to bargain, which the man in the Free Trade country has not. Anyone who has had practical experience of bargaining with continental producers knows that the first thing they say is: 'You cannot export to our country, because we have a tariff. How much of your market are you going to give us?'"

Cartel participants have also solicited government help in enforcing domestic cartel regulations and in negotiating more effective international agreements. Private efforts to cartellize the production and export of tin and rubber were ineffectual; only the coöperation of the governments of the principal producing areas made the attempts successful.

For these reasons, and because of increasing public awareness of the character of the trade barriers imposed by cartel regulations, it is probable that if there is an expansion of international cartellization in the postwar period it will take place under the sponsorship and regulation of governments. Within this framework the term "regulation" should not be taken too seriously. The experience of European governments in the regulation of cartels is both extensive and unhappy. Government sponsorship of cartels would, no doubt, impose limitations on private action. Publicity might be required, and the grosser forms of restrictive practice forbidden. But there is no reason to expect effective regulation of cartel output and price policies in the interests of groups broader than those composed of cartel members. On the basis of experience there is every reason not to expect it. Governments will sponsor and regulate cartels with an eye to the expansion of the exports of their nationals. The more important foreign trade interests are in the economy of a country, the more actively government will support cartels and the less it will consider anything other than export interests when it does so.

This conclusion is further supported by the behavior of those government-owned firms which participated in essentially private international cartels in the period between the wars. Governmen-towned aluminum, timber, nitrogen, potash and phosphate producing or exporting enterprises joined in all the restrictive practices pursued by the cartels of which they were members.

As governments penetrate into cartel activities, private controls are not only in part circumscribed but cartel arrangements become available to the state as vehicles of foreign policy. In the mercantile period many foreign trading companies were semi-political in character. The British Government accomplished through the East India and the Levant companies tasks which, in the nineteenth century, were the sole prerogative of state officials. There is considerable evidence that semi-public cartels engaged in foreign trade may come to fulfill similar purposes: mention has already been made of the use by the Nazis of German cartel connections to attain various military objectives. Cartels, moreover, have been one of the important instrumentalities in the integration of European industry under German control during the last four years.

If, in the postwar period, limited world supplies of strategic materials are to be produced and allocated by cartels with government participation, private interests are likely to be overshadowed by government security considerations. Likewise, spheres of political influence in Europe and elsewhere will affect the scope and function of cartel activities.

The inter-penetration of government and business in foreign trade activities creates problems which are likely to be serious to this country. More, perhaps, in the United States than in any other country, business has remained private and public affairs have been carried on by public officials. Nor is our form of government well adapted to a flexible inter-relationship of public and private interests in foreign affairs. It would be well for us to recognize that the trend of events abroad appears quite definitely in the direction of greater state participation in all forms of foreign economic activity.

III

The prospects for a liberal foreign trade policy in the postwar period, including the reduction of private as well as public trade barriers, depend primarily on two conditions: the emergence of effective security coöperation among the Great Powers, and the orientation of domestic economic policies in the direction of full employment. Effective coöperation among, at least, the Great Powers is a necessary condition. The competition for supplies of strategic materials which would ensue in a world split into spheres of influence would in itself be sufficient to blast any chances of a liberal policy in foreign trade.

But international coöperation is not enough. Domestic economic policies designed to promote reasonably full employment of resources are a sine qua non for a liberal solution. It was the depression of the thirties which produced that array of protective tariffs, exchange controls, quantitative limitations, currency depreciation, export subsidies and restrictions through cartels which by the end of the decade had put international economic relations in a strait jacket. Prolonged depression in the postwar period would maintain all the old restrictions and no doubt add new ones.

Government policy toward cartels is part and parcel of foreign economic policy. What is done in the cartel field will be dependent on what can be accomplished in other areas. If an effective international security organization and sensible domestic economic policies develop, it may be possible by international agreement to get rid of the more restrictive types of international cartel practice along with other barriers to foreign trade. In the imposed terms of a peace settlement there are also chances of important alterations in the European cartel structure which centered in Germany. It must be remembered, however, that such measures are not likely to be successful unless they conform to the long-run economic interests of the countries affected.

At this stage of affairs both the political and economic interests of the United States run so strongly in the direction of a liberal foreign policy that the appropriate attitude toward international cartels may be said to be predetermined. The fact that this attitude also conforms to a long-established anti-monopoly tradition gives assurance that this aspect of a liberal foreign policy will probably have stronger domestic support than some others. We should realize, however, that if international events and domestic policies defeat the possibilities of a liberal international trade, then we may be confronted with the necessity of changing our attitude toward cartels rather drastically.

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