THE British imperial preference system was born out of the union of political exaltation and economic uneasiness. The British Crown emerged from the imperial campaigns, of which the Boer War was the last, with immense new territories. British settlements throughout the world were swept by a feeling of triumphant national pride. Readers of Kipling will be familiar with the emotions of the time, which have been more lately recalled for us in the historical moving picture "Cavalcade." But these give no sign of the uneasiness that at the same time was invading those dim offices of London and Birmingham where the watch is kept over Britain's trade condition. The United Kingdom was carrying almost all the rapidly mounting cost of imperial defense. Its share of world trade had clearly declined during the past 20 years; German and American competition were growing more difficult to meet. The idea of trade preferences within the Empire, discarded many decades before, gained support both as a means of uniting the scattered domains and of sustaining Britain's trade.

The first significant step was taken around the turn of the century, when Canada and South Africa enacted preferences for British goods. When Joseph Chamberlain sought office in 1906, however, on a program of tariffs for Britain and preferences within the Empire ("a true Zollverein for the Empire") he was badly defeated. Britons still wanted cheap food; British industry still wanted cheap raw materials and had confidence in its ability to hold its own. The First World War brought the change: between 1915 and 1922, 26 governments within the British Empire and Commonwealth granted preference of some kind to goods of British origin; and the United Kingdom began to reciprocate, first chiefly by granting favors on sugar, wine and tobacco, and then by extending the preferences to a growing list of agricultural and industrial products.

The Smoot-Hawley bill drew together all the members of the British Commonwealth in injured indignation; and the injury to their exports was the harder to bear because other foreign markets were also being reduced by trade controls. Britain, already leaning strongly toward increased protection, made a major tariff revision. Its extent is indicated by the fact that 83 percent of Britain's foreign imports had entered free of duty in 1930 while in 1932 only 30 percent did so.

Thus well equipped with the weapons of economic nationalism, the United Kingdom met with the other members of the Empire to discuss trade relations. The Ottawa agreements of 1932 greatly extended the range of preferences among the United Kingdom, Australia, Canada, India, South Africa, Southern Rhodesia and New Zealand. Many of the increased tariffs and preferences applied to manufactured products in the sale of which the United States had previously led. At about the same time many of the colonies ruled from London took similar action; and in the following years the preference system, particularly in the colonies, was made more rigorous by the introduction of quotas on foreign textiles, primarily directed against increasing Japanese exports. Thus in the middle of the thirties the structure of preferences and the American tariff barriers were at their height. Empire goods received a preference in the British market varying from 10 to 33 percent, and even more for the chief foodstuffs and raw materials produced within the Empire.

In 1938 the trade war between the United Kingdom and Eire was ended and an agreement was signed establishing reciprocal preferences between these two countries. But in the same year trade agreements were negotiated among the United States, Great Britain and Canada. Great Britain lessened or dropped certain preferences that hindered the sale of American farm products, particularly apples and wheat. Canada reduced the duties on such significant items of American export as iron and steel products, chemicals, drugs and electrical supplies. The trend toward ultraprotectionism was at least interrupted, and the desire of the United States and Canada for greater freedom of trade was expressed by further agreements between them during the war years.

Yet the end of the Second World War finds the imperial preference system still extensive. The participants cling to it as an assured basis of trade at a time when Britain is anxious over her ability to pay her way, the Dominions worry over future surpluses of such staples as wool and the colonies over the prospects for high-cost production of sugar, wine, tobacco and the like. The United States Government has steadily objected to the system since its establishment. But it has never been in a position to force its abandonment, for American sales to Britain and Canada have generally exceeded our purchases from these countries. Thus it has had to resort to bargaining, as in the trade agreements of 1938.

Until 1941 only technical experts and exporters greatly concerned themselves with the subject; but then the bright spark of attention that is struck at each step which great men take fell upon it. President Roosevelt at his meeting with Mr. Churchill on the Atlantic in 1941 tried to obtain the Prime Minister's unqualified endorsement of the American conception of equality in trade. But Mr. Churchill's acceptance of the principle was accompanied with the reservation of "existing commitments." Another attempt to gain the same end was made by the United States Government when negotiating the Master Lend Lease Agreement with Great Britain in 1942. The result is reported by Mr. Churchill in his book "The Dawn of Liberation" -- "I did not agree to Article 7 of the Mutual Aid Agreement without having previously received from the President the definite assurance that we were no more committed to the abolition of Imperial Preference than the American Government was committed to the abolition of their protective tariffs."

Thus, great significance has been attached to a tariff arrangement of relatively little direct economic importance. We have sponsored the opinion that the imperial preferences (among others) are a serious obstacle to the revival of world trade, and therefore prejudice the prospects of progress and peace among nations. The question is certain to be in the forefront when governments meet again to discuss their trade relations. A fresh appraisal of the preferential system, in the light of existing conditions and minus the customary assertion of abstract (and self-righteous) principles may, therefore, be useful, even though it is impossible now to measure its aspects closely or conclusively.

II

The imperial preference system is a maze of fiscal arrangements, by which each participant admits into its markets certain exports of the others at lower tariff rates than are imposed upon the same products when originating elsewhere. The members thus avoid the full force of international competition in regard to the favored products and, when the preferences are fully effective, are assured of a steady market and a supply of sterling funds. It should be noted, however, that many of the preferences have proven of comparatively little trade value. This is the case when the tariff rates that even the preferred sellers must pay are so high that they cannot compete with domestic producers. It also is the case when the margin of preference (that is, the difference between the preferential rate and that paid by foreign countries) is not great enough to enable the favored participant to compete.

Where the preferences are effective, countries excluded from the system lose export opportunity or must sell at lower prices than they would otherwise obtain. Further, they suffer not only in the markets of the British Empire but elsewhere; for other foreign countries try to offset the effect of the preferences by increasing their own trade restrictions and, perhaps, extending their own preferential arrangements.

The United States has protested against the preferences more persistently than has any other country. Great Britain has been the largest single American market; in particular, it has been the best market for American farm products, of which there so often was an excess supply before the war. Then, too, the export trade of the United States is extremely diverse; some American group has suffered from almost any item in the preference schedules. Yet it should be observed that American exports to British countries since 1933 have been maintained about as well as those to the rest of the world. During the years 1926-30, British countries bought about 42 percent of total American exports. The effects of the Import Duties Act of 1932 and the devaluation of the pound, as well as of the Ottawa preferences, are reflected in a decline to about 40 percent for the years 1931-35; but in the years thereafter the British share of American exports rose again to the former figure of about 42 percent. Save for the increased tariffs and preferences it would no doubt have been greater, for the British countries made a better recovery from the depression than many other countries. But this should be observed: American reckonings of injury have usually assumed that Great Britain and the other members of the system could have paid for their imports in foreign currency or gold as easily as in sterling, ignoring the difficulties in the British balance of payments situation.

American resentment at the preferences has been sharpened by the fact that the British Dominions claim complete independence in international political matters. And it has been very easy for us to transform our sense of injury into moral indignation, since the United States dealt with the trade of all foreign countries on equal terms, except for the preferences it granted to the products of the Philippines and Cuba. Whatever our offenses against the economic welfare of other countries, we did not discriminate in this way -- or, at least, our transgression was small. Thus no theme in American diplomatic utterances is coated more heavily with the enamel of virtue than this.

III

But the issue, happily, is not a moral one. It is primarily one of economic circumstances and its solution lies in the improvement of economic conditions. The American conception of equality of trade opportunity rests on the view that competition on equal terms (i.e. subject only to the same external restraints) between the producers of various nations is a feasible rule which will bring all countries the greatest possible benefit from trade. It enables each country to buy from the cheapest sources, and provides the best chance for a country to satisfy its needs for foreign goods by producing more efficiently or working harder. It is an important guarantee of the value of trade privileges obtained by negotiation: and, therefore, facilitates the lowering of trade restrictions by negotiation. It is the most appropriate accompaniment to the idea of the political equality of states; and it is the trade principle least likely to cause disputes. So the claims for the doctrine run, and each has weight -- though not the same weight for every country.

But it must be recognized that the validity of the claims varies with the degree of restraint imposed on the movement of trade and the stability of the economic outlook. When countries enjoy a world-wide market in which to offer their goods and acquire the means of paying for imports, then each may truly participate in the competitive opportunities that the world affords on equal terms (though of course it is true that resources and productive skill are not evenly distributed among the different countries). Under such circumstances the American conception of equality of trade opportunity would actually best serve the interest of most countries -- though not all. There would, even so, be a few so smashed by this war that they would not be able to get along without temporary special favor either in the form of trade opportunity or gifts. There will always be a few so poor in resources and incapable of meeting competition that they will be destined for misery unless similarly aided; these perhaps should be absorbed into some larger trade unit if it can be achieved by peaceful agreement. And there will be some colonies that cannot be satisfactorily left by their mother countries to manage on equal terms with others; they would fall into disorder and soon seek another political connection. But for the larger and more productive countries, granted a good prospect of peace and sufficient export opportunity, the rule of equality (in some form or other) should be feasible. Feasible but not without its price; that lies in a willingness to make internal economic adjustments in response to the tides of international competition.

Up to the end of the First World War actual conditions approximated those sketched out. Trade restrictions were relatively small and the world market rapidly expanding. Problems of internal adjustment presented themselves. But they were managed without great trouble. Under these circumstances preferences such as the present British system could be condemned out of hand as lacking economic justification and as a troublesome form of national exclusiveness. The change in international economic conditions now softens such a judgment. The conception of equality is not as self-evidently beneficial as it was and is more difficult for many nations to practise.

There is space here to take note of only three of the changes which affect the readiness of the British countries (and others) to dispense with preferential arrangements. They are: first, the existing restraints on international trade; second, the need of many countries to be certain of a stable balance in their international accounts; and third, the extension of government regulation of costs, prices, production and employment.

High barriers ruin the idea of trade equality: of what value is equal opportunity to compete on equal terms with other foreign countries in a market that is barely open to any? Furthermore, trade restrictions reduce the export opportunity of some countries more than that of others. The American tariff, for example, admits most tropical products freely but excludes almost all products which might compete directly with those of the American farmer. All selective trading systems such as the tariff have in them the germ of inequality, and the more selective the system the greater the resultant inequality. Further, if trade restrictions are great and general it becomes more difficult for some countries to observe the rule of equality, even if they are so inclined. Only those whose products are in exceptional demand or who have competitive superiority find it easy to sell enough to pay for their imports. The pursuit of special advantages gains economic justification with every increase in trade restrictions.

The second change may be temporary. The internal production arrangements in many countries including Great Britain are operating poorly. Money costs of production are uncertain. Means of payment for essentials are short. Under these conditions the risk of facing international competition on equal terms is grave. This is, on the whole, what happened during the depression in the absence of any organized international program of aid; it need not be a lasting condition now.

The third change in circumstance that I have mentioned -- the increasing control by governments and groups of costs, prices, production and employment -- may prove to be the most stubborn point of difficulty in dealing not only with the imperial preferences but with other forms of preferences practised by other countries. For countries which apply such controls widely are ordinarily disposed to subordinate gains from foreign trade to the successful management of the planned economy as a whole. It is plain that in dealing with countries that regulate the essentials of their economic life the American conception of trade equality becomes difficult to manage and apply. It requires redefinition in terms of a set of very different facts and purposes. The examination of this question, of immediate concern in our relations with the U.S.S.R., must be left for another day. Suffice it to remark that enough flexibility will probably continue to exist in the economic systems of the chief participants of the British imperial preference system to make it possible for them to give a substantial measure of effect to the rule of equality without upsetting their programs of control -- provided other economic circumstances are favorable. Even in cases where there is a wish to do so, however, the centralized direction of many branches of production and import will limit the effectiveness of the rule in practice.

The use of preferential trade methods does not necessarily express malice or indifference to the economic welfare of others. There are instances, such as the German economic program in the Danubian area before the war, and possibly the present program of the U.S.S.R. in the same area, that represent primarily a wish to secure domination and have little fairness or economic justification. But most of the preferences that American trade faces, including the British preferences, are a response to economic conditions or necessities.

The elimination of preferences is not a moral issue, but part of the general problem of economic revival that faces the world. The restoration of production, the attainment of high levels of real income and employment, the gradual reaccumulation of capital, the lowering of trade restrictions and the brightening of the prospects for political peace and order -- all these are needed if the rule of equality is again to prevail. Through the Bretton Woods Agreements and the American-British Loan Agreement, the two countries are already working together for these ends. The problems that will present themselves for solution may be made more clear by a review of the importance of the preferences in the past trade of the Empire and the United States, and an attempt to forecast their importance in prospective trade.

IV

The importance of Empire trade to Great Britain and the usefulness of the preference in sustaining British exports to the Empire is indicated by the following record.

Percentage of
British Exports to
Years Empire Countries
1913 37.2
1921 42.5
1927 46.1
1929 44.5
1931 43.7
1935 48.0
1938 49.9

With the help of the preferences, British export trade to the Empire fared better than that with foreign countries. The preferences of the earlier period helped reverse the declining importance of Empire markets in the export trade of Britain; and after the Ottawa agreements these markets bought a steadily increasing part of all that Britain sold. It is impossible to measure how much of this increase was made possible by the preferences. Economic recovery in the Dominions after August 1932 (the date of the Ottawa Agreements) went faster and farther than in much of the rest of the world. British exports -- partly as a consequence of retaliation against the preferences -- were subjected to increased hindrances in many foreign countries. And lastly, the record reflects the fact that Empire countries had no difficulty in paying for British goods while many of the foreign countries did.

That the preference system was only one element, and perhaps not the most important, among several seems to be clearly proven by the fact that between 1931 and 1938 (the period in which the Ottawa Agreements were exerting their full influence), the share of British products in the total imports of the Dominions did not markedly increase. The record of Canadian imports may be used as illustration. In 1929 Canada purchased 15 percent of her imports from the United Kingdom and 19.8 percent from the whole of the British Empire including the United Kingdom; between that year and 1933 these portions increased substantially to 24.4 percent and 33.1 percent; but by 1939 they had again declined to 15.2 percent and 25.2 percent. In the later interim Canada reduced some of the preferences that applied against American goods. The record suggests that in some important branches of trade the preference extended to Great Britain was not sufficient to enable its products to gain the market. The same inference follows from the fact that while between 1929 and 1933 the share of American goods in total Canadian imports fell from 68.8 percent to 54.2 percent, by 1939 it had risen again to 66.1 percent.

A brief review of the export trade of Britain in the thirties, commodity by commodity, shows that preferences aided some of the favored branches of British industry, but were of little or no importance to others. Among those most clearly helped were certain types of iron and steel products -- including hardware and cutlery, non-metallic minerals, electrical and other types of machinery, motor cars, drugs and dyes, cotton and woolen piece goods; these are all important branches of British industrial production.

Turning to the reverse side of the subject -- the effect of the preferences on the sources of British importations -- the record is as follows:

Percentage of
British Imports from
Years Empire Countries
1913 24.9
1921 30.5
1927 30.1
1929 29.4
1931 28.7
1935 37.6
1938 40.4

This shows clearly that Britain took a substantially greater share of its imports from Empire sources after the First World War than before, and that after the conclusion of the Ottawa Agreements this tendency became decidedly stronger.

However, again judgment must be uncertain as to the extent to which this was a consequence of the preference system rather than of other causes. For other developments were tending to bring about the same result. The nature of British imports changed substantially during the thirties. Imports of manufactured products became relatively much less important; imports of raw materials and foodstuffs became relatively more important; Empire countries supplied chiefly the latter. British imports from most foreign countries would have declined somewhat in relative value even if no preferences had been granted. This was caused in part by the increasingly high and comprehensive tariff restrictions that Britain placed on manufactured products and in part by the depreciation of the pound. These, rather than the preferences, were the chief obstacles to American exports of many manufactured goods. In some cases, however, such as automobile parts and certain types of machinery, the preferences caused trade to be diverted to the Dominions; and preferences were also the primary obstacle in the case of certain farm products such as tobacco and dried fruits.

That the preferences maintained by Britain did actually and substantially aid Empire producers as compared with their foreign competitors is corroborated by inspection of the record of the distribution of their exports. The sales of other members of the Empire to Britain were much better sustained than their sales in other foreign markets. For example, the percentage of total Canadian exports sent to the United Kingdom rose from 29 percent in 1931 to 41.6 percent in 1934. The preferences encouraged the establishment of branch plants by United States manufacturers in Canada and a few other Empire areas. This suggests that the export trade of the Dominions was helped more by the preferences than that of the United Kingdom. This was, perhaps, not so much due to the terms enforced by the individual members as to the fact that the Dominions were in a stronger competitive position than was Great Britain.

V

It is impossible to forecast with any precision the extent to which the removal of the preferences would affect trade between the countries of the Empire under postwar conditions. And the question whether or not other trade restrictions or controls would be increased further complicates the analysis. If the preferences were removed without increasing the general tariff rates, various important branches of British production, industrial and agricultural, would become more exposed in the home market to the competition of American and other foreign products. Among them, to take a scattering of instances from the industrial field, would be the iron and steel industries, other kinds of metals manufacture, electrical machinery and apparatus, motor cars, various branches of chemical manufacture, drugs and dyes, the milling industry and certain types of textile products. It may be assumed that Britain would guard so important a range of economic activity by maintaining some form of protection for them even after the removal of the preferences.

British producers would have to meet foreign competition in other Empire markets without any such aid; reserved markets would become competitive ones. But so unsettled are the terms of future export competition between Great Britain and foreign countries that it seems impossible to estimate what part of British exports to the Empire might be endangered as the result of the removal of the preferences it now enjoys.

Any loss of possible export business anywhere, in the years immediately ahead, is certain to be anxiously viewed by Britain. For a large deficit in the British balance of current accounts is anticipated during the years 1946-49. This deficit was estimated by the British representatives in the recent loan negotiations as five billion dollars for the three years -- roughly the amount of the loans sought from the United States and Canada. In the writer's judgment, it may prove to be substantially less.

Whatever the exact deficit may prove to be, it seems probable today that Britain's primary difficulty in eliminating it will not be lack of export orders. With or without the preferences everything that Britain can produce, or almost everything, is likely to find a foreign buyer for the next few years. The limiting element in British recovery is more likely to be shortage of labor and production rather than lack of markets. The correctness of this surmise is of course dependent on the economic condition of the rest of the Empire and of foreign countries -- particularly the United States. If the affairs of these countries are steadily thriving, then full demand for virtually everything Britain can export is assured. If they collapse, British export trade will wither and the loss of the preferences would be keenly felt. In that sense removal of the preferences would be in part a wager upon the future of the American economy.

Other members of the Empire -- particularly the Dominions which have found sheltered markets in Britain for their foodstuffs and raw materials -- might in fact encounter greater difficulties of adjustment than Great Britain were the preferences removed. They might in a few years have to yield to the United States part of the market they have obtained in such products as hams, lard, dried fruits, tobacco, rice, wines and timber. But here again anxieties regarding loss of export opportunity may prove unjustified. The total prospective need is much greater than before the war, and very likely to be converted into effective demand. And when the possible disturbing effect of American competition on the main exports of the Dominions is reckoned, two new factors, both affecting the ability and disposition of the United States to regain certain export opportunities, must be noted. They are first, the limited American reserves of such commodities as timber, lead, copper and petroleum; and second, the strongly entrenched policies of maintaining very high minimum prices for agricultural products such as wheat, cotton and rice. If these policies are continued, the United States cannot compete on equal terms.

So also it is impossible to forecast with precision what new growth American trade would find if the preferences were removed. It seems probable that our comparative advantage will display itself most clearly, perhaps solely, in manufactured products -- in such products as machine tools, automobiles, refrigerators, electrical and other machinery, the new plastics, certain dyes, drugs, chemicals and the like.

But again it should be emphasized that in the years immediately ahead the preferences will be of far less importance in determining our opportunity to export such products to the British Empire (and other countries) than will other circumstances -- such as the economic conditions of our customers and their ability to pay the prices we ask. Recently the American level of money costs of production have been rising more notably than those of Britain and the Dominions, and our prices may be high.

Great or small as their loss of trade to the United States would be, it seems clear that the members of the British preference system will not accord new trade opportunities to the United States unless this country reciprocates. Influential leaders in the British Government believe that they can assure themselves of increased trade by planned bilateral arrangements -- of which the preference system is a mild species. Can and will the United States (and other countries) offer assured enough opportunity under formal multilateralism to dissuade them from this course? Will the British produce efficiently enough to be able to take advantage of this opportunity?

There are several reasons to be hopeful of satisfactory answers to these questions if the Empire and United States earnestly seek them in concert. First, in the years immediately ahead there will be buyers for almost anything that Great Britain and the other members of the Empire can export. Many of the purchasers have reserves of gold and dollars far in excess of amounts ever previously possessed. The resources controlled by the institutions created under the Bretton Woods Agreements will increase this volume of purchasing power.

Second, the preferential system is likely to be less esteemed by the other members of the Empire than it was during the earlier years of its existence. There will be little sentiment to preserve it for its own sake if other trade arrangements as good or better are in sight. The changing strategy of warfare and defense and the creation of the United Nations have lessened the belief in the unity of Empire as a guarantee of security. In the economic sphere, the preferences will probably be less useful to the participants than before the war. As time goes on, the United Kingdom is likely to become a relatively less important market than it has been. The increased production capacity of some of the Dominions will stimulate their wish for other foreign markets. The growing industrialization, accompanied by a readiness to extend protection, in the Dominions and India, is likely to reduce the value of the preferences on various manufactured products. These prospective changes in economic relationships will perhaps bring the British members of the imperial preference system into conference with the disposition to consider alternative ways of attaining economic growth and balance.

The path taken is certain to be influenced by the judgment of the British countries as to whether, inside or outside of the United Nations, a reliable partnership has been established with the United States -- partnership in the sense of conjoined destiny that will give each assurance that they would be standing together in any great future economic or political crisis. An agreement to lower preferences in return for other trade opportunities might be reached even if this was lacking. But if there seems a serious risk that in any grave future international crisis each would stand alone, then each will almost certainly continue to strive to make itself more and more self-sufficient -- for peace or war. Then controls and restrictions will remain extremely comprehensive. Trade will be kept at the minimum necessary to serve the striving of each to make itself independent of the rest. Any modification of the preferences that is made will turn out to be of little or no significance.

Political considerations have a bearing on the subject therefore, though the issue of imperial preferences is primarily one of economic need and circumstance and should be discussed as such. The task of the negotiators should be to find the acceptable terms of reciprocal economic adjustments that each country concerned must make, if the American conception of equality is to be accepted as valid and feasible. It may be found necessary to proceed gradually, to provide for the stretching out of the period of adjustment. It may also be found advisable to continue to grant dependent and poor colonial areas special privileges, akin to those which the United States accords to Cuba and the Philippines. The goal is not absolute. The American objective is not the rigorous pursuit of a formal principle, but the removal of a disturbing hindrance in the trade relations between the two countries.

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  • HERBERT FEIS, former Adviser on International Economic Affairs in the Department of State; recently Special Adviser to the Secretary of War; author of "The Changing Pattern of International Economic Affairs"
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