THE policy of the United States regarding reciprocal trade arrangements with other countries has gone through several phases; and it now seems likely to enter another. The direct and immediate effect of a realignment is easily exaggerated. Moreover, it seems a dry subject, involving details about processes of negotiation. And yet, in its underlying essentials it has a very great importance. The spirit and temper in which it is approached make an enormous difference in our relations with other countries, in our own gains or losses when trading with them, in our influence on the whole course of world development. In what follows I shall deal with the arid details only so far as some knowledge of them is necessary in order to understand this particular situation. My main purpose will be to direct attention to the larger lessons.

Our present policy regarding reciprocal trade arrangements dates in part from 1909, in part from the first half of the decade 1920-30. It rests to some extent on diplomatic action, mainly on legislation. The legislative provisions go back to the tariff act of 1909, when the previous reciprocity provisions of 1897 were abolished, and it was enacted that the United States would deal with foreign countries simply and solely on the penalty basis -- the threat basis, or, if you please, the holding up of a club. The duties then imposed (with the extraordinary detail that appears in all our tariff acts) were expressly stated to constitute the minimum tariff of the United States. The maximum was, on each several rate, 25 percent in addition. This maximum tariff the President was authorized to apply to imports from a country which in any way "unduly discriminated" against the United States. The minimum tariff -- that is, the real tariff -- was under no circumstances to be lowered. That is, the United States offered nothing in the way of concession; we simply threatened the foreign countries if they "unduly discriminated."

Substantially the same was enacted in 1922, when the next high tariff came.[i] In 1922 nothing was expressly said about a minimum tariff. But the President was again authorized to impose additional duties on imports from any country which "discriminates in fact" against the United States, or "imposes any unequal imposition or discriminations." If the President finds that "any benefits accrue or are likely to accrue to any industry in any foreign country" from the imposition or discrimination, he may cause to be levied additional duties of our own, not to exceed 50 percent, "to offset such benefits."

Finally, the tariff act of 1930 -- that now in force -- not only pursues this policy, but pushes it a step further. As in 1922, there is no specific mention of a minimum tariff. As in that act, additional duties may be imposed by the President, up to 50 percent, on imports from any country imposing on our products "any unreasonable charge . . . which is not equally enforced upon the like articles of every foreign country" (italics mine). But a weapon even stronger is put in his hands. If the country maintains or increases its discriminations, he may completely exclude its products from importation into the United States.

All this constitutes what may be called, to repeat, the club policy. We make no offer. We fix our own duties quite as we please, and quite unalterably. With each successive tariff act, we shove them higher and higher. We make them applicable to all countries without mitigation. And then we insist that all countries shall in turn treat us just as well as they treat any third country. If any one of them grants a favor or reduction to another, this must automatically inure to us also. If not, the President has the club in his hands. He may impose heavy additional duties on their products, may even exclude them entirely.

Turn now to the diplomatic side of our policy. This brings in specifically the most-favored-nation clause. At the date of the passage of the tariff act of 1922, the State Department at Washington inaugurated an abrupt change from what had been the historic attitude of the country. Previously we had fought shy of most-favored-nation agreements or contracts; that is, agreements by which we should agree, completely and unqualifiedly, to apply to the imports of the contracting country rates as low as are applied to any other country whatever. We had been ready to grant only "conditional" most-favored-nation treatment; that is, we gave the "favorable" treatment, not once for all and without qualification, but only to such extent as we deemed a fair equivalent for what was conceded by the other country to the bargain. This earlier practice engendered its troubles, about which it is enough at this point to say that endless bickerings resulted and no happy results were attained. The practice has virtually disappeared; some left-over scraps of treaties of this type are still listed as in effect, but they mean nothing.

In 1922 the State Department, under the leadership of Mr. Justice Hughes, then Secretary of State, turned the other way, and began the negotiation of treaties on the other and unequivocal basis: unconditional most-favored treatment on both sides. This was in accord with the recommendation made in 1918-19 by the United States Tariff Commission, of which I then was Chairman. In a very full and indeed exhaustive report, the Commission narrated and analyzed the working of the earlier policy, concluded that it had been unsatisfactory, urged the adoption of the other. This latter procedure was adopted. Treaties on the new basis were concluded with some half-dozen countries. How these treaties came about, and what they mean, will be explained presently.

Such are the two sides of the general framework -- the legislative and the diplomatic. They fit together perfectly. The principle is that we shall settle our tariff rates as we please, and then apply them equally to all comers. We give all countries the same treatment; each and every one is "most favored." We insist on the other hand that we too shall be treated with perfect equality -- that we too shall be in as good a position as their "most favored." It is all quite simple, quite logical, entirely consistent. But as applied by us in practice, it can bring about no good result. On the contrary it proves not to improve or extend commercial relations, but to be a breeder of friction, animosity, commercial warfare.

The explanation of this sad failure is to be found in the way in which we have worked the plan. Formally, we have worked it quite in accord with the rules. Substantially, we have done nothing of the kind. What is expected to lie underneath the most-favored-nation arrangements is that there shall be some favor. We have considered it, however, merely as a means of securing equal terms to us and from us; and this equality of treatment, so far as our side is concerned, in fact is an equality not of favorable treatment, but of equally bad treatment all around. We raise duties pitilessly and rigidly. The State Department, when negotiating treaties, can hold out no prospect of any reduction or mitigation on our side. But if any other country makes an arrangement with a third involving mutual concession between them, we say we must have those same concessions. If they are not forthcoming, we hold up the club. The President has the power to impose additional rates on the offending country's goods, even exclude them entirely.

This is a quite untenable position. The result which it was expected to attain has proved impossible of realization. A country which we approach for good treatment -- for the best treatment which it gives to any other -- finds that nothing is to be gained by an agreement with us; and moreover its self-respect and pride are hurt by our holding out a threat. Our tariff legislation makes our duties virtually prohibitory on most imports; and when there prove to be after all some scraps of imports which happen to get over the barrier, we proceed to put on still higher duties to make sure of keeping out all goods possibly competitive. Our policy through this century -- always setting aside the tariff of 1913 -- has been to admit only those articles which we cannot produce, such as tea, coffee, rubber. Of course, literally speaking, we can produce even these, by methods such as Adam Smith satirized when he spoke of the possibility of growing grapes in hot-houses in Scotland; but this exemplifies only the lack of logic in the procedure, not its lack of rigor. The actual situation is that our imports consist mainly of these quasi-exotic things. Hence -- to digress for a moment -- the average rate of duty on all imports, free and dutiable taken together, is low. This low average, curiously enough, is not infrequently adduced to show that after all our tariff is really a moderate one. Obviously, on such reasoning, rates that were completely prohibitive on all the competing imports would be the most moderate of all; for then only the noncompeting imports would continue, the average rate on the competing imports would be zero, and the average rate on all imports would be low. As regards the competing imports, which alone enter in the present discussion, we offer nothing but bad treatment when we offer equal treatment. We cannot expect such an offer to elicit a favorable response. The club may indeed then be lifted, but what does the other party care? We have already done practically all the damage it could inflict. The natural answer to an overture of the kind is -- go your own way and let us alone.

That this is the real outcome is made more clear by an inspection of the few treaty arrangements which happen to have been concluded on the new basis. The diplomatic side of our policy, it appears, has made little headway, indeed virtually none. The only treaties on the most-favored-nation basis which might seem to have importance are with Germany, Hungary, Austria. A few others, with China, Estonia, Latvia, Turkey, may be disregarded. The three first mentioned are the countries of Central Europe which were our enemies during the World War, and which have been under obvious inducements to get on good terms with us in the period since the war. They have welcomed a gesture from us that at least purports to be friendly, and they have made a friendly gesture in return. Their industrial structures have been highly unstable; indeed, they have well nigh succumbed. Their imports from us have been in the main things urgently needed by them. They were in no position to protest, still less to bargain, as regards our own duties on their products. Their adherence gives no indication of real progress toward carrying out the new policy.

When it comes to countries not thus handicapped in their relations with us, not a treaty has been made. There are our former allies -- Great Britain, Canada and the other constituents of the British Empire; Belgium, France, Italy, Greece, Japan; the former neutral countries of Europe, Holland, Denmark, Sweden, Norway; and the South American countries -- not one has had any interest in our program. Most significant and most regrettable of this is our unfriendly commercial relation with the Dominion of Canada, our nearest neighbor, our best customer, the country that should be our warmest friend and indeed remains, I fully believe, at heart strongly attached to us, notwithstanding the harsh and even boorish manner in which we have so long dealt with her. We have not only failed to attract Canada, but have alienated her; let us hope, not irrevocably.

One other element in this deplorable situation is to be noted. While we have the club ready, we dare not use it. I cannot conceive that, if a country should refuse to give us most-favored-nation treatment and go its own way in negotiations with others, a President would apply the penalties which the law puts into his hands. The extreme protective system is at bay. It has been so extreme that even among its own leaders there is much shaking of the heads. To make the rates even higher than they are, by adding 50 percent to the figures of 1922 and 1930 (not to mention the complete prohibition which is authorized by the law) is something no President would venture to do. Looking at the situation as a whole, we find ourselves virtually stalled.

What now should be done? My conclusion is that the whole present policy should be scrapped; that this pretense of a general most-favored-nation system should be given up; and that the next practicable step is to make separate arrangements for reciprocal reductions of duty.

I come to this conclusion with regret. It seems, at least at first sight, to be quite out of accord with recommendations to which I gave cordial assent a decade or so ago when Chairman of the Tariff Commission. In the Report of the Commission the policy which I now propose was condemned, and the adoption of the most-favored-nation policy was urged. The change of heart which appears in the conclusion just stated is explained by the course of events in the last ten years. The Tariff Commission Report was prepared in 1917-18, submitted to Congress in December 1918, and printed in 1919. At that period the tariff act of 1913 was in effect; and while it was more than probable that its provisions would soon be modified, no one could foresee the marked upturn of all rates which came in the tariff act of 1922, and the equally marked upturn which followed in the act of 1930. Had there been some salvage of the moderate rates of 1913, we might have had something to offer under the most-favored-nation policy. As it was, our tariff legislation of 1922 was such as to make impracticable the most-favored-nation policy at the very time when it was nominally established and when the State Department tried to carry it out. The successful working of that policy rests, to repeat, on giving actuality to the term "favors;" whereas our tariff acts have sternly set their face against favors of any kind.

The belief that separate bargains with individual countries now constitute the first steps toward a solution of the troublesome problem is based on the international and domestic situation as it now stands. An entirely fresh start might indeed conceivably be made by us with a new general tariff act, of a reasonable character; with general provisions for reductions going far enough to mean something to other countries, and with equality of this favorable treatment for all countries that treated us in like manner. Much can be said for a simple and straightforward policy of this kind. Much can be said, also, against the policy of separate treaties. It does lead often to bargaining and bickering. It lends itself to pressure by interested persons. The negotiators are tempted to try to get the better of each other, to make a show of doing a smart thing. The real result aimed at -- a loosening of the restrictions on commerce between nations -- is in danger of being buried in the mass of details. These dangers and disadvantages inhere in the procedure. But it seems now to be the only practicable one for progress toward the goal. Our tariff is so complex, and the difficulty of a general overhauling is so great, that the problem of revision had best be taken up piece by piece, schedule by schedule. The same complexities and difficulties appear, unhappily, in the tariffs of other countries. The world all around is in a situation where the only available resource seems to be patchwork.

It is not impossible, fortunately, that in this case patchwork may lead in the end to something well knit and durable. Successive negotiations with the several countries may proceed on similar lines, and may bring harmony in the results. The eventual outcome may not be essentially different from what it would be if a most-favored-nation program were laid down at the start. Everyone will admit that continuity and consistency are eminently to be desired. Our commercial policy has lacked these qualities, mainly because our tariff legislation has lacked them. Let us hope that something better will gradually evolve. The program of separate negotiation is to be regarded as the immediate practicable step toward an ultimate good solution.

It would be futile for any individual to try to work out a detailed plan for the action which Congress should take. One prime essential is that the executive should have authority to offer favors definitively -- something in the way of assured reductions of duty. It is hopeless to expect any consistent or effective action if each individual treaty must have a two-thirds vote in the Senate. The form authorized might easily be that of reduction of our duties by a stated percent. There need not be the same scale of reduction all around; yet preferably (it would seem) uniform for a given schedule or for a given set of articles within a schedule. Reciprocal extensions of the free list are also much to be desired. The difficulties inherent in such matters are all too familiar. Our long-established habit or tradition is that every representative and senator is on the watch for the supposed interest of his local constituents. Quite as firmly established is the habit of exaggerating grossly the real effects alike of an increase or a decrease of duties. There will be an enormous amount of frothy talk, with predictions of disaster from the slightest change. And there is always the danger of log-rolling and of deals. No worth-while program of legislation on the tariff can be carried out unless the leaders in Washington -- the guiding spirits in the executive as well as in the legislative branches -- have some settled policy and a firm purpose.

All of the preceding relates to mere machinery -- to the ways in which better commercial relations can be brought about. The heart of the matter, needless to say, is that the interdependence of the nations of the world should be recognized as the basis for action.

It is not to be expected that changes of the kind here considered will have immediate consequences of large substantial importance. The really important effects of all tariff changes -- up or down -- work themselves out slowly. The industries in the various countries and the currents of trade between countries gradually adjust themselves, and it is only after a stage of transition that the enduring benefits come. But immediate consequences there are also, and in the present juncture these are in many ways the more important. The psychological factor plays a great part just now. Among the obstacles to recovery from the universal depression one of the most obvious is a panicky breakdown of the usual course of international trade. Not only is there a great decline in the physical movement of trade, but a disastrous decline in the prices of goods and so in the total money volume of trade; which in turn reacts to lessen still more the physical volume. The fall in prices in good part has been inevitable; how largely inevitable, or to what extent preventable, it would be hard to say. As regards the physical volume the decline has been in less degree inevitable. It is caused, or at all events greatly promoted, by bad legislation and bad international relations. The monetary system of the world is out of joint. The gold standard, which after all remains the best attainable basis of smooth and calculable transactions between nations, cannot bring about its good results unless there is a fairly wide distribution of the metal among the nations. Its breakdown in so many countries, those of the British Empire conspicuously, has led to the evils so sadly familiar: fluctuating rates of foreign exchange; artificial promotion of exports here and imports there; fears of further fluctuation; and then further spasmodic drops in exports and imports. Duties are pushed higher and higher in vain endeavor to check the disturbances, quotas and prohibitions are resorted to, trade is entangled and half-throttled in every quarter. The tale is a long and weary one, much of it still obscure and difficult to follow. But one thing is outstanding: uncertainty and fear have played a great part. There has been uncertainty as to the extent of trade which will still go on; and fear of still further breakdown, in the political spheres as well as in the economic.

The problems constitute a whole; but they can be broken into separate parts. The monetary problem is one; the inter-allied debts, political as well as commercial, are another; the tariff relations, with which this paper is concerned, a third. No one of them, still less the whole, can be settled at a stroke. But we can move in the right direction with all of them. As regards the tariff relations, the right direction is easy to see. This country has taken the wrong path, and has set a demoralizing example, by pushing its duties higher and higher, with the pretext and the boast that here is the one cure for adversity, the one way to prosperity. Now that it is obvious even to the man on the street that all this has been an abject failure, let us turn to the better way; loosen our restrictions on foreign trade, encourage other countries to loosen theirs, turn from economic threat and economic war to friendly offer and friendly intercourse. That way let us make a start, bit by bit, with care and caution, but with unequivocal act and intent, and in the right direction once for all.

[i] The provisions of the act of 1913 need not concern us; the World War prevented them from being of substantive effect.

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  • F. W. TAUSSIG, Professor of Political Economy at Harvard University; Chairman of the United States Tariff Commission, 1917-19; author of "Tariff History of the United States," and other standard works
  • More By F. W. Taussig