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THE President has pronounced in favor of reducing the tariff by negotiating with foreign countries. The United States appears about to dive headlong into the maelstrom of European bargaining tariffs. What are the implications of this change of policy? What are the probabilities and possibilities? Does it mean an era of lower tariffs? Does it mean an era of tariff discriminations and tariff wars? Does it mean the end of the most-favored-nation clause and of equality of treatment? Can there be effective bargaining under our existing treaties? Is the United States to lose its sovereign control over its own tariff? What are the domestic political implications? How far does it indicate a change in the center of gravity of our government? How does it affect our relations with our neighbors in this hemisphere?
Of many such questions which spring to mind, at least one can be easily and definitely answered, namely, that concerning the compatibility of a tariff-bargaining policy with our existing unconditional most-favored-nation treaties. But the true answer may not come first into the minds even of those familiar with tariffs and treaties, and the failure to grasp the possibilities has extended beyond popular opinion into our usually best informed circles.
Last summer a prominent political leader attacked our unconditional most-favored-nation treaties as making reciprocity treaties impossible, in these words:
We are powerless now with reference to the nations with which we have made these treaties to accomplish reciprocal trade agreements with any of them without giving to other competing nations trade advantages. This simply makes reciprocal trade agreements impossible. No nation can be induced to enter into any reciprocal agreements, knowing that competing nations with it for the United States trade will get exactly the same favors. . . . A public sentiment must be created against this brazen attempt to nail down the lid on the tariff trap in which we have voluntarily permitted ourselves to be caught. (My italics.)
The tariff is a technical and forbidding subject and the ignorance of the layman is quite excusable. With the American background of exclusive reciprocity treaties, it is easy to assume that no nation will bargain for favors which it must share with other countries; but the history of the countries which have long practised tariff bargaining shows that unconditional treaties and the sharing of favors are the usual custom.
For the last half century, the countries of continental Europe have almost regularly followed each general tariff revision by a series of bargaining treaties, although all were bound by numerous unconditional most-favored-nation treaties. There have been variations in policy, and a detailed discussion would distinguish the system of maximum and minimum tariffs from the system of general and conventional tariffs. But both systems and all their variants proceeded, and still proceed, upon the device of raising tariff rates by statute (or less often by decree) and then reducing them by treaty. Occasionally a reduction by treaty has taken off the whole statutory increase of a tariff rate, and possibly a case might be discovered where it had taken off a little more. Commonly, however, the net result of the statutory plus the treaty revision is distinctly higher tariff rates. In general, the European system of tariff bargaining, ever since the protectionist movement resumed its sway in the late 1870's, has been a device connected with the raising of tariffs and it has attained no net reduction of tariff rates.
But this is not the place to describe the way the European governments play poker with their tariffs. The present point is that for the last two generations European countries have been bound by an almost complete network of unconditional most-favored-nation treaties. Except for certain longer or shorter tariff wars and a very few other failures to grant equality of treatment (for example, the lack of a tariff accord between France and Portugal from 1892 to 1911) every European power which reduced rates by treaty regularly extended each such reduction to the whole number of countries with which it had most-favored-nation treaties, and in some cases to all countries regardless of the absence of a commercial treaty with this one or that one. And every country which obtained concessions knew that these concessions would be given to its competitors also. In Europe it is assumed as a matter of course in tariff negotiations that the concessions on both sides will be generalized, that is, extended to many, if not to all, other countries. Ordinarily, a government which believes that it cannot afford to reduce a certain tariff rate in respect of imports from all or most foreign countries does not agree to reduce it in favor of any single country. We are not now discussing details and exceptions, but merely describing the outstanding features of the customary method of tariff bargaining in Europe.
Americans have had difficulty in grasping the European system of tariff bargaining, and the fact that it is compatible with unconditional most-favored-nation treatment, because they have had in mind only the American experiences with exclusive reciprocity treaties made under conditional most-favored-nation treaties. They are unaware that even the negotiators of the American conditional most-favored-nation treaties contemplated that concessions made to one country might normally be extended to others. The language of a typical treaty reads:
The contracting parties, desiring to live in peace and harmony with all the other nations of the earth, by means of a policy frank and equally friendly with all, engage mutually not to grant any particular favor to other nations, in respect to commerce and navigation, which shall not immediately become common to the other party, who shall enjoy the same freely, if the concession was freely made, or on allowing the same compensation if the concession was conditional. (My italics.)
Only one part of the arrangement made with Canada in 1911 went into effect, namely, the reduction by the United States of the duties on wood pulp and paper. These reductions were held by the Court of Customs Appeals to have been conceded freely (since the Canadians did not ratify the agreement) and therefore to be freely enjoyed by countries with which the United States had conditional most-favored-nation treaties. But this fact is not generally known. What most Americans know is that our one surviving reciprocity treaty, that with Cuba, grants exclusive concessions. Some know also that the concessions to Canada in 1855-66 and those to Hawaii in 1875-1900 were exclusive. The concessions to Cuba are not merely exclusive in result, but they are by the terms of Article VIII of the treaty "preferential in respect to all like imports from other countries." When this treaty with Cuba was signed, all the treaties of the United States were of the conditional type, under which a concession granted to one country for compensation remained exclusive unless some other country or countries purchased the same favor by equivalent concessions. In contrast, under the treaties made by the United States since 1923, save that the special treatment of Cuban products is expressly excepted from the most-favored-nation obligations of these treaties, the concessions made to Cuba would have to be extended to the other parties to the treaties "immediately and unconditionally."
The United States is now under obligation to extend to Germany, Austria, Hungary, Norway, Czechoslovakia, and various other countries immediately and unconditionally, and without further and special compensation, any commercial concessions made to any country. Without discussing our other treaty obligations, we may anticipate that in practice every concession will be generalized (widely if not universally) instead of being confined to the single country with which it started. This obligation to extend more or less widely every concession granted to any one country has been sufficiently understood, but the effects of the obligation are widely misconceived. Two assumptions have been made, either that the obligation to generalize concessions by unconditional most-favored-nation treaties makes all concessions impossible or impracticable, or, as in the passage quoted above, that no country will be willing to purchase concessions which are to be extended to others. The conclusion has been reached that the American Government has so tied its own hands that it cannot bargain in regard to tariffs -- a conclusion possible only because of ignorance of the European method of handling the problem and failure to consider the effectiveness of limited tariff bargains.
The reconciliation of tariff bargaining with unconditional most-favored-nation pledges is accomplished by one very simple formula -- namely, that ordinarily no concession is made to any country except in respect of articles imported chiefly from that country. By this formula the substance of the concessions is reserved for the two countries which make the bargain, even though all the concessions are scrupulously extended to third countries. These other countries may pick up some fragments of trade, but their gain from the reduced tariff rates consists mainly in the spiritual satisfaction of receiving equality of treatment, since they are unimportant exporters of the products forming the subject of the bargain.
In spite of technical progress which tends to enable any country to produce any sort of product, an examination of international trade item by item shows that national specialization is still dominant. In the greater number of items, one country predominates in export trade, or if there are several important exporting countries (e.g., Cuba and Java for sugar), they send their products to different markets. A tabulation of United States dutiable imports in 1931 from 29 selected countries, supplying 96 percent of total dutiable imports, shows that on the average 71 percent of each dutiable import came from some one country, and only 29 percent from all other countries. Examination of the leading imports from Canada indicates that, if any product comes in greater value from Canada than from any other one country, on the average Canada supplies 80 percent of that product. Thus in recent years Canada has supplied the whole of United States imports of maple sugar and maple syrup, fresh water fish, pulpboard in rolls, turnips, and acetic acid; 96 to 100 percent of imports of salmon, 92 to 97 percent of halibut, and 92 to 97 percent of filleted fish; 88 to 94 percent of imports of potatoes, 88 to 99 percent of hay, and 80 to 92 percent of boards; and 77 to 87 percent of motion picture films not exposed.
The writer is not here suggesting that the United States should bargain in respect to these articles -- or any others. He is not here advocating a bargaining tariff policy nor expressing any opinion on the economic or political advantages of tariff bargaining. He is merely pointing out that if the negotiators have a reasonably free field in selecting articles for bargaining, the existence of unconditional most-favored-nation treaties does not render a bargaining policy impracticable.
On the one extreme, the government might determine to bargain only in respect of products each wholly derived from a single country. This would indeed severely limit the program, but a few bargains might be made, and if made, the extension of the reduced rates to other countries under most-favored-nation treaties (or otherwise) would be purely nominal.
On the other extreme, the government might bargain on every dutiable article, in each case bargaining with the country most important as a source of imports. In this case the bargains would cover the whole range of the dutiable list. As measured by the trade affected, not less than 70 percent of the dutiable importations would be directly affected by the bargaining with the chief source of each article and the remainder would be affected by the extension of the same reductions to other countries (assuming, to make the extreme case, that all other countries would benefit by the reductions accorded to most-favored-nations).
This idea that some fraction of the total concession must be given gratuitously to third countries may strike the reader as an impossible generosity. That point will be discussed after three facts have been pointed out which indicate that the amount conceded "gratuitously" is likely to fall far short of 30 percent of the total.
First, in certain cases, the same concession may be sold twice. Our dutiable imports of cattle come from Mexico and Canada, recently two-thirds from Mexico. If a bargain were made with Mexico reducing the duty on cattle, the reduced rate would hardly be extended to Canada which has no treaty with the United States and which practises wide discriminations against American products. Canada would have to pay for the concession. Thus instead of bargaining in regard to two-thirds of our imports of cattle and conceding one-third gratuitously, the whole 100 percent would be bargaining material.
Second, there are some products included in the above average figure whose sources are so scattered that bargaining concerning them seems improbable. These are characteristically by-products, so that their output cannot easily be increased. For instance, in 1931, imports of sausage casings of sheep, lamb and goat were imported from a score of countries of which the most important one supplied only 14 percent of the total. Of goat and kid skins, in the last four years, the chief supplier has contributed only from 23 to 29 percent. Other products illustrating the same point are horsehair, cotton waste and beeswax. Ivory tusks are imported in not unequal quantities from Great Britain and from Germany, but it seems unlikely that the duty will be reduced either in bargaining with one of these powers or in bargaining with an African country in which some of the tusks may originate.
Third and most important, the preliminary average of some 70 percent of paid concessions is derived from the figures for general imports which are published by countries of origin, whereas the bargaining will presumably take place on the basis of the more detailed figures for imports for consumption. These latter figures are not published by countries of origin, but their origins are available. The headings under which general imports are classified may make it appear that imports of a certain kind are supplied more or less equally by several countries; whereas use of the detailed classifications of the imports for consumption, or further subclassifications which might be introduced by the reciprocity agreements, might confine each concession to a product, or a grade of a product, which is derived almost solely from a single country. For example, general imports divide electric lamps into "carbon filament" and "other," but imports for consumption show "miniature" and "neon and mercury" lamps. The point is of special importance in regard to the catchall or basket items such as "other electrical machinery and apparatus" which follows electric lamps in the table of general imports. In the table of imports for consumption this general heading is divided into twenty-one articles and groups of articles. "Earthy and mineral substances, not elsewhere specified" are grouped together in "general imports," and the figures show Canada as supplying only 21 to 38 percent of the totals in 1930 to 1932. But when the classification is divided into its components it is found to be made up of deadburned dolomite imported entirely from Canada, of cornwall stone imported from England, of "granito" imported from Italy, of glass sand imported from Belgium, and so on -- each separate subitem is imported almost exclusively from some one country.
No detailed examination has been made of the extent to which application of these three factors may enable the American Government to pursue a policy of reciprocity so selective that the benefits accruing from the favors granted will be substantially restricted to the countries to which the favors are respectively directly granted. But it seems probable that an American policy of tariff agreements would call for the gratuitous extension to third countries of less than 20 percent and perhaps not much more than 10 percent of the concessions made.
But are such extensions really gratuitous? In the first place, they are usually sufficiently known in advance. If the leading supplier of an article furnishes only 60 percent of it and the other 40 percent comes from countries to which the concession will be extended "gratuitously," the negotiators naturally weigh the concessions which they get from the other country against the whole of the concession which they make, and not against 60 percent of it. And it is their business to know whether the reduction of a duty will allow the entry of some variety or grade of an article which is now excluded and does not appear in the statistics.
In the second place, looking at a country's trade and treaty relations as a whole, surely it is true that the tariff reductions which are extended under most-favored-nation treaties are extended "gratuitously" only in the short view, not in the long view. For example, Germany, having pledged unconditional most-favored-nation treatment to the United States in 1925, made a treaty with Spain in 1926. By this treaty (as in ten other German treaties since 1925) reductions in tariff rates were exchanged. Those made by Germany were "immediately and unconditionally, without request and without compensation" extended to products of the United States. The concessions were on articles of primary interest to Spain (and to the ten other countries respectively) and of only minor advantage to the United States; but they were given to the United States under the German-American treaty. Under the same treaty, if the United States should now exchange tariff reductions with Spain (or any other country except Cuba), any concessions it might make must be extended "gratuitously" to Germany. But why should the United States call such concessions to Germany "gratuitous," when in anticipation of them Germany in 1925 pledged non-discrimination and eleven times since 1925 Germany has compensated the United States in advance by extending to American products concessions made to other countries?
It is true that there may be no close equivalence in the incidental advantages accruing through the most-favored-nation clause to the two parties to an agreement. Germany may make many treaties containing many concessions, and all these concessions may be extended to the United States. The United States may meanwhile be making few or no tariff-bargaining treaties and Germany may be gaining little or no incidental advantages from its treaty with the United States. If the United States suddenly embarks on a great program of tariff treaties, it may appear to be giving to "third" countries incidental advantages of substantial value with no immediate return. But in the long run, if many countries are pursuing bargaining policies, it may be assumed that the incidental advantages which any country receives through the bargains of other countries with each other will approximately balance the incidental advantages which it extends to other countries in generalizing the concessions which it has made in negotiating its tariff treaties. Under a general system of tariff bargaining under unconditional most-favored-nation treaties, there appear to be no really gratuitous concessions -- though at the moment of extension, according to the language of the treaty, the grant of the lower rate may be "without compensation."
If the United States embarks on a tariff-bargaining policy, it is the task of the negotiators to see to it that the direct gain from each bargain will be a satisfactory return for what is being conceded. The negotiators must consider also the concessions incidentally granted to third countries, but as these concessions are not given at the same time as the incidental advantages are derived from our most-favored-nation treaties, the incidental concessions may or may not be equivalent to the incidental gains through unconditional most-favored-nation treaties. If in the long run they be found not to be equivalent, the discrepancy cannot be very serious, since the incidental concessions will in no case cover any great percentage of the trade, unless our negotiators are very inept.
One of the reasons why the most-favored-nation clause has been under fire in Europe is that manufacturers have tabulated the reductions of duty incidentally extended to third countries, but exporting interests have not been equally diligent in calling attention to the reductions in foreign tariffs to which their exports have become incidentally entitled in the same manner.[i] But whether or not the indirect effects of most-favored-nation treaties are equal, and whether or not they are thought to be equal by the people, it is difficult to believe that the unconditional most-favored-nation clause will be discarded. After the World War, France experimented with the idea of abandoning the most-favored-nation clause. André Siegfried has reviewed the result.[ii] By 1927 France was again driven back to the granting of most-favored-nation treatment, either de jure or de facto. The reason is not far to seek. When a country, by exclusive tariff bargains, institutes discriminations against third countries, then the greater these discriminations the greater will be the pressure against that country for their removal. In each successive negotiation it finds that the firmest demand of the other country is for equality of treatment, present and future, guarded by a most-favored-nation clause or its equivalent. Says André Siegfried, "by force of necessity, which the negotiators practically could not escape, it was necessary to accord the total of the minimum tariff, which is in fact equivalent to the grant of the most-favored-nation clause." The other country attaches perhaps an exaggerated importance to the avoidance of discriminatory duties upon its products. On the other hand, the country which has already made the initial concession in a certain rate of duty finds itself on weak if not untenable ground in attempting to justify the refusal of the same rate to a second or a third country, particularly as each negotiation begins with cordial professions of amity, good will and desire on the part of each side to favor the trade of the other. The demand that equality of treatment be granted is particularly hard to resist if the country, as in the case of France, is bargaining from the top of a double tariff -- i.e., from tariff rates which have been admittedly imposed with no intent that they should ever be applied generally but merely to put the country in a good bargaining position.
It may be objected that in the European bargaining system it is not always true that a concession in respect of a given article is made in the first instance only to the country which is the leading supplier thereof and that the extensions of the concession are only minor and incidental. For example, Finland or some other country may have reduced a tariff rate in favor of French automobiles, though France supplied only a minor share of her imports, and may have extended the concession to American automobiles which formed the bulk of her imports. A fair number of such reductions on automobiles, grain, and other important American exports can be cited, but examination will show that they result from the play of the European poker game, and not from straightforward tariff bargaining. Such concessions have been extended to the United States because the United States was pursuing a non-bargaining policy and because the concessions given were only reductions of rates which had been raised for the purpose of bargaining. There never had been any intention or desire to maintain the higher rate, and when it had served its purpose of obtaining a concession from the other bargaining country, at which it was aimed, there was no point in refusing to generalize the lower rate. This padding of tariff rates in anticipation of negotiations is a chief reason why half a century of bargaining has meant on the whole higher and higher tariff rates in Europe instead of lower and lower rates.
The compatibility of tariff bargaining with the unconditional most-favored-nation clause is clearly established both by the practice of European states and by analysis of the trade figures. This clause does not preclude bargaining, though it does operate powerfully to restrict bargaining to one type, namely, bargaining on articles imported chiefly from the other party to the bargain. This is a narrower or wider restriction according to the niggardliness or the liberality of the bargaining countries in excluding from or admitting to the lists of tariff concessions articles of which considerable fractions are imported from third countries. There is no evidence that any other kind of bargaining would be popular if the obstacle of the most-favored-nation clause were removed. Uniform percentage reductions, as in the Cuban-American treaty, have not been sought.
The unconditional most-favored-nation pledge in commercial treaties permits tariff bargaining of an effective type, but it does not facilitate or encourage bargaining. It limits the scope of the negotiations, and hampers the negotiators. But this point has frequently been overemphasized. In the absence of most-favored-nation treaties, the negotiators might legally have a completely free hand, but they would not actually be unrestrained. The most-favored-nation clause expresses an idea of equity which exists even without its formal embodiment in treaties. No country could denounce all its most-favored-nation treaties and run amuck scattering tariff discriminations here, there and everywhere. Not only would the discriminatory system complicate the customs administration, but the retaliations would soon drive the discriminating country back to a simpler and more equitable system. A most-favored-nation clause expresses explicitly a restriction which exists, though of course with much less rigidity, outside of treaties.
The most-favored-nation clause is quite certain to survive not only the attacks of those who criticize it for extending its favors too widely, but also the attacks of those who object to it as an impediment to the reduction of tariffs. And it does or may impede the reduction of tariffs in at least three ways. Mr. Owen Jones, British Commissioner of the International Chamber of Commerce in Paris, states one of these ways as follows:[iii]
The weakness of the unconditional clause is speedily revealed, however, if it is regarded as an instrument for tariff reduction. It was not meant to serve this purpose. It really works out as an obstacle to tariff reduction, and often has done so in the past to the detriment of British trade. A country is often in a position to grant to another country a tariff reduction which would be highly valued by the receiving country, but the concession cannot be made because the unconditional most-favored-nation clause would generalize it at once. The capacity of the receiving country to produce and export the commodity on which it desires a tariff reduction is known, and perhaps not feared, by the conceding country. But the admission of similar goods from all countries might well create an unacceptable opening for foreign competition in the home market.
There is doubtless some truth in the statement, but it seems relatively unimportant. Neither the United States nor any other country is going to attain any substantial lowering of its own tariff system or of foreign tariff systems by reductions withheld from the chief producers and exporters of each commodity and given only to countries supplying minor quantities. Such minor concessions could never cover more than a small fraction of the total trade, and would be relatively barren of economic results, since in many if not in most cases they would not offer the advantage of obtaining imports from the country with the most effective production.
Again it is pointed out that the unconditional most-favored-nation clause impedes tariff reductions because certain countries desire to avoid extending reductions even to minor imports from countries whose tariff rates are considered exorbitant. This charge is sometimes stated to be aimed particularly at the United States.[iv] It would be more convincing if it were accompanied by some attempt to show that other countries have already made great progress in reducing rates of duty upon products of kinds not exported from the United States and other high tariff countries against whom the charge is levied. Until such evidence is forthcoming this argument smacks of a good excuse, a plausible scapegoat. Sir Arthur Salter puts it forward on page 201 of "Recovery. The Second Effort," but he states the real reason for the failure to reduce tariffs by bilateral bargaining on pages 204-5 in his description of the resistance offered by "the economic interests and the political forces inevitably created by a protectionist system."
The third way in which unconditional most-favored-nation treaties may prevent tariff reductions is by hampering multilateral or plurilateral agreements, whether regional or otherwise. Tariffs are so complicated that any agreement including several countries is almost inevitably either confined to one or two products or else formulated in some very simple rule, such as that all the tariff rates shall be simultaneously and uniformly reduced by one-tenth. There have been widespread demands for such agreements but little evidence that the countries concerned could actually agree. Two more or less successful attempts can be cited -- namely, concessions by western European states in favor of cereals from the Danubian states, and the proposal of Holland, Belgium, and Luxembourg to reduce their duties by fixed percentages in favor of each other and of all other countries which would join the movement.
Adequate discussion of this point would unduly prolong this article, but it may be said briefly that while the most-favored-nation clause may be unconditional, unlimited and unrestricted, it may also be limited by exceptions of various kinds. Perhaps an exception should be made in favor of certain types of multilateral treaties, safeguarded as proposed by the Economic Committee of the League of Nations; but such exceptions are not likely to be admitted generally until various countries stop playing international politics with their tariffs and show a genuine desire for reducing tariffs on sound economic bases. Too frequently examination discloses that these plans for regional preferences are not designed so much to lower tariff rates and abolish trade barriers for those within the preferred area as to increase tariff rates against those outside.
In conclusion it may be repeated that the purpose of the unconditional most-favored-nation clause is to avoid discrimination and to preserve and promote equality of treatment. Its mission is peace and good will. But it has been neutral and indifferent -- perhaps unduly indifferent -- concerning the height of tariff rates. It is a mere agency for carrying out the will of statesmen. Those who object that it is an obstacle to lowering of tariffs overlook the fact that during the free-trade movement of the last century the unconditional most-favored-nation clause contributed substantially to the lowering of tariffs. So it will again if and when the statesmen of the world are convinced that tariffs should be lowered and are determined to lower them.
[i] Paul Naudin, "Reflexions critiques sur la clause de la nation la plus favorisée," Revue Politique et Parlementaire, December 10, 1932.
[ii] Reprinted in "A Picture of World Economic Conditions at the Beginning of 1929," published by the National Industrial Conference Board, New York.
[iii] "Tariff Bargaining," Nineteenth Century and After, May 1932.
[iv] Mr. Owen Jones says: "Another reason why generalized tariff reductions are difficult to obtain lies in the diversity of tariff levels. The high and autonomous level of the United States tariff is here a much quoted obstacle. Many a low-tariff country would receive more favorable tariff treatment for its exports if the favors had not immediately and unconditionally to be extended to highly protectionist countries."