IT MAY be assumed that the recovery of world commerce is conditioned to a large degree on the recovery of our commerce, and that our commerce is, in turn, dependent to an important degree upon a revival of general world business. The Administration's foreign trade recovery program has, therefore, awakened world-wide interest. There is hope and some apprehension in this country, and hope, and perhaps skepticism, abroad. How valid are these various feelings of hope, skepticism and apprehension?

The best way to judge the possibilities of the American trade agreements program is to state briefly its aims and purposes. The Act of June 12, 1934, entitled "An Act to Amend the Tariff Act of 1930," gives the President the power to modify customs duties and other import restrictions in exchange for similar concessions from other countries which will result in "expanding foreign markets for the products of the United States." No existing duty, however, may be changed by more than 50 percent, and no article may be transferred from the free list to the dutiable list or from the dutiable list to the free list. The Act authorizes the Administration to reduce trade barriers set up by the United States in exchange for the reduction of such barriers in other countries, with the objective of increasing the commerce of the United States and, pari passu, that of the countries with which trade agreements are made. Moreover, being based on the unconditional most-favored-nation principle, each bilateral agreement stimulates international trade in the aggregate.

The whole program, and more particularly the methods employed, have come in for a good deal of criticism, not only on the part of those who are opposed to any actions which would affect our present tariffs and of those who are committed to the philosophy of autarchy, but also on the part of those who genuinely believe in broad international trade and who feel that its reëstablishment is vital to any important degree of world recovery. Some of these more sympathetic critics have doubts as to the efficacy of the trade agreements program as now being conducted and feel that some other method would be better. I shall discuss frankly the arguments advanced by such critics, rather than those of the opponents of any liberalization of our commercial policy.

The only alternatives to the mutual lowering of trade barriers as contemplated in the trade agreements program would be either a unilateral lowering of our tariff rates or a multilateral lowering of rates and other barriers on the part of the principal countries of the world by means of an international convention. Unilateral action by the American Congress would undoubtedly be a quick and effective method if the system under which the world operated before the war, and to some extent after the war, were still in use. If the world's commerce were free from the many restrictive devices which have been instituted in recent years, and if some sort of an international gold standard were in operation, the lowering of our own tariffs would result in an increase in export commerce more or less corresponding to the increase in imports facilitated by our tariff reductions. But with conditions as they are today, I am convinced that a unilateral tariff reduction program, even if politically feasible, would not have this effect. In view of the possibility that exports would not increase quickly enough to compensate for disturbances to certain branches of American industry, there would be a strong probability that the tariff reductions would be quickly withdrawn and replaced by still higher tariffs. At a time when we are just emerging from the depression it would be particularly difficult to make tariff adjustments downward without some assurance of immediate compensations in the form of increased exports. Under present conditions, unilateral tariff action is not economically and politically a practicable alternative to the program now in operation.

A multilateral convention would take much time to conclude and it would have the further disadvantage of being based on percentage decreases in rates which would have little relation to any scientific adjustment of tariff schedules. Another defect of the multilateral method is that the varied situations in which the countries of the world find themselves make it difficult to find a satisfactory common denominator. Any agreement between a large number of countries is likely to go no farther than those least prepared to reduce trade barriers can go. And there is an even more cogent consideration. Tariff rates have lost much of their importance as a factor in the trade control methods of many important countries. Consequently, multilateral action, unless it included a formula (most difficult to work out) for a relaxation in various controls such as quotas, exchange allocation, and government monopoly purchases, would not reach the root of the problem. The reciprocal reduction of rates and barriers which the Administration has been working out under the trade agreements program, whatever may be its limitations, thus seems to offer the most promising approach.

In order that the trade agreements program might function broadly and without the complications that would at once arise were our tariff reductions applicable only to the country with which an agreement is made, the Act provides, in accordance with the principle of unconditional most-favored-nation treatment, for the generalization of the reductions to all countries that are not discriminating against American commerce. This principle, clearly provided for in the Act, has been subject to criticism mainly on the ground that it freely gives to third countries the benefits of our tariff reductions without requiring any direct compensation from them. Critics of this policy argue that we are going even beyond the obligations we have with those countries with which we have unconditional most-favored-nation arrangements, and are extending our generalizations not only to countries with which we have, formally at least, conditional most-favorednation treaties, but even to countries with which we have no treaties or executive agreements whatsoever. It is urged, therefore, that the conditional, rather than the unconditional, form of the most-favored-nation principle would better serve our national interests. I believe that a moment's consideration will make clear that the policy we pursue is sound.

The conditional most-favored-nation principle seems logical enough as an abstract legal concept. But as a practical instrument of commercial policy it leaves -- speaking with excessive moderation -- something to be desired.

One of the most important obstructions to our trade which we seek to eliminate through our trade agreements program is discrimination against our commerce on the part of foreign countries. The bearing of the conditional most-favored-nation principle upon the attainment of this objective may be seen from the following illustration. Suppose that a country which in order to avoid offending anyone we shall call Latinia, grants a concession on automobiles produced in a rising industrial country, which we shall name Europa, in exchange for a concession by the latter in favor of Latinia's lard. Both of these concessions are of interest to the United States since both products are of export importance to us. But let us concentrate for the moment on the lard. Europa's concession on Latinian lard is more than a favor to the latter. It is a positive injury to us because our competitive position in the Europan market is impaired. We must therefore try to do something about it. Our treaty with Europa contains the mostfavored-nation clause in its conditional form, and Europa has not extended the lard concession freely to any other country. In order to remove the discrimination we must offer Europa something which we regard as indisputably equivalent to what Latinia has given, namely, precisely the same duty reduction on automobiles. But Europa has doubts about the equivalence of the concession we offer. The position of the American automobile industry is so strong, and the nature of the consumer demand in our market is such, that even if automobiles were put on our free list Europa could not compete. Latinia, on the other hand, is an agricultural country, with little or no domestic automobile industry, so that a reduction in duty really means something to Europa in the way of increased trade in its type of automobiles. Europa demands, therefore, as the price of removing the discrimination against our lard, that we offer a concession that will be more than nominally equivalent, and suggests some other product. What will it be? This may prove to be a very difficult thing to agree upon, especially if, as has been known to happen, Europa has made up its mind that nothing that we can offer will be accepted as an equivalent. By the time an agreement is reached American lard will have been displaced in Europa's market and our exporters will have turned their attention elsewhere. As a practical means of assuring equality of treatment for our commerce the conditional mostfavored-nation clause is an excellent subject for academic discussion, but nothing more.

Plainly operations under the conditional most-favored-nation principle are difficult and cumbersome. It involves almost constant negotiation, gives rise to international ill-feeling, and invites retaliation. There is haggling for a specific quid pro quo on each concession. The unconditional principle, on the other hand, is based on the broader concept of reciprocity in the form of generalization of concessions in return for generalization of concessions. It is fully reciprocal, since unconditional most-favored-nation treatment is predicated on like treatment in return.

This doubtless is one reason why even the countries with which we have conditional most-favored-nation arrangements have followed the general practice of generalizing concessions to us on an unconditional basis, and why it is good policy and good practice for us to do the same, not only in the case of the countries with which we have conditional most-favored-nation treaties and agreements, but also in the case of non-discriminating countries with which we have no commercial treaties or agreements whatsoever.

It is important to keep in mind that the non-generalization of a concession is a de facto discrimination against the countries which do not immediately get the lower rate; hence, in self-defense, these countries retaliate or threaten to retaliate with a view to having the discrimination quickly removed. There are those who would go so far in establishing the conditional form of agreement as to serve notice of the abrogation of all our unconditional most-favored-nation treaties and agreements, in number about thirty-five. Under such a plan, we would have to buy back with tariff concessions all the many and valuable benefits which we are enjoying as a result of these treaties. We would end up about where we were before abrogation. To what end? The suggestion is the reduction to the absurd of the conditional argument.

An alternative might be for us to negotiate simultaneously with all countries likely to benefit from a reduction of our duty on any particular commodity whenever that commodity becomes the subject of negotiation with any one country. Remembering the difficult negotiations involved in making a trade agreement with a single country, one can see how impracticable, if not impossible, it would be to wipe the slate clean of all unconditional commitments and attempt to carry on simultaneous negotiations with all the countries concerned with a view to regaining the benefits assured before the agreements were abrogated. We used to be the sponsors of the conditional most-favored-nation principle, but tardily abandoned it in 1923. The reasons for abandoning it then were very strong. They are compelling now.

Until recently we had but one tariff schedule, and raised or lowered our rates with respect to all countries. We did not follow the practice of altering our rates under agreements with other countries. That is why we did not experience the practical disadvantages of the conditional most-favored-nation principle in actual operation. Now we have, in effect, a two-column tariff, established by means of bilateral agreements. Were we to go back to the conditional principle now, all the disadvantages I have referred to above would be accentuated. If we conceded, as we would have to do, the same principle to countries with which we make or do not make agreements, we would have to buy from each country every concession not granted freely to third countries. We would be in constant and difficult negotiation to prevent actual discrimination against our export business and, what is of very great importance, we would never have any assurance that even those concessions obtained by trade agreement negotiations would not be taken from us, at least temporarily, by further concessions on the same item to third countries.

The conditional most-favored-nation theory is that each specific concession must be bought by a specific concession. Many countries at the moment are following this narrow quid pro quo bargaining policy. The conditional principle has inevitably degenerated into a vast and complicated system of bilateral arrangements which have made international commerce in effect commercial warfare, with countries forced to buy from each other what are not, in a true sense, trade-building concessions, but rather tribute for immunity from acts of commercial aggression.

The whole system of clearing arrangements, compensation agreements, etc., concluded usually for short periods, is, in effect, the nullification of the commercial treaty as an instrument for trade-building, and has developed into a net-work of preferential arrangements. These arrangements frequently implement the bilateral balance of trade theory, and thus serve to channelize and reduce world trade. It is not necessary to discuss the particular instrumentalities used in what has become a form of trade warfare, nor the reasons for the development of the extensive controls of trade, to realize that the philosophy behind the whole movement is the antithesis of the unconditional most-favorednation principle.

Consequently, if this country is to make a serious effort to turn the tide of commercial warfare, which logically runs into autarchy, it can do so only on the unconditional most-favored-nation principle. This principle goes absolutely counter to what is happening in many countries, and represents a repudiation of the concept of bilateral balancing of trade. Our policy of using discrimination as the criterion for withholding generalization is fair, is in harmony with the unconditional most-favored-nation principle, and will, we hope, prove to be an effective instrument for the complete reëstablishment of that principle in the world.

Some persons assume that the development of trade controls in many countries, clearly tending toward bilateralism, makes the application of the most-favored-nation principle in our agreements impracticable or even impossible. They argue that we should, therefore, adjust our own policy to the trend which is predominant in certain other countries, despite the definite indications that it has failed as a means of sustaining or increasing the volume of international trade. This criticism is in line with the argument that because certain countries of the world seem bent on war, we should be also. It is the philosophy of defeatism.

There are, however, those who though they wish that we may succeed in reëstablishing more liberal trade policies on the only principle upon which sound international trade can be reëstablished, i.e., the unconditional most-favored-nation principle, still have doubts as to whether it can be done. They point out that the large number of compensation agreements now in effect in Europe and in some of the Latin American countries so tie the trade of those countries that it is impossible for them to extend unconditional most-favored-nation treatment to us. They contend that bilateralism has developed so far that it will be impossible, at least for the present, to free commerce sufficiently to enable it to find its natural channels. True, there are one or two important countries whose arrangements with certain other countries have gone so far that they may not any longer be able to carry out agreements with us except on the bilateral balancing principle. However, with most of the countries of the world, even where some compensation agreements have been entered into, it is quite possible for us to make agreements which will carry out the principles for which this Government stands.

It must be kept in mind that the mere fact that a country has been forced by its currency position to establish control of commerce does not necessitate its violation of the principle of fair or unconditional most-favored-nation treatment. Controls instituted to reduce the volume of imports need not result in the artificial diversion of trade from one country to another. The principle of bilateral balancing is not implicit in the principle of control.

The bilateral balancing concept has been developed as a club to increase export trade. It is intended to force countries which have raised barriers excessively to moderate them, under the pressure of threats to their export trade where imports fall short of sales. Those countries which normally have a passive merchandise balance have been tempted by this concept of bilateral balancing. It has not worked, however, because it has resulted (as revealed by a study of the commerce of countries which have committed themselves to it) in a leveling down of the trade rather than a building up of exports.

However, those countries which have used controls simply to reduce the sum total of their imports, and which have not gone too far in applying the bilateral balancing idea, can make agreements with the United States on the unconditional most-favorednation principle. They can do so because, while historically the principle contemplated tariff rates as the only form of trade control, there are no reasons why something approaching this principle cannot be applied to other forms of trade control such as quotas, exchange allocation, and government monopolies. Fair and equitable treatment is the criterion. Quotas, exchange allocation, and government monopolies can easily be used to divert commerce from one country to another, but clearly this is not inherent in the use of these controls.

When a country is under the necessity of cutting down its imports there is no reason why it should not do so proportionately to all the countries from which it is buying goods. It can do this if it establishes its quotas on the basis of percentages of imports in some representative period. Obviously the selection of the standard period may, in effect, be discriminatory; quotas not infrequently are allocated on the basis of some period selected for the purpose of diverting commerce from one country to another. But agreement could be reached without too much difficulty as to what period would result in something approaching fairness to all concerned. Although the selection of a standard period involves the freezing of the proportions as they existed in the past, makes for less elasticity and prevents the normal shifts of trade which might occur under uncontrolled conditions, the allocation of quotas in the manner indicated represents the application of the underlying philosophy of most-favored-nation treatment to the greatest extent that quota systems permit.

The same thing is true of the sometimes more arbitrary control of trade through exchange allocation. A government may provide that the share of the total available exchange allotted for trade with such and such a state shall be based upon the proportion of the total exchange used in a previous period, prior to the establishment of exchange control, for the settlement of commercial obligations.

In the matter of government monopolies, the problem is somewhat more difficult, but provision can and is being made in agreements where monopolies exist that American suppliers be accorded "a fair and equitable share of the market as nearly as may be determined by conditions of price, quality, etc., such as would influence a private commercial enterprise." As a matter of fact, agreements including such safeguards have already been concluded, and it is anticipated that others will soon be made with other countries now exercising controls of these various sorts in which assurances will be given of unconditional most-favorednation treatment to American commerce.

A number of countries have arbitrarily cut down what would be our proper quotas. Hence the assurance that we will receive a fair share of the trade of each of those countries, regardless of the form of control which it adopts, will provide immediate increases in our exports, and further expansion as general trade of the countries in question expands. We will be assured of the benefit of all concessions in the way of reduced tariff rates or expanded quotas. In other words, we will be on a footing of equality with every other country with which the countries in question carry on trade.

On our side, we agree to extend immediately all the tariff reductions which result from trade agreements with third countries, or from Congressional or Executive action. We assure fair treatment on any quotas we have or may have. We assure fair treatment in the event of any possible exchange control that an emergency might require. Each agreement contains sanctions which insure the carrying out by both parties of these principles of fairness and equity.

It is true that the countries with which we make agreements will be in the happy position of securing additional tariff concessions as the trade agreements program advances. But we likewise will get further concessions from those countries with which we make agreements, and from all countries giving us unconditional most-favored-nation treatment. However, the extent to which they can liberalize their policies depends very largely on the general unshackling of trade restrictions.

The United States is not under the pressing necessity that some other countries are of instituting trade restrictions, owing to its normally large export balances and strong gold position. We therefore could afford to give concessions even without receiving the same immediate compensation that may be necessary in the case of some of the countries with which we are making agreements. Our objective is the general amelioration of the world situation. We shall find compensation in a greatly increased export business as a result of opening up our markets in greater degree to the world's goods through the medium of trade agreements.

If we can bring about a general liberalization of international trade practices, I am convinced that we can carry out the trade agreements program in a manner which will not affect our domestic economy adversely. The careful study and investigation carried out by a large group of experts regarding the commodities upon which concessions may be made insures a type of scientific tariff adjustment such as our country has never had before. Fifteen large volumes of documented material were prepared for the negotiation of the Belgian agreement. Studies equally extensive have been prepared for the other countries with which agreements have been concluded or with which we are negotiating. All the questions involved are carefully considered by technical committees and by a general committee made up of seasoned tariff and commercial policy specialists, with a view to promoting the economic welfare of the country as a whole. One would be rash indeed who would argue that the Tariff of 1930 is a perfect instrument or who would contend that there are not large numbers of items the import of which can be permitted or increased without adverse effect.

Often it seems to be assumed that imports are detrimental to domestic production, even if they do not directly compete with it. This is based on the fallacy of limited purchasing power. But purchasing power expands with trade. It is generally realized that purchasing power and economic activity can be expanded and contracted, but this is often overlooked where international commerce is concerned in the widespread belief that imports for the most part displace American production. In a broad sense, goods and services coming into the country are the purchasing power for goods which will go out of the country. Activity, income, and employment will increase with the two-way increase of international trade.

A careful study of our trade agreement schedules reveals a great many items of which the domestic production is either nil or very small, and of which the imports might beneficially be increased. Frequently it is possible to break down tariff classifications and to reduce the duties on certain items which had been included under political pressure. In some cases seasonal reductions in duties are possible; in others, duties may be reduced in the interest of price flexibility to check monopolistic control. The fact that we can produce effectively 50 or 60 or even 90 percent of a commodity does not mean that we can produce 100 percent of it efficiently and cheaply. Protected by a high tariff wall, producers take care of the whole 100 percent, but often only at great economic cost to the country as a whole and serious reduction in the amount of consumption which that 100 percent represents.

Criticism is heard that the program has been moving too slowly[i] to accomplish the restoration of international trade, and that in any case it will not go far enough in adjusting our tariff schedules downward to put us in a position consistent with that of a great commercial and creditor country. While it is true that the number of agreements thus far signed is small, this has been due to the necessity for extremely careful preparation on the one hand, and on the other to the difficulties of adjusting the principles upon which we are working with the policies being followed by many of the countries with which we are in negotiation. Now, however, the problems of procedure and policy are largely solved, the program is now gaining momentum, and it is confidently expected that by the first of the year upwards of a dozen agreements will have been consummated.

This criticism is less justified now in view of our trade agreement with Canada, signed November 15, 1935. This, the most important of the trade agreements which have been negotiated, will, when it becomes effective on January 1, 1936, establish our commercial relations with our northern neighbor on the basis of reciprocity for the first time in almost seventy years. So fully has the daily press carried the details of this agreement that it is unnecessary to repeat them here, but some of the highlights may be mentioned. The opportunity for increased trade is demonstrated by the decline the trade has suffered, from 503 millions of dollars of Canadian exports in 1929 to 232 millions in 1934, while in our exports the decline was from 899 to 302 millions.

The few tariff quotas provided for in the Canadian agreement may be criticized as constituting a restriction on trade. But they limit merely the quantity of imports to be admitted at the lower rates and do not restrict trade as fixed quotas on total imports usually do. The tariff quota used under these circumstances to the limited degree it has been employed in the Canadian agreement is a step in the direction of trade liberalization, not restriction.

The fact that, in addition to the products on which Canada has granted us specific tariff concessions, a long list of other items will benefit from lower rates through the application of most-favoredforeign-nation treatment to our goods, is an example of the practical, dollar-and-cents benefit of the unconditional mostfavored-nation principle to our trade.

It is too early for official statistics to show impressive results from the agreements now in effect. Only one, the agreement with Cuba, has been in operation as much as a year. But that example is noteworthy. During the first twelve months in which the new agreement has been in effect our trade with Cuba has shown an increase in the value of our imports of 43.6 percent, excluding sugar, and in the value of our exports of 58.8 percent. Some have suggested that this increase in trade has been due to causes other than the trade agreement. The fact remains that our exports to Cuba have increased relatively far more than our trade with other Latin-American countries, while Cuba's exports to us have grown relatively far more than her exports to other countries. In any case, it must be clear that even if other factors in the trade relations of the two countries are favorable to expanded business, the lowering of tariff barriers between them must be a real factor affecting the increase, for obviously commerce flows more freely when artificial barriers are cut down.

The contention is frequently made that we cannot make progress in the program which I have outlined here until currency stabilization has first been effected. I am convinced that the liberalization and normalization of world trade must be pressed vigorously without awaiting formal stabilization. To say this is not to minimize in the slightest degree the importance of currency stabilization in the reëstablishment of an international monetary and price system. But our own program furnishes proof that much can be accomplished on the basis of de facto stability. At the same time, the standard general provision making possible the abrogation of the agreement in the event of wide variation in the exchange rates is itself a strong stabilizing factor.

It is not too much to say that the trade agreements program is of fundamental and prime importance for the functioning of the international price system and the functioning of the system of free enterprise. For even more serious than tariffs and trade barriers as such, and far more threatening with respect to the future of world industrial development, is the virtual destruction during the last four years of the structure of international prices as a result of gross discriminations, preferential arrangements, and the arbitrary control of trade by means of import quotas and exchange allocation. These measures have made it virtually impossible for our traders and others to compete on an equal footing in many foreign markets.

The international price structure cannot function properly in a network of arbitrary preferential arrangements. Industry and trade cannot be organized on a stable and economic basis. Trade degenerates into a catch-as-catch-can scramble. Systematic planning is impossible. Admittedly, the disruption of the world economic situation is itself the basic cause for the initiation and rapid growth of these arbitrary arrangements. Free enterprise, however, cannot survive except in a world economy knit together by a reasonably free international price structure. Although the deranged world monetary structure is itself an obstacle to the restoration of international trade, progress may nevertheless be made in the direction of the reduction of trade restrictions and the removal of arbitrary trade discriminations by a direct attack on these practices. In fact, formal currency stabilization might prove abortive unless real progress had first been made in removing barriers to trade and in restoring normal international price functioning.

One of the large barriers to world trade has been our own excessively high tariff. The tariff policy of this country since the war has gone far beyond the bounds of legitimate protection. It has given rise to retaliatory measures, which, implemented by new instruments of commercial warfare, have greatly injured our trade. The trade agreements program is not in any sense a free trade program. It is merely an attempt to remove the causes of retaliation and to restore thereby to American enterprise its natural markets abroad and to retain at the same time reasonable protection for domestic industry.

We have already lowered many rates, which have been generalized to other countries. When we shall have gone the rounds of most of the important countries of the world, reducing in each case the duties on commodities of which it is the principal or important source, we shall have lowered our tariffs on a great many items where the case for lowering is justified. As a result of extending these reductions to virtually all countries, we will obtain, it would seem, what the proponents of unilateral tariff reduction desire; but we will do it more carefully and scientifically than is possible by legislative action. We will at the same time bring about a substantial downward revision of foreign trade barriers. Normally, the foreign countries with which agreements are concluded will generalize their concessions to third countries. Eventually, therefore, our trade agreements program, with the coöperation of other nations, will have accomplished something of very real importance towards the general reduction of world trade barriers.

By the policy of withholding generalization of concessions from countries which in fact discriminate against American commerce, we give them an incentive for removing their discriminations. We are not taking a self-righteous attitude, but one which is essentially practical. We will not have a blacklist. We will have a two-column tariff. If countries will give us in effect unconditional most-favored-nation treatment, they will get it from us; if they do not give us such treatment, they can hardly expect the benefits of our minimum rates.

Because of the importance of our position in world trade, because -- let it be admitted -- we ourselves have raised our trade barriers to excessive heights, we can with good grace take the lead in a trade recovery program that promises to go far to reëstablish world business. With the restoration of normal business, we hope that the reasons for import restrictions and the various types of trade control will speedily disappear, so that the peoples of this and of other nations will enjoy in fuller measure than ever before the benefits of the international exchange of goods.

[i] Four agreements are in effect: with Cuba, Haiti, Belgium, and Sweden. Three are signed but not yet in effect: with Brazil, Colombia and Canada. Ten are in active negotiation, with early consummation expected.

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  • HENRY F. GRADY, Chief of the Division of Trade Agreements in the Department of State; Professor of International Trade and Dean of the College of Commerce at the University of California
  • More By Henry F. Grady