The Day After Russia Attacks
What War in Ukraine Would Look Like—and How America Should Respond
THE American tariff bargaining program appears to be in a critical stage. In the two years following its inauguration in June 1934 it scored substantial accomplishments. American negotiators were successful in getting rid of some of the most serious hindrances to the expansion of American trade in foreign markets. Discriminations of long standing in French and Canadian tariffs were replaced by most-favored-nation treatment. In all, fourteen trade agreements were concluded including ones with such important commercial countries as Canada, Cuba, Brazil, France, the Netherlands, Belgium and Switzerland.
In these new agreements the United States made its first real advance since 1913 in the direction of lower tariffs. To be sure, the steps taken were timid and hesitating; the breaches made in our massive tariff wall were not wide. But certain rates were actually reduced, notably those on sugar, whisky, cigar wrapper tobacco, lumber, linen goods, dyes, watches, cheese, and on one or two types of cotton goods. Continued free entry, during the life of the agreements, was assured for coffee, newsprint paper, wood pulp, pulpwood, bananas and cacao beans. Taken together, the fourteen agreements constituted an achievement in which Secretary Hull and his staff could take legitimate pride. And their significance far transcended the American scene. For they represented the only genuine and effective departure taken by any great nation away from the exaggerated protectionism of the postwar years.
But in the spring of 1936 the bargaining machinery seemed to stall. Since May 1936, when the agreement with France was signed, only two additional agreements have been concluded, those with Costa Rica and El Salvador.[i] Negotiations which had been undertaken with Italy and Spain have been given up. Two explanations for the slump are obvious: the Presidential campaign, which regularly halts constructive effort in foreign relations; and the fact that in June 1937 the new bargaining powers were to expire unless renewed by Congress.
In the past few months the trade agreement's program has given signs of renewed life. In February, Congress extended the President's bargaining powers for an additional three-year term. In May, the State Department announced that an agreement with Czechoslovakia was under consideration and also one with the United Kingdom.
The possibilities of an Anglo-American tariff agreement, and the problems involved, form the subject of this essay. The commercial significance of such an agreement hardly needs emphasis. The United States and the United Kingdom are the leaders in world trade. Between them, they buy 28 percent of the world's imports and sell 24 percent of all exports. To say that the United Kingdom is America's best customer tells only half the truth. Our exports to the United Kingdom in 1936 were valued at $440,000,000, a sum equal to our combined sales to nine European countries, viz., France, Germany, Italy, Belgium, the Netherlands, Denmark, Norway, Finland and Czechoslovakia. Forty-seven million Britishers bought more American goods than the thousand million persons who inhabit the continent of Asia.
From the English point of view, world trade, like Cæsar's Gaul, is divided into three parts: (1) trade with the colonies and the self-governing commonwealths that comprise the British Empire; (2) trade with the United States; and (3) trade with other foreign countries. Of every $100 worth of foreign goods brought into the United Kingdom, $18 is supplied by the United States; of every $100 of British goods sold in foreign markets, the United States buys $12.50. No country, not even one of the Dominions, exports as much to the United Kingdom as does the United States; only India, Australia and occasionally Canada outrank the United States as a market for English goods.
Anglo-American trade is no hothouse growth, forced by subsidies or other forms of state aid. On the contrary, it resembles rather the sturdy weed whose survival in the face of discouragement proves its adaptation to its environment. For American tariff policy has not dealt leniently with imports from the United Kingdom. Our upward tariff revisions of 1922 and 1930 were chiefly aimed, it is true, at German and Japanese competitors. The tariff blunderbuss, however, is no respecter of nations. The new high rates applied to imports from all countries; and English manufacturers, although innocent bystanders, inevitably suffered. Apologists for the Hawley-Smoot Act may point out that 45 percent of all goods imported from England, Scotland, Wales and Northern Ireland enter our ports free of duty, but that paradoxically is because the free goods are not British. The English sell us each year millions of dollars worth of tin, of furs, tea, carpet wools, rubber, to say nothing of platinum, shellac, goat and kid skins, cacao beans and vegetable oils. None of these goods are of English origin; they are imported via England rather than directly because of England's excellent banking, insurance, shipping and merchandising facilities. Most of the transhipped goods, being not directly competitive with American products, are not dutiable. Eliminating them, we find that over 80 percent of the genuinely British goods are taxed at our customs houses.
And our taxes are high. A few items come in at rates of less than 30 percent ad valorem, or at specific rates which, at present prices, are equivalent to value rates of less than 30 percent.[ii] In this favored group are such items as burlap, leather, tin plate, boots and shoes. The bulk of English goods, including most of the cotton manufactures and linen goods, pay rates between 30 and 45 percent. On many items the rates are much higher. Table damask, wool noils, broad silks, all pay rates varying from 45 to 60 percent; wool carpets, wool hosiery, china and porcelain wares are dutiable at rates between 60 and 75 percent, worsteds at rates between 75 and 90 percent, and earthenware, heavy woolen goods and cotton laces at rates of 90 percent or more.
English trade policy, until the World War, was the antithesis of the American. In solitary eminence among the great trading nations, England maintained her policy of free trade. The doors of her rich markets stood wide open to all foreign goods. Protective duties were unknown; the only taxes on imports were those imposed purely for revenue purposes on tobacco, liquors, and a few other commodities of wide consumption. Imposing no barriers to foreign goods, England could give no preferential treatment to goods from Canada, Australia, or other self-governing parts of the Empire. The policy of the Open Door was steadfastly maintained in the Crown colonies.
Even after the war, with protectionism rampant all over Europe, the traditional English prejudice in favor of free trade was overcome with difficulty. A few protective duties were imposed in 1915, dyestuffs were protected in 1920, a few other industries were assisted by "safeguarding" duties in the years from 1921 to 1929. But the practical results of these flirtations with protection were negligible. As late as 1930, only 12 percent of all English imports were dutiable, and only three percent were subjected to taxes whose purpose or result was the protection of British industries.
The great depression, which in the United States was in large measure responsible for shifting trade policy away from protection in the direction of freer trade, had quite the opposite result in England. In 1931, it will be recalled, the gold standard was abandoned and the pound was allowed to depreciate 25 percent in terms of the dollar. Later in the same year, new protective duties at high rates were imposed on a wide variety of industrial and agricultural products. Both the monetary and the tariff policies were urged by the Government and accepted by the English people as emergency measures necessary for dealing effectively with acute economic distress. But now, six years later, we find England still off gold and with protectionism apparently firmly embedded in its commercial policy.
The emergency tariffs of 1931 were supplemented in 1932 by a general tariff act. Raw materials for British industries, certain foods, and all Empire products were placed on a free list; all other imports, not previously dutiable, had a basic 10 percent rate imposed on them. But the 10 percent rate formed merely the groundwork for the new tariff edifice. The superstructure is the work of an unusually effective administrative board, the Import Duties Advisory Committee. As a result of its labors, English dutiable imports are now roughly classified as follows: raw materials, dutiable at 15 percent; manufactured goods, at 20 percent; and luxuries and semi-luxuries paying 25 to 30 percent. Special protection is afforded the iron and steel and automobile industries by rates of 33⅓ percent.
The new tariff structure was given permanence by the Ottawa Agreements, concluded in August 1932. The same agreements augmented its adverse effects on American trade. By these agreements, the system of imperial tariff preferences was put on a contractual basis. The various self-governing commonwealths had already given discounts from their import duties to goods from the Mother Country, but as the latter had nothing to offer in return the tariff preferences had been purely voluntary concessions. At Ottawa, Mr. Baldwin, armed with his new tariffs plus a plan for the further protection of English farmers, had something to bargain with, and he used his weapons to good advantage.
Obviously, there were two possible methods of increasing the margins of inter-Empire tariff preferences; (1) by lowering the barriers to trade between the Mother Country and the commonwealths; or (2) by raising all round the Empire the tariff barriers against outsiders. Mr. Baldwin exhorted the delegates to the Conference to aim at lowering rather than raising tariff barriers, reminding them that not even the British Empire could isolate itself from the world. But other counsels prevailed. Manufacturing and labor interests in Canada and Australia blocked moves to lower duties. When the agreements were finally published, it was found that they had raised both Dominion and English tariffs against non-Empire goods.
Nations exporting industrial products were disturbed by another departure from traditional English policy at Ottawa, the abandonment of the Open Door policy with respect to Crown colonies. The agreements extended tariff preferences in non-self-governing parts of the Empire on a wide scale to products of the Mother Country and of the Dominions. The significance of this step was stressed by Sir Herbert Samuel (now Viscount Samuel) who observed that the new policy if continued would convert the colonial empire into "a preserve for British manufacturers."
Two additional features of the new English protectionist policy deserve consideration: agricultural protection, and the new English trade agreements.
English agriculture, despite a long period of decline dating from the middle of the Nineteenth Century, is still, if horticulture is included, Britain's largest industry. English farms and gardens employ more than a million persons and supply more than 40 percent (by value) of England's food consumption. None the less, the United Kingdom is the world's greatest market for certain types of foreign foods. Ninety-nine percent of the world's exports of bacon and hams in 1930 were sold in England, also 96 percent of the world's exports of mutton and lamb, 63 percent of the butter exports, and 59 percent of the beef.
The rapid increase of food imports into the United Kingdom during the early years of the depression furnished the occasion for protective measures more extensive and more drastic than any legislation since the repeal of the Corn Laws. The long-standing principle that the Englishman's food shall not be taxed was thrown in the discard; duties were imposed on foreign wheat, barley and rice, fresh and canned fruit, dairy products, fresh and canned fish. Import quotas, far more destructive to normal foreign trade than tariff duties, were fixed for beef, lamb and mutton, hams and bacon. The wheat duty was supplemented by a bounty to English growers. In all this legislation the guiding principle has been: "Home producers come first; Empire producers come second; foreigners take what is left."
The new English tariffs have been used not only as a barrier against foreign goods but also as bargaining instruments to open foreign markets more widely to English goods. They also have been used to protect the interests of English holders of foreign securities. Twenty-three new trade agreements have been concluded which involve still further departures from traditional English policy, particularly with respect to the application of the most-favored-nation clause. Aside from a few reductions in duties, the undertakings of the United Kingdom have consisted principally of guarantees hot to worsen the treatment accorded to other countries. In some of the agreements, the United Kingdom has secured trade advantages at the expense of third parties. Her insistence, for example, in making treaties with Scandinavian countries upon having minimum shares in their purchases of coal handicaps German and Polish producers. Discrimination of a different type is found in the agreement with Argentina which guarantees "that there shall be available, for the purpose of meeting applications for current remittances from Argentina to the United Kingdom, the full amount of the sterling exchange arising from the sale of Argentine products in the United Kingdom, after deduction of a reasonable sum annually towards the payment of the service of the Argentine public external debts." Both this agreement and that with Soviet Russia are based on the idea that payments between pairs of countries should be equalized. But international trade is not normally bilateral, it is multilateral; and attempts to equalize payments between pairs of countries inevitably discriminate against third parties and tend to force trade into unnatural channels.
Attempts to measure statistically the impact of the new British policies on the trade of the world, or even on that of a single country such as the United States, are foredoomed to failure. There are too many variables in the equation. It can be demonstrated, for example, that since the Ottawa Agreements went into effect, England's trade with the Empire has increased more rapidly than her trade with foreign countries. But preferential tariffs, alone, cannot be held responsible. Monetary policies, and shifts in English demand during the depression from luxury goods to larger proportional purchases of necessaries, have played their part. With respect to imports of food, England's policy of protecting home producers, and of favoring Empire sources for outside supplies, seems definitely to have accomplished its purposes. In the four-year period 1931-1935, English food imports from all sources declined 12 percent in volume. In this period purchases from foreign countries shrank by 30 percent, but imports from Empire countries gained 17 percent.
American trade, judging merely by the proportion of our total exports marketed in the United Kingdom, appears not to have suffered. The United Kingdom statistics tell the same story; about the same proportion of total English imports (11 percent) was bought from the United States in 1936 as in 1932. But these averages are misleading. Closer examination of the trade statistics shows that exports of American food have suffered severely. For example, English purchases of American flour and wheat fell from £3,919,000 in 1931 to £210,000 in 1935; purchases of hams from £2,381,000 to £1,910,000, of condensed milk from £422,000 to £8,000. Similar declines were shown in purchases of American barley, rice, apples, grapefruit, salmon, canned and dried fruit. American exporters of these goods lost not only absolutely but relatively. English consumers took a smaller proportion of their food supplies from the United States and a larger proportion from Empire countries.
Here, again, there is no simple relation of cause and effect. Tariff policies were not the sole nor the most important factor in these changes. The drought of 1934 and the crop restriction policies under the Agricultural Adjustment Administration cut American food exports to all countries. But tariffs, and particularly imperial preferences, cannot be acquitted of blame. American farmers would not have found the English 6-cent tariff on their wheat a serious obstacle to sales in the British market if Canadian wheat had also paid 6 cents. But with Canadian wheat entering free of duty, the 6 cents became a real handicap. Similarly, two cents a pound on rice would not mean much if Indian rice also paid two cents. The English rates on barley, condensed milk, apples, canned and dried fruit, tobacco, all are of concern to our exporters and producers, not because of the absolute amount of the duties but because competing producers in Canada, Australia, South Africa, and elsewhere in the British Empire pay either lower duties or no duties.
American exports to the United Kingdom, of course, include industrial as well as agricultural products. English tariffs check the sales of American electrical apparatus, refrigerating machinery, machine tools, and a great variety of miscellaneous manufactures. Preferences are accorded to Empire producers of these goods. But in this area our competitive position is stronger. We are industrially more mature than any of the Dominions, and the larger scale of our manufacturing operations, together with the established reputation of American specialties, more than offsets the handicap of preferential tariffs. It seems, therefore, that a successful Anglo-American agreement, from the American point of view, hinges upon the possibilities of modifying the Ottawa Agreements, so that American foods and raw materials may enter British markets on more even terms.
What concessions can American negotiators offer in return? Our Trade Agreements Act authorizes the President to offer reductions of 50 percent from the Hawley-Smoot rates, in return for what he considers equivalent concessions from foreign tariffs. To be of interest to the English, our reductions must obviously apply to manufactured goods. Also, since by the terms of the Act all our concessions must be "generalized," i.e., applicable to imports from all countries, they will be valuable to English exporters principally in so far as they are confined to products which are English specialties. Among the dutiable imports from England, some 60 odd items appear to be distinctively English. For them, in tariff bargaining parlance, England is the "principal supplier." This group forms the basis for tariff bargaining operations. The next question is: "Where shall the rate cutting begin?"
Naturally, American manufacturers who believe their interests endangered will protest, and American negotiators will have to give attention to their protests. The problem will be to reduce rates so as to make possible substantial increases in sales of English goods in our markets, at the same time avoiding real injury to efficiently conducted American industries. This sounds like the old problem of having one's cake and eating it, too. But actually it is not so impossible.
When we examine the 60 commodities, we find among them a considerable number on which tariff duties could be reduced without serious results. There are, first, the goods not directly competitive with any American product. Take table damask and handkerchief linens for illustrations. Neither is produced in American factories; our entire supply is imported, principally from northern Ireland where the linen industry profits by an abundance of skilled labor and large supplies of yarns of all grades and qualities. In the light of these facts our tariff rates averaging about 45 percent are difficult to justify. Here is an excellent opportunity for the use of tariff bargaining shears.
It would not be difficult to spot other non-competitive imports in the cotton and woolen schedules of our tariff. We levy substantial duties on fine English yarns, mule-spun from Egyptian cotton; they do not compete directly with the American yarns which are the product of ring spinning. Certain types of cotton cloth imported from England, such as those produced on swivel looms, find no counterpart in the products of American mills. English worsteds and woolens are, typically, high-grade fabrics of advanced styles and colorings. They are not directly competitive with the bulk of American production. Other items which might be added to the non-competitive group are razors (the dangerous kind), kaolin, jute burlaps, ground yellow mustard, and flax.
A second group of distinctively English goods deserving the attention of tariff bargainers are those which supply only a small proportion of American consumption. Inlaid linoleum is one such item; others are anthracite coal, pig iron, tin plate, linen yarns, thread and twine. English goods which have been losing their place in the American market might next be examined. In 1928 we bought 25 percent of our imports of ferromanganese and other ferroalloys from the United Kingdom; in 1935 these imports had disappeared. Imports of English iron and steel wire, iron and steel pipes, golf balls and carpets show great losses. What are the causes? Have competitive conditions changed so that the 1930 tariff rates can now be safely reduced?
Finally, the imports dutiable at high rates should be scrutinized. The average ad valorem rate on all dutiable imports in 1935 was 42 percent. About one-third of the 60 distinctively English commodities paid duties higher than this average. Our negotiators might begin with questioning the necessity for the very highest rates. Why, for example, should imported machine-made cotton laces, raw wool, wool wastes, heavy woolens, and earthenware pay duties equivalent to 90 percent or more of their foreign values?
From this brief analysis it should be evident that there is no lack, in the tariff of either country, of opportunity for making concessions of value to the other. But the area of practical bargaining is more limited. The negotiators are not free. The extent of the concessions they can offer depends, in general upon the attitude of public opinion, and in particular upon the intensity of the "heat" applied by protectionist groups to party leaders. On this side of the Atlantic, the tariff bargaining program so far has had easy going. It has been subjected to less criticism than any other prominent feature of the New Deal. No effective opposition was offered by either industrial or agricultural groups when the renewal of the Presidential bargaining powers was under consideration. All this augurs well for the successful negotiation of an agreement with England. But it must be remembered that in none of the agreements so far concluded have the interests of great protected industries, such as steel or woolens or chemicals, been challenged.
On the English side, the American proposal for a trade agreement has received strong support by organs of liberal opinion. The eventual attitude of the Government is still uncertain; Mr. Runciman has praised the idea in principle, while emphasizing practical difficulties. The difficulties are of two sorts, the commitments made by the Government to English farmers in its ambitious agricultural program, and the pledges made to the self-governing commonwealths in the Ottawa Agreements. But with the return of prosperity in England the fervor for tariff reform has abated. Liberals, who reluctantly supported emergency import duties in 1931 and 1932, are now vigorously criticizing "full-blooded" protection. They are calling attention to the administrative weaknesses of import quotas and marketing controls. Business interests, exporting industries, bankers, insurance and shipping companies contend that permanent prosperity depends not on promoting inter-Empire trade but on the revival of international trade. English commercial policies since 1932, they claim, have worked in the opposite direction. This view was strongly urged by Sir Arthur Salter in a recent speech in the House of Commons. "If we take into account," he asserted, "the place which Great Britain occupies in the trade of the world, the size and importance of the British market, and the novelty of the new commercial policies that have been introduced, and then consider the cumulative effects of Imperial preference with the Dominions, the new protective system here, the abandonment of the Open Door, the establishment of agricultural quotas, it is literally and absolutely true to say that in the last 5 or 6 years . . . the commercial policy of no single country has had so great an effect in restricting and deflecting the trade of the world."
But economic considerations explain only in part the strong support given in England to the proposal for a trade agreement with the United States. There is, in addition, a political reason. English believers in democracy are alarmed at the spread of autocracy on the Continent. Recent events in Germany, Italy and Spain make them wonder how long their own institutions can be maintained. Where, outside of England, can they find support? At present only in France and the United States. France has already signed a trade agreement with the United States. An Anglo-American trade agreement would perhaps unite the three democracies even more closely against the encroaching dangers of Fascism and Communism.
It must be remembered, however, that a trade agreement between the United States and the United Kingdom cannot be simply bilateral; it is bound to be multilateral, involving bargaining not only with the Mother Country but with the self-governing Dominions as well. Furthermore, the attitude of the Dominions may determine the success or the failure of the negotiations. For the reduction of English duties on certain farm products, and the liberalization of quotas, concessions of vital importance to the United States, involve modification of the Ottawa Agreements. Will the Dominions assent?
The question was raised opportunely by Secretary Hull's proposals. The five-year term of the original Ottawa Agreements ends in August of this year. The Agreement with Canada has already been renewed on terms which give England freer rein to bargain with the United States. Action on the Australian agreement has been postponed until next year; the terms of new agreements with India, New Zealand and South Africa are now under discussion. The London Imperial Conference which followed the Coronation gave an opportunity for Empire prime ministers to discuss the American proposals. The favorable attitude which they are reported to have taken may have been based on a growing realization that the British Empire cannot be made economically self-sufficient. The annual "exportable surpluses" of wool, rubber, tin, copper, wheat and meats is greater than can be sold profitably in the United Kingdom. Outlets in other industrialized countries are essential to the prosperity of the Dominions. On this account they will not be adverse to bargaining with the United States. But they will want to get real concessions from us. Canada would like to sell us more milk and cream, New Zealand more butter, and Australia more wool.
What will American wool growers and dairymen have to say to such proposals? Naturally, they will object that their interests are being sacrificed to those of agricultural exporters, grain farmers, fruit growers, corn and hog farmers. Conflicts of interest such as these inevitably arise when any modification of tariff duties is undertaken. They are usually settled on political rather than on economic grounds. An economist might point out that the injuries suffered by American wool growers and dairymen as the result of moderate reduction in their tariff duties would not be severe. The import duties on clothing and combing wools are equivalent, at present prices, to about 100 percent of the foreign value of imported wools. Wool production in the United States, which not long ago was considered a stationary or declining branch of farming, has recently shown marked recovery. The dairymen have less cause to worry about tariffs than the wool growers. In the gigantic American market, imports of butter, cheese, fluid milk and cream form only a minute proportion of total supplies.
Special and local interests notoriously predominate when Congress revises the tariff; the national interest is submerged. But the President controls the making of trade agreements. Representing all the people, he is free to raise the national interest to the dominant position it deserves. The experience of the last three years gives ground for confidence that, so far as the United States is concerned, neither the special interests of industrial nor of agricultural groups will be able to prevent the conclusion, in the national interest, of an agreement with the United Kingdom.
[i] The new one-year arrangement with Soviet Russia, proclaimed August 6, 1937, does not provide for reductions in import duties on either side. The U.S.S.R. agrees to purchase not less than $40,000,000 worth of United States goods and we in return extend most-favored-nation treatment to goods of Russian origin.
[ii] In this paragraph, and elsewhere in this article, the ad valorem equivalents of specific rates of duty have been calculated on 1935 import values.