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Most-Favored-Nation Principle

Most-Favored-Nation Principle

Justus D. Doenecke and

Michael R. Adamson

From its inception, the United States has incorporated the most-favored-nation (MFN) principle into its trade policy. Until 1923 it adhered to its conditional form and thereafter to unconditional MFN treatment. Only with the passage of the 1934 Reciprocal Trade Agreements Act (RTAA), however, did Congress allow U.S. trade negotiators to use unconditional MFN treatment as an instrument of trade liberalization. That is, the MFN principle does not equate with free or freer trading environments. From 1778 until 1934, U.S. trade policy was explicitly protectionist. In this environment, the adoption by the State Department of unconditional MFN treatment did nothing to advance its program of trade liberalization. MFN treatment is an instrument of trade policy. Its use must be understood within the context of trade policy. In the United States, interest group pressures, the actions of policymakers, and the constraints and opportunities presented by the international political economy shaped policy over time.

MFN treatment means that policy discriminates among nationals and foreigners but treats all foreigners equally. National treatment extends the same privileges to foreigners and nationals alike. Equal treatment in general is known as nondiscrimination. As far as U.S. trade policy is concerned, two types of MFN treatment are relevant. Unconditional MFN treatment is provided gratuitously to nations eligible for MFN status. Under conditional MFN treatment, third parties must bargain and provide equal compensation in order to benefit from MFN status. Linked historically to MFN treatment in practice is the instrument of reciprocity. Reciprocity, or the exchange of trading privileges through bargaining, implies discrimination among trading partners. That is, benefits are not conferred freely.

The following example illustrates the difference between conditional and unconditional MFN treatment. Assume that the United States extends conditional MFN treatment to Germany, then signs a trade deal with Japan that provides for a reduced tariff on the import of Japanese televisions. Under conditional MFN, however, the United States will not allow German television imports at the new rate until German trade negotiators offer equivalent compensation. German trade negotiators may then offer, for instance, to accept imports of U.S. sewing machines at a lower rate. U.S. trade negotiatorssince 1962, officials of the Office of the U.S. Trade Representative; before then, State Department officersmay accept the offer, if the increased value of American sewing machine exports to Germany balances the increased value of German television imports into America. If America were to extend unconditional MFN treatment to Germany, however, the latter would receive benefit of the U.S.Japanese treaty without having to make any concessions.

As this illustration suggests, unconditional MFN treatment may constitute the means by which a multilateral trading regime is created from a series of bilateral agreements, since its use ensures that all eligible countries enjoy the benefits of past and future concessions. This has been the experience internationally during most of the postWorld War II period. As discussed below, both the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), incorporated unconditional MFN treatment into their charters.

MFN TREATMENT IN PRACTICE, 17761887: CONDITIONAL MFN WITHIN PROTECTIONISM

At the time of the American Revolution, Great Britain and continental Europe adhered to unconditional MFN treatment, which they had done since the seventeenth century. To maintain the political and economic independence of the new American republic, the Founders focused on balancing internal economic development among industry, agriculture, and commerce. Once established, the national government aimed to develop the nation's resources and secure neutral rights internationally. Leaders of the early republic did not seek autarky (that is, national economic self-sufficiency and independence). Indeed, Benjamin Franklin and Thomas Jefferson, for example, leaned toward free trade. However, since they believed that free trade would threaten America's political viability, they sought access to overseas markets for U.S. commodities through both reciprocity and nondiscrimination. Ideally, they wanted the benefits of unconditional MFN treatment. But they were prepared to settle for equality of treatment with foreign nations. Moreover, they recognized that the great powers of Europe were unlikely to reciprocate on trade. Ultimately, they adhered to conditional MFN treatment to preserve the means to bargain for access to overseas markets, but this approach ensured that all trade treaties were bilateral, unique, and discriminatory.

In July 1776 the delegates to the Continental Congress were prepared to allow unrestricted imports into the U.S. market in order to gain diplomatic recognition and break Britain's hold on Atlantic trade. John Adams, assisted by Benjamin Franklin, drafted a model commercial agreement that was approved by the delegates. It instructed trade negotiators to obtain equal national treatment or unconditional MFN treatment to gain access to Europe's markets (and those of its colonies).

America's first trade treaty, the 1778 Franco-American Treaty of Amity and Commerce, secured neither equal national treatment nor unconditional MFN status for American goods. U.S. trade negotiators Benjamin Franklin, Silas Deane, and Arthur Lee settled for a conditional MFN clause (Article II).

Neither side wanted the treaty to benefit Britain; French negotiators feared the consequences of a possible U.S.British political reconciliation. U.S. negotiators wanted Britain and other European countries to buy access to the U.S. market with reciprocal trading privileges to their home and colonial markets. French officials only offered access to its home market. In 1783, France reverted to unconditional treatment and tried to interpret Article II in this way. U.S. officials balked; they decided to use reciprocity to secure equality of treatment.

During the early national period, U.S. officials had little success in opening overseas markets to American goods. They concluded treaties with Sweden and the Netherlands, but only the latter offered MFN access to both its home and colonial markets. In 1784 U.S. negotiators initiated another round of trade talks, using the 1776 plan as a blueprint. They succeeded only in securing a pact with Prussia in 1785, which secured the conditional MFN treatment granted by France in the 1778 treaty. Officials such as John Jay and Elbridge Gerry became convinced that a strict reciprocity approach would best serve U.S. interests, at least until negotiators gained experience in trade matters and America gained in importance within the international economy.

Crucial aspects of U.S. trade policy hampered the use of either reciprocity or conditional MFN treatment in a manner that benefited American exporters. Treasury Secretary Alexander Hamilton's 1791 Report on Manufactures provided the justification for a protective tariff system to enable America to establish its own manufacturing base as the basis for economic development. After the War of 1812, Congress took up the recommendations of Hamilton and James Madison's Treasury secretary, Albert Gallatin, and adopted the so-called American System sponsored by Senator Henry Clay: a nationalistic industrial policy based on high tariffs and support for domestic manufacturers. Until the Great Depression, many U.S. leaders, especially Whigs and Republicans, remained adamant that protectionism was the key to U.S. economic development, class harmony, and political independence.

Congress also subjected all imports to a uniform (single-schedule) tariff, leaving little room for officials to negotiate preferential bilateral agreements. Until Congress adopted a dual-schedule tariff in the 1909 Payne-Aldrich Act, there was little chance that trade negotiators could wield reciprocity, not to mention MFN treatment, to win concessions from trading partners. This limited policymakers in the executive branch to adjusting the level of tariffs: Democrats tended to lower tariffs to levels adequate to fund the budget, and Whigs and Republicans tended to raise tariffs to protect domestic producers from foreign competition.

Until the late nineteenth century, foreign markets were the concern only of commodity producers in the South and timber and fur exporters in the North. Hence, there was little interest-group pressure to persuade Congress to lower the barriers that protected domestic industries and workers. Diplomacy served the economic and security interests of a developing country with a large domestic market and little disposition to global leadership.

State Department negotiators therefore sought equal access for American goods to the markets of European competitors by offering equal access in return. The administrations of Presidents John Tyler, James Polk, Franklin Pierce, and James Buchanan were especially interested in using reciprocity to pry open overseas markets. However, Congress generally refused to ratify the reciprocal pacts that State Department officials negotiated, fearing that the MFN clauses in earlier treaties might compel the United States to generalize proposed concessions. Opponents also recognized that the State Department paid inadequate attention to negotiating an equivalent exchange of concessions.

With othersCanada, Latin America, and AsiaU.S. trade officials sought special privileges and offered special concessions for raw materials and agricultural goods in the U.S. market. The expansionist Polk, Pierce, and Buchanan administrations were eager to experiment with new approaches. They sought either unilateral MFN treatment or one-sided agreements that assured the United States of MFN treatment. For example, treaties with China in 1844 and Japan in 1854 provided America with MFN access to both markets, but did not extend equality of treatment to the U.S. market for either China or Japan in return.

The United States held contracting parties to conditional MFN treatment even when commercial agreements contained ambiguous language or appeared to contradict each other. As Secretary of State John Jay put it in 1787, it would be inconsistent with "reason and equity," as well as with "the most obvious principles of justice and fair construction," to demand that the United States grant unconditional MFN treatment simply because a treatyin this case the 1782 treaty with the Netherlandsfailed to specify conditional MFN treatment. Just because "France purchases, at a great price, a privilege of the United States," the Netherlands cannot "immediately insist on having the like privileges without [paying] any price at all."

The use of conditional MFN treatment led to disputes with trading partners. For example, the so-called Convention of 1815 with Britain set the stage for a dispute with France over the Louisiana Purchase. The convention extended privileges to British ships in American harbors that French ships did not enjoy. In the absence of a specific MFN clause, France insisted that the United States adhere to the literal interpretation of the MFN clause. France claimed that it had given America an equivalent concession at the time of the Louisiana Purchase. Nonetheless, Secretary of State John Quincy Adams asserted that "the condition, though not expressed in the article, is inherent in the advantage claimed under it." Only when France reduced duties on wines in 1831acceding to a request from Secretary of State Martin Van Burendid the United States grant France the commercial privileges it sought.

MFN TREATMENT IN PRACTICE, 18871933: CONDITIONAL AND UNCONDITIONAL MFN WITHIN PROTECTIONISM AND EXPORT EXPANSIONISM

Until 1887, the United States was a relatively passive and highly protectionist country within the international economy. U.S. trade policy was nonnegotiable and nondiscriminatory and characterized by high tariffs. By the late nineteenth century, this policy complicated efforts of exportoriented sectors that sought to gain access to foreign markets. From the late 1880s, U.S. administrations identified opportunities that the international economy offered these interest groups and attempted to facilitate the expansion of exports on the basis of reciprocity and conditional MFN treatment. But Congress, dominated by powerful Republican protectionists such as Senators Nelson Aldrich and Reed Smoot, remained opposed to trade liberalization on principle. Before World War I, U.S. administrations from Grover Cleveland to Woodrow Wilson focused on export expansion. This was possible because Britain adhered to free trade even as America and Germany challenged and surpassed it in economic productivity and output. That is, the United States could continue to enjoy the benefits of Britain's free-trade policy without compromising its own protectionist policy. Yet the United States had limited success in gaining access to major overseas markets. Indeed, after World War I, the United States and its trading partners raised barriers to trade, exacerbating the financial and commercial imbalances created by the war. Both reciprocity and MFN treatment conditional or unconditionalproved to be poor instruments of trade liberalization as long as U.S. markets remained closed to competing goods from overseas.

As administrations and Congresses reaffirmed their commitment to Clay's American System in the immediate postCivil War period, Europe followed Britain's lead toward trade liberalization. The 1860 Cobden-Chevalier Treaty, also known as the Anglo-French Treaty of 1860, between Britain and France epitomized the free tradelow tariff regime established across much of Europe by treaty and unconditional MFN treatment. The treaty was meant to eliminate all tariffs between Britain and France and induced them to initiate a round of bilateral tariff reduction treaties with other European nations. Almost all commercial treaties involving European nations thereafter included the MFN clause. With the entry of Germany into the European system in the late 1870s, however, Europe began to retreat from liberal trade. In 1878, under Chancellor Otto von Bismarck, Germany raised tariffs on agricultural products and sheltered so-called infant industries. France also retreated, giving up the Cobden-Chevalier Treaty in 1892 with its adoption of the Méline tariff, which raised average rates on dutiable items and implemented a dual minimum-maximum schedule. (The maximum rate constituted the conventional rate. The minimum rate could be extended to trading partners through negotiation.)

In 1887, President Grover Cleveland called for duty-free status on raw materials. He wanted to recast the tariff as an instrument of export expansion. The 1890 McKinley and 1894 Wilson-Gorman Acts supported this approach. Both laws maintained protectionism, but they also sanctioned the pursuit of special reciprocal relationships with Latin American countries through lower duties on selected raw materials. Their aim was to expand U.S. exports to the region at the expense of British and European traders.

By the late 1890s, American exporters faced the probability of losing access to European markets. Some European countries now attached conditions to their MFN clauses. Average European tariff levels remained far below those of the United Statesin 1900 European minimum or conventional rates averaged 10 percent while U.S. tariffs on dutiable items averaged 30 percent (and America offered concessions only on noncompetitive goods). But these tariff levels were trending upward. The goal of expanding exports was clearly under threat. The administrations of Presidents William McKinley, Theodore Roosevelt, and William Howard Taft responded by differentiating among trading partners. They maintained the approach of expanding markets in Latin America and protecting the domestic market, but they now used bilateral reciprocity to counter European trade restrictions. Under section 4 of the 1897 Dingley Tariff Act, Congress extended the bilateral reciprocity provisions of the McKinley tariff beyond Latin America to "France, Germany, Belgium, and other European countries."

Because the single-schedule tariff and conditional MFN treatment remained features of U.S. trade policy, the efficacy of using reciprocity to maintain or expand access to European markets was limited. Indeed, U.S trade negotiators could not compete with free-trading Britain for favorable tariff treatment from continental Europe. With U.S. manufacturers able to compete against European producers, European governments showed their displeasure with U.S. trade policy by putting tariff arrangements on a temporary basis and discriminating against U.S. products.

The ambiguity of MFN treatment among trade treaties created the basis for increasing commercial frictions between the United States and its trading partners once the executive branch acquired the capacity to use reciprocity as an instrument for expanding exports. The most notable example was the degradation of U.S. trade relations with Germany, beginning in 1905, which almost exploded into a tariff war but was resolved in 1907.

Beginning in the late 1890s, the German government pointed to numerous trade pacts, including the 1828 U.S.Prussia Commercial Treaty, as evidence that America accepted unconditional MFN treatment. The Germans were particularly critical of the special commercial benefits the United States accorded Switzerland in 1898, in response to the Swiss government's demand that the United States extend the same concessions granted France earlier in the year. Since an 1850 U.S.Switzerland trade treaty explicitly provided for unconditional MFN treatment, the United States decided that "both justice and honor" required meeting the Swiss claims. When Germany claimed the same treatment, however, the United States renounced the MFN clauses in the 1850 treaty.

Germany renewed its protests when a 1902 reciprocity treaty with Cuba gave the latter an exclusive rate 20 percent below the rates provided for in the Dingley tariff. Germany argued that Cuba's sovereign status required the United States to grant it commensurate reductions. The administration of President Theodore Roosevelt cheekily advanced the theory that the 1901 Platt Amendment, which forbade Cuba from entering into foreign agreements contrary to U.S. interests, rendered Cuba part of the U.S. political system, akin to a European colony. The incredulous German government threatened to retaliate with tariff revisions that targeted U.S. exports. It did so to induce the U.S. government to adopt unconditional MFN status, as Europe understood it. But powerful Republicans in Congress, including Speaker of the House Joseph Cannon and Senate Finance Committee Chair Nelson Aldrich, refused to budge. A major trade war was averted only when the U.S. and German governments concluded an executive agreement regarding a possible customs agreement. It outlined the terms of an exchange of the German conventional rate on nearly all items in return for U.S. concessions along the lines of the 20 percent cuts provided for in section 4 of the Dingley tariff.

With the introduction of a statutory minimum-maximum tariff schedule in the 1909 Payne-Aldrich tariff, U.S. trade negotiators held that the minimum rates in effect constituted unconditional MFN treatment as Europeans practiced it. Although the executive branch did not renounce conditional MFN treatment, and therefore remained technically free to alter policy, State Department officials were determined to use the minimum-maximum provisions in the act to embed the nondiscrimination principles of the Open Door policy in trade policy. Trade liberalizers in the executive branch adopted this approach to gain access to overseas markets and to attract the support of agricultural and export manufacturing interests as allies in the battle for a more liberal trade policy.

The administrative features of the Payne-Aldrich Act, including its establishment of the Tariff Board, also enabled trade agreements to be hammered out within the executive branch, independent of Congress and largely free from public scrutiny. Unfortunately for trade liberalizers, the system proved rigid in operation, because Congress successfully resisted lowering U.S. minimum rates to European levels. Conditional MFN also remained in place. The Wilson administration and the Democratic majority in Congress thus abandoned the dual-schedule tariff for unilateral rate reduction and a single schedule in the 1913 Underwood-Simmons Act. Nevertheless, the 1909 Payne-Aldrich Act contemplated and institutionalized ways of dealing with liberalizing trade that would be built upon by the 1934 Reciprocal Trade Agreements Act.

After World War I, Republican Congresses and administrations rejected reciprocity altogether and reestablished protectionism. In this context, Secretary of State Charles Evans Hughes used the equality-of-treatment clause in section 317 of the 1922 Fordney-McCumber Act to put U.S. trade policy on an unconditional MFN footing. But this failed to increase international economic cooperation, since Congress also precluded any liberalization of the tariff in the act.

The third of President Wilson's Fourteen Points included a demand for "equality of trade conditions." He recognized that nations that expected to increase exports needed to open their own markets to imports. This was especially so for America, which, Wilson hoped, would demonstrate international political and economic leadership in the postWorld War I era. In addition to reinstating protectionism, the Fordney-McCumber Act addressed the issue of access to overseas markets for U.S. exports. Officials in the State, Treasury, and Commerce departments sought flexible retaliatory authority to counter discrimination. After much wrangling, Congress authorized the president to retaliate unilaterally against foreign discrimination. In addition, it stipulated in section 317 that the Tariff Commission established in 1916 monitor discrimination and make recommendations to the president. The State Department interpreted section 317 to be in harmony with unconditional MFN treatment.

As part of a State Department policy review, William Culbertson, a member of the Tariff Commission, suggested using section 317 to negotiate a series of trade treaties to extend equality of treatment and implement unconditional MFN treatment as broadly as possible. Inclined intellectually to free trade and uninhibited flows of capital, and institutionally sensitive to allowing trade wars to disrupt political relationships, State Department economic advisers Stanley Hornbeck and Wallace McClure agreed that discrimination against U.S. goods should be monitored, but recommended against retaliation unless officials determined it to be absolutely necessary. The policy review elicited strong support for the unconditional MFN approach. State Department officials wanted to avoid the bargaining associated with conditional MFN treatment, and they viewed unconditional MFN treatment as a way of avoiding diplomatic conflict, promoting trade, and improving foreign relations, including the trade negotiation process. They pressed Secretary Hughes to initiate a new round of trade talks based on the unconditional MFN principle. Hughes sold President Warren Harding on the idea. Congress offered no opposition; most members at this time did not engage trade as an issue at the technical level. The administration went forward with the decision on unconditional MFN treatment in February 1923. Hughes announced it in a circular letter to overseas posts in August.

In justifying the decision in a note to the Senate Foreign Relations Committee, Hughes argued that conditional MFN treatment was incapable of winning equality of treatment for U.S. exports, and that what might constitute equivalent compensation was "found to be difficult or impracticable." "Reciprocal commercial arrangements," Hughes averred, "were but temporary makeshifts; they caused constant negotiation and created uncertainty." In his August circular, Hughes explained why a new series of trade pacts had to be concluded: "The enlarged productive capacity of the United States developed during the World War has increased the need for assured equality of treatment in foreign markets."

From 1923 to 1930, the State Department negotiated trade treaties with forty-three countries; twenty-one of them contained unconditional MFN clauses. Nonetheless, in the context of the financial chaos and the payments imbalances created by world war and the postwar Versailles settlement, important markets such as Canada, Britain, France, and Germany increasingly shut their doors to U.S. exports.

U.S. trade negotiators had little to offer any country that accepted unconditional MFN treatment and equal treatment for U.S. exports. The Fordney-McCumber Act raised the average tariff on dutiable items some 38 percent and on all imports to an average of almost 14 percent. This was lower than the average rate of the Dingley tariff. Yet the new tariff granted more protection than its 1897 predecessor, since Congress also instructed the executive branch to adjust duties by up to 50 percent to equalize production costs between home and foreign manufactured products. Moreover, the act redefined dumping to include any product imported at a price below the U.S. cost of production (rather than the producers' own costs). In addition, Congress allowed the president to strip MFN status from any country that discriminated against American products or dumped goods into the U.S. market. The tariff now effectively excluded all competing goods.

The punitive responses and the single-schedule tariff regime reestablished by the Fordney-McCumber Act hamstrung all State Department efforts to negotiate unconditional MFN clauses in trade agreements. Tariffs could be adjusted only to equalize production costs or punish others for uncooperative acts. Equalization applied to all nations regardless of their MFN status. Discrimination applied selectively to nations that lost MFN status for their treatment of U.S. goods. To make matters worse for trade liberalizers, Congress supplemented tariffs with selectively applied quotas: a form of protection totally at odds with the MFN principle.

U.S. trade policy under the Fordney-McCumber Act, together with congressional insistence that allies repay their war loans to the U.S. Treasury, undermined international efforts to stabilize and reconstruct the postWorld War I international system. Rather than assume the mantle of global leadership as Britain's economic power waned, the Republican administrations of Warren Harding, Calvin Coolidge, and Herbert Hoover relied on private capital flows to ameliorate the payments imbalances created by war debts and reparations. These flows ultimately proved insufficient to overcome the foreign economic policy of these administrations.

In its ongoing search for a way to liberalize trade that Congress might find politically acceptable, the State Department began thinking in terms of an approach that involved both reciprocal bargaining and unconditional MFN treatment. During the Coolidge administration, economic adviser McClure suggested as much, saying that it might pave the way for bilateral negotiations with important trading partners. McClure, a friend of fellow Tennesseean Representative Cordell Hull, worked closely with the future secretary of state to develop what would become the reciprocal trade agreements program. Both McClure and Hull preferred lowering trade barriers through bargaining rather than unilaterally reducing tariffs, which was the approach employed by the Wilson administration in the Underwood tariff. However, congressional Democrats adhered to the Wilsonian approach until the election of Franklin Roosevelt.

Congress reinforced its commitment to protectionism with its passage of the debilitating Smoot-Hawley Act in 1930. The act produced additional international economic conflict. Trading partners retaliated to protect themselves from the loss of the U.S. market, worsening relations and reinforcing the effects of global depression. The defensive reactions of trading partners, Britain and Canada in particular, demonstrated that the U.S. economy could be injured by foreign reaction. Politicians and officials recognized that trade policy could no longer be treated as an independent domestic issue. Further, when Britain failed to restore its pre-1914 position of international economic leadership following its return to the gold standard in 1925, the idea that international economy stability required American leadership began to gain support in some circles. Above all, the Smoot-Hawley Act demonstrated that the costs of protectionism were too high, prompting a turn toward a more liberal approach in trade policy, one within which all trade instruments, including unconditional MFN treatment, could serve as tools to lower trade barriers.

MFN TREATMENT IN PRACTICE, 19341974: UNCONDITIONAL MFN AS ONE INSTRUMENT OF TRADE LIBERALIZATION

The State Department under Cordell Hull moved forward with the trade liberalization program that it had championed since the nineteenth century. The 1934 Reciprocal Trade Agreements Act marked the beginning of a successful U.S. effort to liberalize trade and create a multilateral regime of commercial cooperation. The most important aspects of the RTAA were institutional. Foremost, Congress ceded to the executive branch the power to set and manage the trade agenda. Members of Congress voted to do so partially in response to the fallout from the Smoot-Hawley Act and the persistence and depth of depression. They were also persuaded by executive branch promises to compensate producers that were harmed by subsequent trade deals.

The RTAA formed the basis for the postWorld War II multilateral system that employed bilateral reciprocity to negotiate lower trade barriers and enforce fair trade norms, and used unconditional MFN treatment to spread the benefits of reciprocal bargaining. The State Department used the RTAA to promote international trade, rather than just U.S. exports, and its officials recognized that America had to lower its trade barriers. In the run-up to World War II, the State Department granted concessions on an unconditional MFN basis as part of an effort to build an alliance to counter German and Japanese aggression. The RTAA approachequality of treatment, a negotiable tariff, and executive-branch authority to negotiate agreements that would be binding without congressional ratificationwould become the framework for international cooperation under the General Agreement on Tariffs and Trade.

Many State Department officials were liberals in the nineteenth-century tradition. They linked trade discrimination to political conflict. As such, they believed in free trade, to which Britain adhered until 1932. At the same time, they appreciated the power that Congress retained over trade policy. Hull and his advisers therefore chose reciprocity as a way to both lower trade barriers and placate members of Congress who remained wedded to protection. Unconditional MFN treatment would be the tool to maximize the benefit of bilateral treaties.

After keeping trade off the agenda during his first year of office to concentrate on reviving and regulating the U.S. economy, President Franklin D. Roosevelt proposed the RTAA to Congress, selling it as a domestic recovery measure. To placate wary members of Congress, the administration proposed no changes to the 1921 Anti-Dumping Act, retained the countervailing duty provisions in section 338 of the Smoot-Hawley Act, and agreed to subject the act to reauthorization in three years. The RTAA also said nothing about dismantling protection. The State Department took it upon itself to use both reciprocity and unconditional MFN treatmentlinked for the first time in U.S. trade policyas tools of trade liberalization.

In the interests of trade liberalization and international security, State Department officials pressed for few concessions in the series of negotiations that occurred before and during World War II. This was especially the case with Europe. (In Latin America, U.S. officials threatened to refuse to negotiate reciprocal trade and to withhold Export-Import Bank credits and other financial assistance unless governments satisfied their demands to settle debts in default to U.S. bondholders, treat U.S. direct investment in a fair and equitable manner, and adopt political reforms.) Determined to reverse the ill effects of U.S. protectionism, U.S. trade negotiators offered concessions to Belgium, Britain, Switzerland, and others, while tolerating trade barriers, currency depreciation, and other actions that closed overseas markets to U.S. products.

The State Department also decided to extend unconditional MFN treatment to most third-party countries. Under the RTAA, it was unclear which countries should be eligible to receive such treatment. The department moved initially to extend concessions to countries that did not discriminate against U.S. exports. Since all of America's major trading partners continued to discriminate against U.S. products, however, the State Department deemed this approach to be impractical. It concluded that the administration should withhold benefits only when others' discrimination was flagrant. In its view, such a stance would improve relations among nations. It therefore singled out Nazi Germany for retaliatory action. In moving in this direction, the State Department departed from the bilateral approach to reciprocity for which Roosevelt campaigned in 1932 and that Congress intended in the RTAA. (Roosevelt, his "brain trust" advisers, and key cabinet officials such as Treasury Secretary Henry Morgenthau Jr. doubted that the reciprocal trade program could play the role that Hull designed for it in achieving either the security or economic goals of the administration's foreign policy. For Roosevelt, trade, like all matters of foreign economic policy, took a backseat to domestic issues.)

In terms of expanding U.S. trade, the reciprocal trade agreements concluded between 1934 and 1945 achieved limited results. But actual trade expansion was secondary to building international cooperation against the Axis threat. In arguing for extensions of the RTAA in 1937, 1940, 1943, and 1945, State Department officials were explicit about the national security role of the trade program. Moreover, the State Department became convinced that the institutional structure of the RTAA, linking reciprocity and unconditional MFN treatment, should serve as the basis for constructing a postWorld War II multilateral trade regime.

Hence, the linkage between reciprocity and unconditional MFN treatment was translated into the norms of the General Agreement on Tariffs and Trade (GATT). In the view of State Department analysts, economic autarky and fascist aggression were bound together as causes of the world war. Thus, political cooperation was possible only if economic cooperation was established. During the war, State Department officials developed a blueprint for the structure of commercial cooperation in the postwar world. The lack of cooperation during the interwar period persuaded them that economic nationalism was the root of instability in the international system and degraded relations among nations. They resolved to make nondiscrimination in trade the basis for economic cooperation, which they believed was essential to an enduring postwar peace. The International Trade Organization (ITO) would monitor commercial relations on the basis of unconditional MFN treatment. But countries would also negotiate bilaterally to both open markets and preserve their recourse to measures to protect domestic producers and social welfare policies, as the RTAA prescribed.

In 1947 the administration of Harry Truman invited countries, including Russia, to Geneva, Switzerland, to negotiate a multilateral trade agreement; twenty-four nations accepted the invitation. Although the Soviet Union opted out of the process, twenty-three countries negotiated bilaterally on a product-by-product basis. The bilateral pacts became the multilateral GATT, since every signatory enjoyed unconditional MFN treatment. The nine countries that felt they could adhere to the demands of the treaty, accounting for 80 percent of world trade, implemented the GATT on 1 January 1948.

The State Department supported a more liberal approach to trade policy than the still-protectionist Congress and the other agencies of the executive branch, most of which were solidly "New Deal" in orientation. But it recognized political reality and retained the "fair" trade elements of the Reciprocal Trade Agreements Act in its negotiations for the International Trade Organization (and the GATT, after Congress rejected the ITO over sovereignty issues). The elements of the New Deal that provided for state responsibility for economic growth and social welfare were not going to be repealed. The United States, Great Britain, and other participants wanted to retain flexibility on domestic economic policy even as they agreed to liberalize international trade. And given their expectations regarding America's position of leadership in the postwar order, U.S. architects of postwar trade policy concluded that it was America's responsibility to offer asymmetrical concessions in order to establish the trade regime in which they were interested. Thus, unconditional MFN treatment became the guiding principle of an emerging liberal regime that retained the safeguards, restrictions, and exemptions of "fair" trade. Parties to the GATT promised to consult each other when conflicts arose and to resolve differences through a dispute settlement procedure. Reciprocity would be used as an instrument of both freer and fairer trade.

The GATT governed international trade until the World Trade Organization was established on 1 January 1995. Beginning with the 1947 session in Geneva, the GATT promoted trade liberalization through a series of negotiating rounds. With the Kennedy Round (May 1964January 1967), negotiators adoptedwith some exceptionsa formula for across-the-board percentage cuts, doing away with bilateral negotiating. For this round and the 1947 Geneva parley, Congress authorized tariff reductions of up to 50 percent of existing rates. Both rounds reduced tariffs some 35 percent. In both rounds, the U.S. promptly provided concessions to its trading partners, even if, like western Europe in 1947 and Japan and many developing countries in 19641967, they lagged in reciprocating. From 1947 to 1967, six GATT rounds removed tariffs as a barrier to the U.S. market. In doing so, U.S. policymakers placed a higher priority on stabilizing the American-led anticommunist alliance and promoting the economic reconstruction of its allies than on shielding domestic producers from foreign competition.

MFN TREATMENT IN PRACTICE, 19742000: UNCONDITIONAL MFN UNDER SIEGE BUT PRESERVED

The GATT relied on discrimination and retaliation to enforce an open, multilateral trade regime. The coexistence of unconditional MFN treatment and reciprocity in the GATT gave rise to tensions among members, because disparities in liberalization among participants widened over time. Under unconditional MFN treatment, countries that lagged in opening their markets enjoyed the benefits of a free ride on the system. When the United States experienced economic downturn during the 1970s and 1980s, domestic interest groups called for redress from participants who seemed to be unfairly "gaming" the GATT. The United States seemed to be suffering within a system in which its trade negotiators ceded more to their counterparts from increasingly competitive trading partnersJapan in particularthan they received. In response, Congress resumed the activist trade-policy role from which it had retreated in 1934. Members of Congress introduced a plethora of retaliatory bills that had the potential of compromising America's commitment to unconditional MFN treatment within the GATT framework. In most instances, the actions threatened by these socalled fair, or strategic, trade measures constituted interest group efforts to push policy in a nationalistic direction. But the administrations of Presidents Gerald Ford, Jimmy Carter, Ronald Reagan, George H. W. Bush, and Bill Clinton handled them in (often illiberal) ways that kept the United States committed to the GATT.

Transparency in trade relations constituted a key principle of the GATT. Trade barriers were to be converted into tariffs, which then were to be lowered through negotiation. This approach reached its point of diminishing returns with the Kennedy Round. Nontariff barriers, which included such things as countervailing duties, technical barriers, import licensing, voluntary export restraints, and local content rules, were becoming significant obstacles to trade. The United States still adhered to the principle of nondiscrimination, but the GATT commitment to transparency was being lost.

Congress insisted that President Richard Nixon's administration use reciprocity to defend U.S. producers when it authorized the so-called fast track negotiating process for the Tokyo Round (19731979). (Under fast track, Congress had to approve or reject a trade treaty. Its members could not amend it.) Most significantly, the Tokyo Round extended the GATT to cover non-tariff barriers (NTBs). While tariff negotiations continued on the basis of unconditional MFN treatment, however, NTB bargaining proceeded on a conditional MFN basis. The Tokyo Round in practice did little to reduce these barriers or to equalize access among the American, European, and Japanese markets. U.S. consumers were soon benefiting from a flood of well-made Japanese autos and electronic consumer goods. Besieged U.S. industries, however, petitioned Congress for assistance.

The 1974 Trade Act provided the basis for relief. Section 201 of the act authorized tariffs, quotas, and other remedies to facilitate orderly adjustment to increased competition from abroad. If the U.S. International Trade Commission (ITC) determined that imports were causing "serious injury, or threat thereof " to a petitioning industry, it could order up to five years of relief. As U.S. automakers and the United Auto Workers union discovered in 1980, however, ITC approval of import relief could not be counted upon. In such cases, interested parties appealed again to Congress for help. Congress proved willing to consider measures that violated the GATT to redress sectorial trade imbalances and compensate injured firms and dislocated workers. U.S. administrations used reciprocity to derail such efforts. In the case of the U.S.Japan auto dispute, for example, the Reagan administration negotiated and secured a voluntary export restraint agreement in May 1981. This strategy kept U.S. trade policy within the GATT framework and thereby preserved the U.S. commitment overall to unconditional MFN treatment.

During the 1980s and 1990s, regional trade agreements posed another threat to the principle of nondiscrimination in U.S. trade policy. After the protracted Tokyo Round, the Reagan administration pursued regional free trade agreements even as it pushed for a new GATT round. The Bush and Clinton administrations did so as well, even after the Uruguay Round commenced in 1986. Advocates insisted that free trade agreements not only were compatible with multilateral trade liberalization, they actually promoted it, since the agreements addressed issues not handled successfully with the GATT framework (such as agriculture, services, investment, intellectual property rights, and various nontariff barriers). Nonetheless, free trade agreements with Israel in 1985 and Canada in 1987, as well as the North American Free Trade Agreement (NAFTA) with Canada and Mexico in 1992, marked a digression in U.S. trade policy from unconditional MFN treatment. At the same time, the Clinton administration remained committed to the successful conclusion of the Uruguay Round, which was completed in 1994. One hundred and eleven countries signed the pact, which established the World Trade Organization as the successor organization to the GATT.

During this period, Congress also linked MFN treatment to human rights. The Jackson-Vanik Amendment to the 1974 Trade Act, championed by Senator Henry Jackson, prohibited granting MFN treatment or Export-Import Bank credits to any "non-market economy country" that restricted emigration. Jackson was primarily concerned about the emigration of Jews from the Soviet Union. To achieve its broader aims of diplomacy, the Nixon administration wanted to extend MFN treatment and access to export credits to the Soviet Union. The Nixon administration was also interested in the emigration of Jews but preferred to accomplish it through quiet diplomacy. Administration officials believed that Jackson's amendment had some value in sending a signal to the Kremlin regarding America's concern for human rights. However, as National Security Adviser Henry Kissinger argued, the administration would likely lose any leverage it had on the emigration issue once the Jackson-Vanik Amendment became law. This proved to be the case. From 1972 to 1974, some 87,000 people emigrated from Russia. For the period 19751977, the figure fell to a little more than 44,000.

The Jackson-Vanik Amendment also ensured that human rights became intertwined with the MFN debate on China, particularly after the Tiananmen Square massacre of June 1989. In this case, the Bush and Clinton administrations successfully "de-linked" MFN treatment from human rights. In 1999 the Clinton administration secured congressional approval of "permanent normal trade relations" with China.

From their first commercial agreement in 1979, the United States and the People's Republic of China conducted trade relations on the basis of unconditional MFN treatment. China was not a member of the GATT. MFN treatment for China was subject to annual renewal by the president, per the Jackson-Vanik Amendment, and had to conform to various requirements stipulated by the 1974 Trade Act. Until the Chinese government cracked down on the student demonstrators in Tiananmen Square, the renewal of MFN treatment for China was a pro forma affair. After the massacre, in which more than a thousand protestors and bystanders were killed by soldiers, members of the House and Senate sought to condition MFN status on China's performance on human rights. In 1990, the Bush administration gathered enough Republican support in the Senate to renew unconditional MFN treatment for China. But soon thereafter, members of Congress complicated the issue by demonstrating their willingness to condition MFN status for China not only on human rights but also on a range of strategic, political, and economic issues. To meet the concerns of Congress (and businesses interested in such matters as intellectual property rights and Chinese textile imports), both the Bush and Clinton administrations adopted a policy of "constructive engagement." They used diplomacy to address human rights and other issues. At the same time, they continued to renew MFN status for the purpose of expanding trade and developing investment opportunities for U.S. corporations.

The Clinton administration initially favored linking unconditional MFN treatment to China's human rights record, but President Clinton ultimately proved unwilling to sacrifice the China market. After a protracted battle with human rights groups and members of Congress, the administration succeeding in "de-coupling" human rights from its trade policy on China in 1994. Over the next five years, Clinton administration officials worked to bring China into the newly created World Trade Organization and to put unconditional MFN treatment for China on a permanent basis. This culminated in an agreement of 15 November 1999 to make China a full member of the WTO.

The United States remained committed to unconditional MFN treatment within the WTO framework. However, by the end of the 1990s, further liberalization of trade within the WTO had stalled. Congress revoked fast track bargaining authority from the executive branch after the Uruguay Round, and the Clinton administration did not put a high priority on regaining it. The administration also declined to take a leadership position on the expansion of NAFTA to Latin America, as the Chilean and other governments hoped. With the remarkable expansion of the U.S. economy during the late 1990s, demands by Congress and interest groups for retaliation became less strident. To be sure, trade disputes continued. However, outside of MFN status for China, trade retreated in importance relative to finance as the "high-visibility" foreign economic policy issue.

BIBLIOGRAPHY

Boudreau, Donald G. "Beyond Tiananmen Square: China and the MFN Debate." World Affairs 153 (spring 1993): 140147.

Culbertson, W. S. "Commercial Treaties." In Encyclopedia of the Social Sciences. New York, 1934. Puts MFN in broad historical context.

Eckes, Alfred E., Jr. Opening America's Market: U.S. Trade Policy Since 1776. Chapel Hill, N.C., 1995. A defense of protectionism in U.S trade policy.

. "U.S. Trade History." In U.S. Trade Policy: History, Theory, and the WTO. Armonk, N.Y., 1999. An excellent overview of more than two hundred years of U.S. trade policy.

Goldstein, Judith. "Ideas, Institutions, and American Trade Policy." International Organization 42 (winter 1988): 179217. Argues that state-based actor behavior is crucial to understanding U.S. trade policy.

Gordon, Wendell C. International Trade: Goods, People, and Ideas. New York, 1965. Contains examples of both conditional and unconditional MFN provisions in trade agreements.

Haggard, Stephan. "The Institutional Foundations of Hegemony: Explaining the Reciprocal Trade Agreements Act of 1934." International Organization 42 (winter 1988): 91119. Focuses on the institutional changes in trade policy produced by the RTAA.

Hornbeck, Stanley K. The Most-Favored-Nation Clause in Commercial Treaties. Madison, Wis., 1910. A defense of conditional MFN treatment.

Lake, David A. Power, Protection, and Free Trade: International Sources of U.S. Commercial Strategy, 18871939. Ithaca, N.Y., 1988. Argues that executive branch responses to the constraints and opportunities of the international economic structure shaped policy in conjunction with congressional responses to interest-group pressures.

League of Nations Committee on Experts for Progressive Codification of International Law. "Report on the Most-Favored-Nation Clause." American Journal of International Law 20, supplement (1928).

Milner, Helen V., and David B. Yoffie. "Between Free Trade and Protectionism: Strategic Trade Policy and a Theory of Corporate Trade Demands." International Organization 43 (spring 1989): 239272.

Moore, John Bassett. "Most-Favored-Nation Clauses." Digest of International Law 5 (1906).

Ratner, Sidney. The Tariff in American History. New York, 1972. Provides useful material on the reciprocal trade agreements of the 1930s and the GATT.

Rhodes, Carolyn. "Reciprocity in Trade: The Utility of a Bargaining Strategy." International Organization 43 (spring 1989): 273299. Assesses the use of reciprocity to achieve trade liberalization within the GATT regime.

. Reciprocity, U.S. Trade Policy, and the GATT Regime. Ithaca, N.Y., 1993. Argues that instruments of trade policy, such as reciprocity and unconditional MFN treatment, can be tools of liberalization or protectionism, depending on the overall direction of policy.

Schaefer, Donald D. A. "U.S. Foreign Policies of Presidents Bush and Clinton: The Influence of China's Most Favored Nation Status upon Human Rights Issues." Social Science Journal 35 (1998): 407421.

Viner, Jacob. "The Most-Favored-Nation Clause in American Commercial Treaties." Journal of Political Economy 32 (1924). A vigorous argument against the use of conditional MFN treatment in U.S. trade policy by a University of Chicago economics professor and adviser to the Treasury Department during the Roosevelt administration.

Wang, Yangmin. "The Politics of U.S.China Economic Relations: MFN, Constructive Engagement, and the Trade Issue Proper." Asian Survey 33 (May 1993): 441462.

Wolman, Paul. Most Favored Nation: The Republican Revisionists and U.S. Tariff Policy, 19871912. Chapel Hill, N.C., 1992.

See also Dollar Diplomacy; Economic Policy and Theory; Reciprocity; Tariff Policy .

NELSON W. ALDRICH: ARDENT TRADE PROTECTIONIST

An influential Republican senator from 1881 until 1911, Nelson W. Aldrich (18411915) used his position on the Senate Finance Committeewhich he chaired from 1899 to 1911to maintain protection. Elected to the U.S. House of Representatives in 1878, Aldrich was selected in October 1881 to fill the Rhode Island seat vacated by the death of Senator Ambrose Burnside. As a member of the Finance Committee, Aldrich apprenticed under Justin Morrill of Vermont, who chaired the committee for twenty-two years, until 1898. An ardent defender of both the American System and Congress's authority over trade policy, Morrill opposed free trade, reciprocal trade agreements, and unconditional MFN treatment. When he assumed the chair of the Finance Committee, Aldrich remained steadfast to Morrill's views on trade.

Aldrich championed the position held by the Republican Party that economic nationalism promoted class harmony. By excluding competition from imports, so the argument went, a high tariff wall would promote the well-being not only of producers and workers but also of consumers. As Aldrich put it in the Congressional Record of 5 August 1909: "If we permit American industries to live by the imposition of protective duties, competition in this country will so affect prices that it will give the American consumer the best possible results." For Aldrich, the tariff was the price that overseas producers had to pay to enter the U.S. market. As such, protectionism placed the burden of generating revenue for the federal government on foreign producers and domestic consumers of imported "luxury" items.

Aldrich had a major hand in writing the McKinley (1890) and Dingley (1897) Acts, which allowed the executive branch to negotiate reciprocal trade treaties. However, he opposed the deals that administrations subsequently negotiated because they lacked equivalent exchanges of concessions. Wedded to the congressional committee system as the institutional basis for policy-making, Aldrich also fought the creation of a commission of experts to study the tariff "scientifically" and make policy recommendations. Committed to protecting the textile industries of his state, Aldrich obstructed the modest efforts of the Taft administration to reduce tariffs and sought to make what became the 1909 Payne-Aldrich Act as conservative a piece of trade legislation as possible.

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Most-Favored-Nation Principle

MOST-FAVORED-NATION PRINCIPLE

MOST-FAVORED-NATION PRINCIPLE is an agreement between two parties that each will extend to the other trading terms at least as good as those given any third country. It has been one of the fundamental objectives of American foreign policy since independence. The first expression of this principle was the conditional most-favored-nation article in the Treaty of Amity and Commerce with France of 1778, which was inserted at the request of French negotiators.

One of the more famous uses of this principle was in the Wangxia Treaty of 1844 with China, in which the United States received most-favored-nation status, thus gaining all of the development and trading rights that Britain and France had wrested from the declining Qing dynasty. Most-favored-nation status would become a standard feature of imperialist treaties with the Qing for the remainder of the nineteenth century. Indeed, the Open Door Policy, which the United States articulated at the century's end, reflected this principle, declaring that the United States would press for the same commercial and industrial rights won by Japan and the western European powers, which had carved out spheres of influence in China.

Over the years, this principle ran up against the former British system of imperial preferences and other efforts at closed trading blocs or protective trade rules that favor one industry or one geographic region over another. In the 1990s most-favored-nation status figured prominently in trade negotiations between the United States and former Soviet bloc nations. It was also an issue of contention in U.S.-Chinese relations, with a number of American interest groups and members of Congress wanting to link most-favored-nation status to Chinese improvements in human rights.

BIBLIOGRAPHY

Ghosh, Madanmohan, Carlo Perroni, and John Whalley. The Value of MFN. Cambridge, Mass.: National Bureau of Economic Research, 1998.

Snyder, Richard C. The Most-Favored-Nation Clause: An Analysis with Particular Reference to Recent Treaty Practice and Tariffs. New York: King's Crown Press, 1948.

Charles M.Dobbs

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most-favored-nation clause

most-favored-nation clause (MFN), provision in a commercial treaty binding the signatories to extend trading benefits equal to those accorded any third state. The clause ensures equal commercial opportunities, especially concerning import duties and freedom of investment. Generally reciprocal, in the late 19th and early 20th cent. unilateral MFN clauses were imposed on Asian nations by the more powerful Western countries (see Open Door). In the late 20th cent. tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization. Such a wide exchange of concessions is intended to promote free trade, although there has been criticism of the principle of equal trading opportunities on the grounds that freer trade benefits the economically strongest countries. GATT members recognized in principle that the MFN rule should be relaxed to accommodate the needs of developing countries, and the UN Conference on Trade and Development (est. 1964) has sought to extend preferential treatment to the exports of the developing countries. Another challenge to the MFN principle has been posed by regional trading groups such as the European Union, which have lowered or eliminated tariffs among the members while maintaining tariff walls between member nations and the rest of the world. In the 1990s continued MFN status for China sparked U.S. controversy because of its sales of sensitive military technology and its use of prison labor, and its MFN status was only made permanent in 2000. All of the former Soviet states, including Russia, were granted MFN status in 1992.

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