Free Trade

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FREE TRADE

FREE TRADE. The economic rationale for free trade lies in the principle that if trade is free, certain goods and services can be obtained at lower cost abroad than if domestic substitutes are produced in their place. The concept has each country producing for export those goods in which production is relatively efficient, thereby financing the import of goods that would be inefficiently produced at home. This comparative advantage in production between nations is expected to shift over time with changes in such factors as resource endowments and rates of technological advance. Free trade is therefore thought to facilitate the optimal use of economic resources: each country commands a higher level of consumption for a given level of resource use than would be otherwise possible. Advocates of tariff protection take exception to the doctrine on two fundamental bases: at times national goals other than maximized consumption must be served (for example, national defense), and the interests of specific groups do not parallel those of the nation as a whole. Thus, the history of tariffs and other barriers to free trade is a chronicle of shifting economic interests between industries and geographic areas.

Until 1808 the export of American farm and forest products to foreign markets was so profitable and imports were so cheap that there was little incentive to engage in manufacturing. Existing duties were low and designed for revenue rather than protection. War and embargo in the years 1808–1815 stimulated manufacturing (wool, cotton, iron); restoration of peace caused a flood of imports. Free trade then became a sectional issue, a strong protectionist movement developing in the middle and western states. Depression in 1819 and 1820 convinced workers that protection was necessary to save jobs from foreign competition, whereas farmers felt that building strong American industry would create higher demand and prices for farm goods. New England was divided between the manufacturing and the commercial interests, while the South solidly favored free trade because of its desire for cheap imports and fear of English retaliation against raw cotton imported from the United States.

By 1833 free-trade sentiment revived, as northern farmers, believing that young industries no longer needed protection, joined forces with John C. Calhoun and the South in an alliance that kept tariffs low until 1860. After the Civil War the protectionists controlled tariff policy for many years. Continued southern devotion to free trade and persistent, although wavering, low-tariff sentiment in the West produced only the short-lived horizontal duty reduction of 1872 and a few haphazard reductions in 1883. In the campaign of 1888 free-traders rallied around Grover Cleveland as the tariff for the first time became strictly a party issue. But the protectionists won again and passed the Tariff Act of 1890.

Popular hatred of monopoly—evidenced in the Sherman Antitrust Act of 1890—came to the support of free trade by implicating the tariff as "the mother of trusts." Cleveland won election in 1892 against the high-tariff Republicans, but the Democrats were torn over free silver and lost the opportunity to liberalize tariffs. However, continued antitrust feeling had bred such hostility to extreme protectionism that even the Republicans promised tariff reduction in the election of 1908. Sectional interests continued to thin the ranks of free-traders; the West and South demanded lower tariffs in general but supported the particular agricultural tariffs that served their interests in the Tariff Act of 1909.

Recurring economic crises, particularly the depressions of 1893–1897 and 1907–1908, further shook public confidence in the virtues of the "American system." Only the large industrial interests appeared to be consistently served by the cyclical pattern of economic growth (for example, Standard Oil's combining of small companies during depression, as indicated in the Sherman antitrust case of 1911). The height of tariffs, identified closely by the public with large industry, became a major political issue in 1912. The victorious Democrats promised reduction but held that no "legitimate" industry would be sacrificed. Although a considerable number of items were placed on the free list, rates were reduced, on an average, 10 percent only.

After World War I, with the Republicans in power, extreme protection held sway. Agriculture accepted any tariffs on farm products—although still grumbling about industrial tariffs—and the South found its former solid free-trade front broken by districts with a stake in tariffs on products of farm and factory. In the campaign of 1928 the tariff positions of the two major parties were scarcely distinguishable. Following a full year of debate in Congress, the Hawley-Smoot Tariff Act became law in 1930; the act constructed the highest tariff wall in the nation's history, and its contribution to the shrinkage of world trade and the severity of worldwide depression was considerable. Revulsion from the indiscriminate protectionism, distress with the worsening depression, and the leadership of Cordell Hull, an old-fashioned southern tariff liberal, again turned the country toward trade liberalization.

The Trade Agreements Act of 1934 and its twelve extensions through 1962 beat a steady retreat from the high-water mark of protection reached in 1930. Reacting to the severe decline in the volume of U.S. exports after 1930, the administration of Franklin D. Roosevelt conceived reciprocal trade concessions as an antidepression measure to generate recovery in export-related industries. Following World War II a political impetus was added; by opening its markets, the United States could assist the war-ravaged European economies in reconstruction and could similarly aid the development in poor nations. The economic implications of the Trade Agreements Act and its extensions were conflicting: there was a steady trend of tariff reduction, expedited after 1945 through the General Agreements on Tariffs and Trade (GATT) and the application of the unconditional most-favored-nation concept; but the reductions were tempered by a "no-injury" philosophy, adopted to minimize injury to domestic industry. Escape clauses, peril points, and national security regulations have hedged the U.S. commitment to agreed tariff reductions. The 1958 extension was notable in firmly establishing these concepts and the necessary enforcement machinery. Under the peril-point provision the U.S. tariff commission was to determine before negotiations the level to which a tariff rate could fall before seriously damaging the domestic industry; this estimate was to provide an effective limit to the authority extended negotiators. An industry experiencing severe injury from a tariff already reduced could petition for relief under the escape clause, which had appeared in U.S. trade agreements since 1943; if the U.S. Tariff Commission found sufficient injury, the concession could be withdrawn.

The Trade Expansion Act of 1962 made a significant departure from the reciprocal agreements in providing programs for alleviating injury caused by trade liberalization. Benefits and retraining for labor and special loans and tax treatment for industry were extended on the rationale of reallocating resources into more efficient uses. The reciprocal trade legislation had avoided this process by rescinding the tariff reduction when injury was inflicted. Administration of the provisions of the 1962 act has been difficult, however, because of the difficulty of distinguishing losses owing to increased imports from losses owing to the domestic industry's inefficiency. The 1962 act extended authority for sizable tariff reductions, to be negotiated through the offices of GATT during the five years following. Tariff reductions on items not excepted from this Kennedy Round of negotiations amounted to about 35 percent. As the U.S. trade balance worsened in the late 1960s, culminating in a trade deficit in 1971—the first in the twentieth century—the forces of protection threatened to reverse the forty-year trend of trade liberalization.

Throughout the 1970s, the executive branch resisted congressional initiatives to raise trade barriers. In 1980, Ronald Reagan's election to the presidency ushered in a new era of free trade in American foreign policy, one that would last for the remainder of the century and beyond. In the 1980s the Reagan Administration promoted a new round of GATT talks, and by the early 1990s the United States, Mexico, and Canada had agreed to create a continental free trade zone, known as the North American Free Trade Agreement (NAFTA).

The collapse of communism added momentum to the global trend toward free trade and free markets. During the 1990s governments across the world embraced free-trade policies, including countries that once belonged to the communist bloc, such as Russia, Poland, and China. By the early twenty-first century free trade had emerged as a cornerstone of the new global economy. Nevertheless, substantial opposition to free-trade policies remained an active force in global politics. In particular, environ-mental and labor groups condemned free trade policies on the grounds that they made it easier for multinational corporations to pollute the environment and to pay sweat-shop wages without fear of government regulation. The debate over free trade showed no signs of cooling off as the twenty-first century began.

BIBLIOGRAPHY

LaFeber, Walter. The New Empire: An Interpretation of American Expansion, 1860–1898. Ithaca, N.Y.: Cornell University Press, 1963.

Lake, David A. Power, Protection, and Free Trade: International Sources of U.S. Commercial Strategy, 1887–1939. Ithaca, N.Y.: Cornell University Press, 1988.

Milner, Helen V. Resisting Protectionism: Global Industries and the Politics of International Trade. Princeton, N.J.: Princeton University Press, 1988.

Terrill, Thomas E. The Tariff, Politics, and American Foreign Policy, 1874–1901. Westport, Conn.: Greenwood Press, 1973.

Thomas L.Edwards/a. g.