Free Trade (Issue)

views updated

FREE TRADE (ISSUE)

Free trade was arguably one of the founding principles of the United States. The colonies grew up under the Mercantilist system of international commercial competition between the great trading nations of the time: the Dutch, the French, and the English. (By the eighteenth century Spain was already in decline as a trading nation.) The role of the colonies in a Mercantilist economy was to provide staple goods— agricultural commodities or raw materials like cotton—for the mother country; a market for finished goods produced by the mother country; and a tax base to help pay for the administrative and military costs of imperialism. Mercantilism, as practiced by the main commercial nations of Europe, required government granting of monopolies, government checking for "quality control" in the colonies' commercial products, government stipulation of trade routes, and government imposition of tariffs (import taxes).

Mercantilism was the opposite of the free trade system advocated by economist Adam Smith in the late eighteenth century. Adam Smith, in his brilliant summary of the free trade system, The Wealth of Nations (1776), argued that the government only got in the way of wealth creation under a capitalist economy. Much of what Smith said was true, but the inertia of government policy steered the colonial policy of the British Parliament in the direction of greater government intervention and regulation of the economy. The Navigation Acts of the late seventeenth century had already required the American merchant marine to channel its trade with Europe through English ports, where the goods were taxed.

After the exhausting Seven Years War (1754–1763), the Board of Trade in victorious England attempted to spread the costs the conflict among the colonies by taxing everything from sugar to stamps. It was this internal system of taxation that rankled the American commercial and consuming classes and moved the country in the direction of Revolution. But after the colonists won the revolution one of the first pieces of legislation to be passed by the first Congress in 1789 was a tariff act whose purpose was to raise revenue.

The debate between free trade or protectionism became one of the most contentious and long-standing issues in the politics in the new republic. It was central to the argument between the Federalists and the Republicans over economic policy. Alexander Hamilton (1755–1804) held an American mercantilist position— promoting, in his Report on Manufactures (1791), a policy of protective tariffs and federal subsidies to foster a domestic manufacturing base for the U.S. economy. James Madison (1751–1836) and Thomas Jefferson (1743–1826), who represented the dominant agricultural side of the economy, attacked Hamilton's farsighted reforms, arguing that any measure which increased the power of the central government would not be in the national interest.

Over the next century the leaders in the U.S. government espoused global free trade in principle, but in practice they raised trade barriers to protect import-sensitive sectors of the economy. Tariffs became an integral part of the conflict between the North and South that led to the American Civil War (1861–1865). In 1828 the Tariff of Abominations placed tariffs on almost every imaginable manufactured good. Southern politicians feared and resented the tariffs because they raised prices for goods that the South needed, and displayed the growing political power of the North—a development the South feared because it seemed to indicate a more powerful might impose further restrictions on slavery.

As the U.S. economy became more productive it encountered the problem of over-production. This meant that the domestic market could not absorb the goods that industry and agriculture were producing. The obvious solution was to encourage trade with the markets of other countries. But this could not be accomplished if the United States was maintaining high tariffs keeping other countries from penetrating the its market. Potential trading partners would simply raise their own tariff walls and foreign trade would wither. This became clear in 1930, early in the Great Depression (1929–1939). The agricultural sector of the U.S. economy had been in a depression for the better part of a decade when President Herbert Hoover (1929–1933) attempted to protect U.S. farmers from international competition through the Smoot-Hawley Tariff. Passed in 1930, the Smoot-Hawley Tariff raised the protective barrier to an average of 53 percent of the commodity price—an unheard of level. Hoover had hoped the bill would convince the commodity exchanges to buy domestic agricultural products. Instead, foreign governments retaliated with higher tariffs and quotas of their own. Foreign governments saw Smoot-Hawley as a hostile act, yet another symbol of U.S. isolationism. It provoked a global trade war, which led to a fall in the volume of international trade and resulted in national economies plummeting into a worldwide depression. Scholars estimate that, largely as a result of Smoot-Hawley, the value of world trade in 1933 was one-third what it was in 1929. This demonstrated the perils of protectionism and the virtue of free trade.

Hoover's successor to the presidency, Franklin D. Roosevelt (1933–1945), marked a turning point in U.S. trade policy. With the encouragement of the Secretary of State, Cordell Hull, Roosevelt pushed the Reciprocal Trade Agreements Act of 1934. For the first time in history the executive branch was given authority to reduce tariffs up to fifty percent if the other country reciprocated. Also for the first time, as a step in the direction of expanding global production and employment, the government engaged in continual bilateral negotiations to reduce trade barriers. U.S. trade negotiators signed about twenty-five bilateral trade agreements by the early 1940s. Despite the disruption of trade relations by World War II (1939–1945) the Roosevelt administration had begun the process of trade liberalization that continued with the United States serving as the dominant postwar global economic power.

By 1950 the United States had implemented a trade policy which favored Western Europe and Japan, with massive financial assistance to rebuild their war-torn economies. In the hope of integrating industrialized democracies into a stable and peaceful international economic order the United States gave Western Europe and Japan permission to protect their rebuilt industries with high tariffs against U.S. goods. The United States supported regional economic cooperation among Western European countries even though they maintained protective tariffs against U.S. exports. This free trade umbrella evolved into the European Economic Community and, eventually, in the 1990s, into the European Union. Meanwhile, successive U.S. administrations used trade policy as a foreign policy tool to contain the expansion of communism. Communist countries were excluded from the "free world's" trading system.

In the 1960s the John F. Kennedy (1961–1963) administration developed a plan to create a more integrated Atlantic Community. Using the concept of "trade or fade," the Kennedy administration pushed for the passage of the Trade Expansion Act of 1962, which authorized reciprocal across-the-board tariff cuts of up to fifty percent. It also authorized negotiations of total tariff elimination on a reciprocal basis when the United States and European Economic Community (EEC) made up at least eighty percent of world trade for a product. As a result, the Europeans and the United States signed an agreement that was the largest round of tariff cuts in history, about thirty-five percent globally.

The 1970s brought a new phase of international economic relations, with U.S. competitiveness decreasing despite the nation's continued political and military world hegemony. Observers expressed doubts about the soundness of a liberal trade policy as the nation's trade surplus continued to diminish. In 1971 the most powerful labor organizations in the United States, the American Federation of Labor-Congress of Industrial Organization (AFL-CIO), adopted a protectionist stance. The labor movement was losing members in droves as early as the 1960s due to deindustrialization, which business analysts attributed to the unwillingness of government policymakers to protect American industry from rising imports and increased overseas investments by U.S. corporations.

The pendulum swung back towards protectionism under President Richard M. Nixon (1969–1974). The Nixon administration brought protectionism back in full swing with the announcement of the New Economic Policy in 1971, which imposed a ten percent surcharge on all import duties and terminated the U.S. obligation to convert dollars held by foreign banks into gold at a fixed price. But the free-trade forces in Congress passed the Trade Act of 1974, which authorized the president to reduce tariffs.

The Trade Act of 1974 had two important and seemingly contradictory legacies. One was the completion of a Tokyo round of multilateral trade negotiations. Marking the decline of unilateral U.S. economic dominance, the industrialized nations indicated their intention to help the economies of less developed countries by authorizing "more favorable treatment" to these economies. Among other things, this meant facilitating increased investment in low wage economies.

Second, the Trade Act of 1974 gave more protection to U.S. interests desiring import relief, mostly from Japan and the newly industrializing nations of Korea, Singapore, Taiwan, and Hong Kong. The United States and the EEC practiced "the new protectionism," reaching a compromise between the protectionism of the 1930s and the internationalist trade liberalization of the 1960s.

During the 1980s Reaganomics had a substantive impact on U.S. trade policy. The Ronald Reagan (1981–1989) administration reduced taxes, brought about a rising budget deficit, and allowed the largest trade deficit in the nation's history. With the continued appreciation of the U.S. dollar many sectors of U.S. industry and agriculture were unable to compete in the international market.

In response, the Reagan administration attempted to increase exports rather than reduce imports. The United States introduced the policy of "reciprocity," a rejection of the U.S. postwar policy of ignoring what the administration considered other countries' unfair trade barriers. Reagan announced in 1985 that he would not "stand by and watch U.S. businesses fail because of unfair trading practices abroad." When other nations were unwilling to "voluntarily" reduce their trade barriers the United States threatened retaliation as it did with Japan and China in 1995.

In the 1990s the successive George Bush (1989–1993) and William Clinton (1993—) administrations concluded negotiations for the North American Free Trade Agreement, an historic accord establishing a free trade block between the United States, Canada, and Mexico. Even though the United States carved out a free trade system on the North American continent, it applied selective import restrictions for the rest of the world. While proclaiming its adherence to free trade policies the United States more often than not instituted protections against selected imports that undermined domestic industrial development. Thus, the United States has continually maintained a complicated and contradictory relationship between protectionism and free trade internationalism throughout its history.

See also: De-industrialization, Foreign Investment in the United States, Foreign Investment of U.S. Companies Abroad, Mercantilism, Protectionism, Report on Manufactures, Smoot-Hawley Tariff, Tariff