15 September 2009

Open Trade and Foreign Policy

This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs. View the entire book (PDF, 3.26 MB).

U.S. Secretary of State Cordell Hull said in 1948 that open trade “dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war. … If we could get a freer flow of trade … freer in the sense of fewer discriminations and obstructions … so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.”

In 1948, the United States and 22 other nations signed the General Agreement on Tariffs and Trade, a set of international rules that significantly reduced tariffs and other barriers to the international flow of goods. Seven other rounds of trade negotiations followed as the GATT membership expanded, leading in 1995 to the creation of the World Trade Organization in Geneva, Switzerland, with the authority to oversee member nations’ compliance with trade agreements. The GATT process has successfully lowered tariffs on most manufactured items, stimulating a vast increase in world commerce far beyond the vision of the Bretton Woods organizers. The exception has been agricultural tariffs, which have remained relatively high because of the political strength of the farming sector in both wealthy and developing nations and the desire to safeguard essential food production.

Government subsidies and tariffs on farm products have long been politically controversial. American farmers received $16 billion in various federal subsidies in 2004. U.S. agricultural tariff rates average 12 percent, raising the price of foreign farm products by that amount overall. In the U.S. Congress, representatives from urban areas tend to criticize the tariffs as an unjust tax on consumers that isn’t necessary to support American farmers. Representatives from farm states counter that U.S. tariffs are far lower than average farm tariffs in Europe (30 percent), Japan (50 percent), and India (114 percent).

Subsidies affect farmers’ decisions about which crops to plant. U.S. wheat production has fallen, for example, as many farmers have switched production to corn used in the manufacture of ethanol as a motor fuel. The U.S. government provides a cash subsidy to ethanol blenders, which, in turn, increases the price farmers receive for supplying corn. Farm subsidies are a confrontational issue with developing nations, which have resisted pressures to open their markets further until the United States agrees to lower its support for its farmers.

The theoretical argument for free trade, made more than two centuries ago by Scottish economist Adam Smith in The Wealth of Nations, holds that all nations prosper if each concentrates on manufacturing and trading goods where it has a particular advantage: France its wine, Britain its woolens. On the flip side, for Britain to put a high tariff on French wines raises the price of all wines for British consumers.

But theory and politics began to collide in the 1960s and early 1970s when the rising manufacturing prowess of Japan and Germany began seriously to erode U.S. production in many industries, including steel, automobiles, shoes, and textiles. The advantages of expanded trade would be enjoyed across the entire population, as foreign products afford consumers new choices and, often, lower prices. The costs of trade hit much more narrowly on particular industries and their employees whose businesses slumped or failed.

The AFL-CIO, America’s largest and most influential labor organization, had initially supported the postwar consensus on trade expansion. But it changed direction in 1970. The threat to its union members from the spread of technology, the escalating flow of U.S. investments into foreign businesses, and unfair trade practices by foreign governments could no longer be ignored, said its chief lobbyist, Andrew Biemiller.

The greatest challenge to the United States in trade in the 1980s and early 1990s came from Japan. As the Japanese rebuilt from World War II, they steadily created an array of export-focused industries with world-class technologies and efficiencies. In steel, automobiles, consumer electronics, and semiconductors, Japan’s successes were built on a cohesive cultural commitment to quality. But Japan’s critics argued that its growing trade advantage also rested on unfair trade practices that restricted competing imports from the United States and other rivals, giving Japanese firms a safe haven in which to grow.