Most-Favored-Nation Principle - Mfn treatment in practice, 1776–1887: 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 others—Canada, Latin America, and Asia—U.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 treaty—in this case the 1782 treaty with the Netherlands—failed 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 1831—acceding to a request from Secretary of State Martin Van Buren—did the United States grant France the commercial privileges it sought.

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