Most-Favored-Nation Principle - Mfn treatment in practice, 1887–1933: 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 unconditional—proved 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 post–Civil 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 trade–low 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 States—in 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 post–World 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 post–World 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.

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