Most-Favored-Nation Principle - Mfn treatment in practice, 1934–1974: unconditional mfn as one instrument of trade liberalization



The State Department under Cordell Hull moved forward with the trade liberalization program that it had championed since the nineteenth century. The 1934 Reciprocal Trade Agreements Act marked the beginning of a successful U.S. effort to liberalize trade and create a multilateral regime of commercial cooperation. The most important aspects of the RTAA were institutional. Foremost, Congress ceded to the executive branch the power to set and manage the trade agenda. Members of Congress voted to do so partially in response to the fallout from the Smoot-Hawley Act and the persistence and depth of depression. They were also persuaded by executive branch promises to compensate producers that were harmed by subsequent trade deals.

The RTAA formed the basis for the post–World War II multilateral system that employed bilateral reciprocity to negotiate lower trade barriers and enforce fair trade norms, and used unconditional MFN treatment to spread the benefits of reciprocal bargaining. The State Department used the RTAA to promote international trade, rather than just U.S. exports, and its officials recognized that America had to lower its trade barriers. In the run-up to World War II, the State Department granted concessions on an unconditional MFN basis as part of an effort to build an alliance to counter German and Japanese aggression. The RTAA approach—equality of treatment, a negotiable tariff, and executive-branch authority to negotiate agreements that would be binding without congressional ratification—would become the framework for international cooperation under the General Agreement on Tariffs and Trade.

Many State Department officials were liberals in the nineteenth-century tradition. They linked trade discrimination to political conflict. As such, they believed in free trade, to which Britain adhered until 1932. At the same time, they appreciated the power that Congress retained over trade policy. Hull and his advisers therefore chose reciprocity as a way to both lower trade barriers and placate members of Congress who remained wedded to protection. Unconditional MFN treatment would be the tool to maximize the benefit of bilateral treaties.

After keeping trade off the agenda during his first year of office to concentrate on reviving and regulating the U.S. economy, President Franklin D. Roosevelt proposed the RTAA to Congress, selling it as a domestic recovery measure. To placate wary members of Congress, the administration proposed no changes to the 1921 Anti-Dumping Act, retained the countervailing duty provisions in section 338 of the Smoot-Hawley Act, and agreed to subject the act to reauthorization in three years. The RTAA also said nothing about dismantling protection. The State Department took it upon itself to use both reciprocity and unconditional MFN treatment—linked for the first time in U.S. trade policy—as tools of trade liberalization.

In the interests of trade liberalization and international security, State Department officials pressed for few concessions in the series of negotiations that occurred before and during World War II. This was especially the case with Europe. (In Latin America, U.S. officials threatened to refuse to negotiate reciprocal trade and to withhold Export-Import Bank credits and other financial assistance unless governments satisfied their demands to settle debts in default to U.S. bondholders, treat U.S. direct investment in a fair and equitable manner, and adopt political reforms.) Determined to reverse the ill effects of U.S. protectionism, U.S. trade negotiators offered concessions to Belgium, Britain, Switzerland, and others, while tolerating trade barriers, currency depreciation, and other actions that closed overseas markets to U.S. products.

The State Department also decided to extend unconditional MFN treatment to most third-party countries. Under the RTAA, it was unclear which countries should be eligible to receive such treatment. The department moved initially to extend concessions to countries that did not discriminate against U.S. exports. Since all of America's major trading partners continued to discriminate against U.S. products, however, the State Department deemed this approach to be impractical. It concluded that the administration should withhold benefits only when others' discrimination was flagrant. In its view, such a stance would improve relations among nations. It therefore singled out Nazi Germany for retaliatory action. In moving in this direction, the State Department departed from the bilateral approach to reciprocity for which Roosevelt campaigned in 1932 and that Congress intended in the RTAA. (Roosevelt, his "brain trust" advisers, and key cabinet officials such as Treasury Secretary Henry Morgenthau Jr. doubted that the reciprocal trade program could play the role that Hull designed for it in achieving either the security or economic goals of the administration's foreign policy. For Roosevelt, trade, like all matters of foreign economic policy, took a backseat to domestic issues.)

In terms of expanding U.S. trade, the reciprocal trade agreements concluded between 1934 and 1945 achieved limited results. But actual trade expansion was secondary to building international cooperation against the Axis threat. In arguing for extensions of the RTAA in 1937, 1940, 1943, and 1945, State Department officials were explicit about the national security role of the trade program. Moreover, the State Department became convinced that the institutional structure of the RTAA, linking reciprocity and unconditional MFN treatment, should serve as the basis for constructing a post–World War II multilateral trade regime.

Hence, the linkage between reciprocity and unconditional MFN treatment was translated into the norms of the General Agreement on Tariffs and Trade (GATT). In the view of State Department analysts, economic autarky and fascist aggression were bound together as causes of the world war. Thus, political cooperation was possible only if economic cooperation was established. During the war, State Department officials developed a blueprint for the structure of commercial cooperation in the postwar world. The lack of cooperation during the interwar period persuaded them that economic nationalism was the root of instability in the international system and degraded relations among nations. They resolved to make nondiscrimination in trade the basis for economic cooperation, which they believed was essential to an enduring postwar peace. The International Trade Organization (ITO) would monitor commercial relations on the basis of unconditional MFN treatment. But countries would also negotiate bilaterally to both open markets and preserve their recourse to measures to protect domestic producers and social welfare policies, as the RTAA prescribed.

In 1947 the administration of Harry Truman invited countries, including Russia, to Geneva, Switzerland, to negotiate a multilateral trade agreement; twenty-four nations accepted the invitation. Although the Soviet Union opted out of the process, twenty-three countries negotiated bilaterally on a product-by-product basis. The bilateral pacts became the multilateral GATT, since every signatory enjoyed unconditional MFN treatment. The nine countries that felt they could adhere to the demands of the treaty, accounting for 80 percent of world trade, implemented the GATT on 1 January 1948.

The State Department supported a more liberal approach to trade policy than the still-protectionist Congress and the other agencies of the executive branch, most of which were solidly "New Deal" in orientation. But it recognized political reality and retained the "fair" trade elements of the Reciprocal Trade Agreements Act in its negotiations for the International Trade Organization (and the GATT, after Congress rejected the ITO over sovereignty issues). The elements of the New Deal that provided for state responsibility for economic growth and social welfare were not going to be repealed. The United States, Great Britain, and other participants wanted to retain flexibility on domestic economic policy even as they agreed to liberalize international trade. And given their expectations regarding America's position of leadership in the postwar order, U.S. architects of postwar trade policy concluded that it was America's responsibility to offer asymmetrical concessions in order to establish the trade regime in which they were interested. Thus, unconditional MFN treatment became the guiding principle of an emerging liberal regime that retained the safeguards, restrictions, and exemptions of "fair" trade. Parties to the GATT promised to consult each other when conflicts arose and to resolve differences through a dispute settlement procedure. Reciprocity would be used as an instrument of both freer and fairer trade.

The GATT governed international trade until the World Trade Organization was established on 1 January 1995. Beginning with the 1947 session in Geneva, the GATT promoted trade liberalization through a series of negotiating rounds. With the Kennedy Round (May 1964–January 1967), negotiators adopted—with some exceptions—a formula for across-the-board percentage cuts, doing away with bilateral negotiating. For this round and the 1947 Geneva parley, Congress authorized tariff reductions of up to 50 percent of existing rates. Both rounds reduced tariffs some 35 percent. In both rounds, the U.S. promptly provided concessions to its trading partners, even if, like western Europe in 1947 and Japan and many developing countries in 1964–1967, they lagged in reciprocating. From 1947 to 1967, six GATT rounds removed tariffs as a barrier to the U.S. market. In doing so, U.S. policymakers placed a higher priority on stabilizing the American-led anticommunist alliance and promoting the economic reconstruction of its allies than on shielding domestic producers from foreign competition.



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