Trade Policy

Benjamin Franklin once said, “No nation was ever ruined by trade.” As America’s most savvy commerce expert and the man who negotiated the nation’s first commercial agreement, Franklin possessed the wisdom to render such a judgment. He had observed his land’s trade policies under three distinct governments and gained insights from their successes and failures. Throughout the centuries after his passing, the United States has continued to embrace the spirit—if not always the practice—of his philosophy concerning the goodness of trade.

Trade Policy and the Colonial Experience

As feudalism declined in Europe in the period after the Renaissance, the ideology of mercantilism quickly replaced it. Striving for economic self-sufficiency and a favorable balance of trade through the influx of bullion and the establishment of overseas colonies, most of the European great powers allowed their colonies little freedom in matters of foreign trade. England and its colonies proved an exception. Civil and international wars as well as haphazard colonization initially left England’s politicians with little time for or interest in regulating the trade of the British colonies. Although American colonists, like all British subjects, were barred from challenging the East India Company’s monopoly on trade with Asia, no legal restrictions prevented them from trading with the French West Indies, the Dutch West Indies, the British West Indies, or the Spanish West Indies. Legal barriers prevented the colonists from conducting trade with adversarial nations, but these restrictions seldom proved effective. In fact, much of the currency circulating in the American colonies came from trade with forbidden areas, with the tacit consent of many royal customs officers.

The 12 years between 1660 and 1672 saw the first etchings of a British trade policy in the American colonies as Parliament passed the Acts of Trade and Navigation. Reflecting the dominant mercantilist ideology in that era, the acts created a list of enumerated articles legally traded only with Britain. Initially, the enumerated goods included tobacco, sugar, and cotton, but between 1705 and 1722, Parliament expanded the list to include rice, molasses, furs, and naval stores. The enumerated articles list continued to expand until the beginning of the American Revolution, at which time salt fish was the only significant nonenumerated good.

Such laws did not prevent America’s trade relations with the Indian tribes to the west. These tribes served as some of the earliest trading partners of the American colonists, and regular trade became established throughout the sixteenth and seventeenth centuries. The Narragansett Indians in particular prized European-style manufactures and tools for their utility, superior design, and value as status symbols. The Narragansetts initially exchanged furs for the goods. Such trade proved lucrative for both sides while furs maintained their tremendous popularity in Europe, but many tribes found themselves stuck with an unfavorable balance of trade when the value of their furs plummeted but their dependence on European goods remained steady. Other tribes traded heavily with Massachusetts colonists for firearms, ammunition, and alcohol both before and after the colony passed a law in 1633 that fixed the penalty for selling arms to Indians at £10 per gun, £5 for powder, and 40s. for shot.

The outbreak of King Philip’s War (1675-1676) between colonists and Indians drastically changed the nature of trade with the native peoples. Colonial leaders, desperate for a means of generating revenue to fill the coffers emptied by the war, began to tacitly permit the practice of selling captured Indians into foreign slavery in 1675. At first, this slave trade satisfied colonial leaders’ needs; the market rate for captured natives averaged £3 per Indian, and Massachusetts’s colonists alone obtained a remarkable £387.13 for 188 Indian slaves sold to foreigners. Even Indians living peaceably in colonial hamlets often found themselves “captured” by their colonist neighbors and sold into slavery. Although never fully legal, the practice of selling Indians into slavery ceased only as a result of market forces: As foreigners heard New Englanders’ allegations that the Indians of King Philip’s War were “subtle, bloody, and dangerous,” they feared the risk of owning them; ultimately, Indian slaves became almost entirely unmarketable.

Although the American colonies eventually could not trade in Indian slaves, the African slave market persisted throughout the colonial period. American ships obtained West Africans, and shipmasters sold them as slaves in the West Indies. With the profits from their cargo, the shipmasters purchased molasses and sold it upon their return to New England. New Englanders converted this molasses into the rum that was used to purchase more slaves in the West African market, thus continuing the triangular trade. By 1750 half of the 340 ships in Newport, Rhode Island, were engaged in the slave trade.

To understand the potential magnitude of this trade, it should be noted that in 1750, Massachusetts alone contained 63 rum distilleries producing 12,500 hogsheads (757,500 gallons) of rum. The cost of a man in West Africa equaled 115 gallons of rum. The market for rum proved so vast that, in 1752, a Yankee captain who wanted to fill his sloop with rum before traveling to West Africa five weeks in the future was told by his agent that the demand for rum so exceeded its supply that it would be at least three months before the liquor would be available. The British colonists’ rum choked out their French competitors’ alcoholic products in West Africa.

The end of the Seven Years’ War between the French and the British forced England to reconsider its treatment of the American colonies in terms of their foreign trade. The war had depleted the royal treasury, and the colonies had done little to help out financially. Parliament began to regulate strictly America’s trade. It tightened customs collections, which had previously been considered especially lax, and found long lists of items in the Acts of Trade and Navigation that could produce revenue for the Crown. Parliament also ruled that American exports to the European continent first had to be cleared through a British port, which swelled shipping costs beyond any hope for profit.

Ironically, perhaps the worst blow to American trade actually came from a lowering of tax rates. The import tax on non-English molasses had previously stood at 6d. per gallon, but customs officers had always collected a much lower rate. Parliament cut the official rate to 3d. per gallon on paper but warned of strict enforcement—and this combination of events drove the taxes to twice their previous rate in practice. All this effectively restricted molasses imports to that obtained from the British West Indies alone. Cash reserves melted away, and the export market slowed dramatically. The restrictive trade acts became collectively known as the Sugar Act.

Parliament followed the Sugar Act with another tax, the Stamp Act, which called for a duty on a variety of paper items in the colonies. Opposition to the Stamp Act flared among the colonists, who resented the fact that Parliament had not recognized their objections to the new tax. Further, after the implementation of the Sugar Act, many colonists had already begun to reject the theoretical notions of British sovereignty over the colonies. The Stamp Act hastened the spread of such ideas.

On the eve of the Revolution, in protest against the Sugar Act and other restrictive trade acts against the colonies, 900 American merchants agreed to boycott British imports until Parliament repealed the Stamp and Sugar Acts. Scared

British merchants forced an irate Parliament to take action, and by 1766 the Stamp Act became void and the molasses tax fell to insignificant levels. However, the colonists remained angered over Prime Minister William Pitt’s requirement that all colonial exports had to pass through British ports, and anger turned into outrage over a new order that the New England colonies could only trade with England or the British West Indies. Then, in 1773, Parliament noticed that the popularity in the colonies of imported tea from Britain presented an opportunity for revenue growth. Parliament levied a tariff on tea imports, incorrectly assuming that the colonists would not mind the duty because it allowed the price of British tea to remain at levels below those of smuggled Dutch tea. Opposition to this act proved overwhelming and resulted in the Boston Tea Party as well as other forms of opposition that made a clash between Britain and its American colonies inevitable.

Trade Policy from Independence to 1815

Early on, the federal government took a lax attitude toward trade regulation. The Articles of Confederation, operational from 1781 until 1789, forbade Congress from concluding any commercial treaty that would limit the states’ rights to customs duties. In effect, Congress avoided rendering decisions on foreign trade policy matters. Foreign nations wishing to conduct commerce with the former American colonies now found that they had to negotiate individual trade treaties with each of the newly empowered American states, a process that proved cumbersome for foreigners and discouraged international trade. In 1789 the ratification of the Constitution drastically changed the direction that the Articles of Confederation had set for America’s trade policy. The Constitution clearly permitted Congress to levy and collect taxes, and the first Congress quickly imposed a customs tariff to collect revenue for the fledgling government.

In the 1790s the U.S. economy boomed, and foreign trade became a source of American optimism. By this decade Virginia and the Carolinas recovered their prewar volume of exports in tobacco, naval stores, and rice. Additionally, a poor harvest in France provided a favorable grain market for the middle states. England demonstrated its willingness to become an American rice and tobacco marketplace as trade between the two nations flourished. Restless Jamaican and Barbadian citizens aided American shipmasters as they smuggled goods onto those two islands. No longer forbidden to trade with Asia by the monopoly powers of the British East India Company, northern shipowners participated in a booming trade with Calcutta, India, and Canton, China. In 1789 America conducted more trade in these two cities than any other nation save for Britain.

As foreign trade became increasingly important to the new nation, Treasury Secretary Alexander Hamilton issued the “Report on Privileges and Restrictions on the Commerce of the United States in Foreign Countries” to detail America’s current foreign trade relationships and proffer to Congress a trade policy. At this time, the largest U.S. exports were bread-stuffs, tobacco, rice, and wood. Great Britain purchased more American exports than any other nation, taking in approximately twice as many American goods as French items and more than four times as many products as Spain or Portugal. However, America’s imports from these nations lacked proportion with its exports; the U.S. import relationship with Great Britain rose to 7 times as much as that with France and 50 times as much as that with Spain (see Tables 1 and 2).

Table I Exports to various nations, 1789-1790

Table 2 Imports from various nations, 1789-1790

The “Report on Privileges” showed that American firms faced barriers to trading with European nations and especially with their colonies. These countries imposed heavy barriers to trade in Europe and prohibited much of America’s commerce with their colonies. The Jefferson administration’s recommendations to remedy this situation included promoting free trade through friendly agreements or, if necessary, by imposing countervailing tariffs and barriers against these countries.

Jefferson removed the excise tax on distilled liquors to make them more affordable relative to imports, but this action had the undesirable consequence of making the federal government even more dependent on tariff revenues. As aggressive European powers in the early nineteenth century continued to discriminate against American commerce and violate U.S. claims to neutral commercial rights, Jefferson and his successor, James Madison, both experimented with trade sanctions, including embargoes and nonintercourse, to remedy the problem. (The nonintercourse sanction meant that America would not trade with England or France but would trade with everyone else. Also, America would resume trade with the first of these two countries to promise to respect America’s rights as a nation, and then it would declare war on the other country.) However, the federal government’s dependence on customs income and the subsequent decline in foreign trade before the War of 1812 caused national leaders to resort to bolder measures for the restoration of foreign trade and neutral rights.

Trade Policy from 1815 to the Civil War

The Anglo-American Commercial Treaty of 1815 ended the British policy of discriminating against U.S. ships in British markets. This accursed barrier removed, the United States could return to the course of expanding foreign trade that its leaders had pursued before the war. Thus, President Madison shocked the nation when he rallied for a protective tariff in February 1815.

American foreign trade policy began to shift markedly from its free trade leanings before the War of 1812 to the origins of the American System in the years immediately after it. A national consensus emerged that demanded the development of a manufacturing base diverse enough to secure American independence from foreign military and trade conflicts. As long as mercantilist systems prevailed throughout the world, the leaders of the United States in this era believed that the nation had to pursue a similar policy.

The Democratic Party promoted a higher tariff policy to protect and facilitate American manufacturing. Henry Clay and John C. Calhoun, congressional leaders in the years after the War of 1812, also pressed for heavy protective tariffs for manufactured goods, even though both men represented states that surely would have benefited from increased foreign trade. Politicians viewed the tariff not as a device for overcharging American consumers in the short term but instead as a means of stimulating investment in the United States and reaping the full benefits of production and consumption at home. That tariffs during this era also provided the government with a steady stream of revenue must have been viewed as a boon to such politicians.

In 1816, as a result of these and other arguments in favor of trade restrictions, Congress passed the nation’s first protective tariff. Duties of 30 percent on iron products and 25 percent on cotton and woolen goods were set in place. President James Monroe advocated broad tariff increases in his message to Congress in 1822, and Henry Clay also helped to persuade Congress to raise tariffs again in 1824. Then, the Tariff Act of 1828, also known as the Tariff of Abominations, raised tariffs to their highest rates in American history. Under this act, average rates on durable goods hovered around 61.7 percent.

The Tariff of Abominations opened up a debate between advocates of free trade and proponents of protectionism that would continue throughout the century. The South Carolina nullification crisis induced Clay to engineer a tariff reduction in 1833 that cut tariff rates to 20 percent over ten years. This tariff deviated from the hitherto dominant protectionist philosophy, but the depression of 1837 caused a swing back to a more protective tariff in 1842. In the 40 years from 1821 to 1861, the high-tariff position generally dominated that of free trade.

Nevertheless, in the decades between the War of 1812 and the Civil War, both exports and imports flourished despite the high tariffs. Cotton exports soared 1,300 percent, and tobacco exports doubled. At the same time, the expectation that tariffs would stimulate internal investment came to fruition as private investment in textiles and other import-competing industries increased greatly.

A greater exporting prowess in the South and a changing sentiment toward lower tariffs in the 1840s induced Democrats to shift their party position in favor of tariffs for revenue purposes only, a position close to the free trade stance in the 1800s. In 1854 Democrats negotiated a Canadian reciprocity treaty that allowed for limited free trade. However, because that treaty covered only raw materials, Canada increased its import duties on U.S. manufactures, and American fishing and lumber industries suffered. Democrats also obtained highly biased treaties that provided Americans with virtually unlimited trading privileges in the nations of Japan and China as well as in the Middle East and Africa.

Thus, the debate over tariffs and free trade also served to divide the nation between the free trade, agrarian South and the protectionist, manufacture-driven North. The last president elected before the outbreak of the Civil War, Abraham Lincoln, advocated a high tariff. He believed that free trade would inevitably lead to low wages and financial ruin. After the Civil War began, Secretary of the Treasury Salmon Chase encouraged Congress to double customs duties to pay for the expense of the war.

Trade Policy from the Civil War to World War I

Immediately after the Civil War, the United States experienced a tremendous economic expansion that again changed the nation’s attitude toward foreign trade. Finished manufactures, which made up half of all imports before the Civil War, fell to less than a third of all imports 20 years later. American exports became increasingly prevalent in the world markets. The people were convinced that selling, buying, and investing in foreign markets would prove crucial to the economic wealth and development of the nation. More specifically, Americans felt that overproduction and unemployment, which became all too familiar during the severe depressions of the 1890s, could be prevented by opening up foreign markets to American agricultural and manufacturing surpluses. Foreign commerce became a symbol of national power, the navy and the foreign service industry expanded to protect business interests, and citizens called for an imperialist and activist foreign policy.

Latin America became fertile soil for businesses seeking to exploit the desire of Americans for greater foreign trade. Bananas were especially popular at home after the Civil War, and entrepreneurs found Latin America to have ideal growing conditions for that crop. Although most were never legally American colonies, the nations of Central America, South America, and the Caribbean kowtowed to extremely powerful businesses backed by the American government. Companies such as United Fruit and Standard Fruit negotiated land concessions, tax exemptions, the use of national resources, and the free import of numerous products with host governments. These companies also imported their own labor forces, constructed company towns, and built the entire infrastructure for modern communities in the areas that they dominated.

Soon, the United States had acquired an informal empire in this region, based on economic and political control rather than colonial annexation. American companies controlled the tariff revenues, budgets, foreign debts, and internal investments of a plethora of Latin American countries. Although bananas and coffee often would account for 80 percent of the exports from Central American countries at the time, U.S. conglomerates owned almost all of the concession taxes and import rights on these products. This Central American trade became so important that in 1913, when the Senate Finance Committee debated the proposed Underwood-Simmons Tariff, it found that a meager $.05 tariff on bananas would generate $1 million a year for the federal government. However, the public backlash against taxing these Central American imports proved so strong that Congress removed the banana tariff from the tariff bill.

America’s imperial experience in Asia lacked the power that it had in Latin America. England became a prospective colonizer of China long before the United States had the capacity to dominate the region, and by the late nineteenth century, most European empires had carved a sphere of influence for themselves in China, to the exclusion of U.S. interests. Although ambitious American traders profited greatly as opium-peddling middlemen between the warring Chinese and English in the mid-eighteenth century, legitimate American businesses saw that they had been shut out of China in the years following the Civil War. To combat this combination of barriers, President William McKinley’s expansionist secretary of state, John Hay, issued the first “Open Door note,” which committed America to free trade in Asia and urged all European nations to follow suit.

Hay feared that China’s antiforeigner Boxer Rebellion of 1900 would give foreign powers a reason to overturn the Open Door notes and strengthen their spheres of influence in China, so the United States justified sending military forces to China under the Open Door policy. Later, as Russia and Japan fought the Russo-Japanese War for Chinese territorial conquest, President Theodore Roosevelt feared that the belligerents would disrupt American commerce in China. Roosevelt used the Open Door notes as motivation to bring the warring parties to the peace table.

In 1909 Roosevelt’s successor, President William Howard Taft, supplemented the Open Door notes with the policy of “dollar diplomacy,” which increased U.S. trade abroad by supporting American enterprises and investments in China. Also in 1909 Japan and Russia violated the Open Door policy without U.S. retaliation, and U.S. commercial enterprises began to reduce their investment in China. By 1913 President Woodrow Wilson’s preoccupation with isolationism and the European conflict caused him to abandon the Open Door policy.

Despite the widely held belief that America should rely on foreign trade to increase its world power and domestic economy, laissez-faire sentiments fell into disfavor again after the Civil War. Indeed, in the waning years of the nineteenth century, high protectionism garnered some of its most fervent support in American history. In the 1880 election, tariffs became the sole divisive issue between the high tariff Republican candidate James Garfield and the free trade Democratic candidate Winfield S. Hancock. Garfield’s narrow victory ensured that tariffs would continue to increase; indeed, high tariffs caused Treasury surpluses every year from 1866 to 1888. President Grover Cleveland, the first Democrat elected after the Civil War, thought the Treasury surplus was highly undesirable for the American people and sought to reverse the postwar trend of escalating tariffs. But Congress proved unwilling to lower tariffs, and Benjamin Harrison’s defeat of Cleveland in the 1890 election made the passage of the McKinley Tariff inevitable. Protectionists dropped the pretense that fledgling industries required high tariffs for protection. Instead, they argued that high tariffs would reduce the Treasury surplus by making imports unbearably costly for the American public.

At the turn of the twentieth century, tariff revisionist groups began to form and attempt to lobby the government for a change in trade policy. These organizations generally supported tariffs based on reciprocity and urged the federal government to create a commission to oversee the process in a scientific manner. The National Tariff Commission Association (NTCA), the lobbying organization that worked for the creation of the Tariff Board and strove to see it modeled after the German tariff commission, was the most influential of these groups. Presidents Theodore Roosevelt and William Taft both supported the revisionists in their quest for lower rates. Indeed, Taft so vehemently supported the Payne-Aldrich Tariff of 1909, the first act addressing tariff rates since the Dingley Act of 1897, that he agreed to the Sixteenth Amendment (which provided for a national income tax) just to gain the Democrats’ support for the tariff reduction.

World War I accelerated the growth of America’s international commerce. European and Asian warring states all sought access to U.S. resources. Exports to the Allies quickly began to soar, rising from $825 million in 1914 to $3.2 billion by 1916. Trade between the Central Powers and the United States fell off dramatically after Britain blockaded Germany in the beginning of the war. Germany cried out for the United States to stop selling munitions to England and complained that Washington showed a bias toward the Allies in its extension of war loans. U.S. officials curtly replied that a reduction in trade with the Allies would not compromise America’s neutrality, a position that reflected President Wilson’s disapproval of America simply being the well-paid arsenal of the Allies.

Virtually all trade with the Central Powers ceased with the October 6,1917, passage of the Trading with the Enemy Act, which forbade commerce with enemy nations or their associates. The act gave the Wilson administration the power to impose an embargo on imports from enemy nations, and the War Trade Board became authorized to prevent trade with the enemy. Congress clearly intended to use this act against the Central Powers. The act also authorized censorship of foreign newspapers.

Trade Policy in the Interwar Period

After World War I, the exporting prowess that the U.S. had gained during the war endured, and American products proved competitive in world markets beyond what had seemed possible only years before. U.S. trade during the war enriched the nation, and its continuation after the war made possible the Roaring Twenties. Europe desperately struggled to rebuild, and American goods made that goal possible. World War I had rendered the United States a creditor nation, with many more goods flowing from America into Europe than vice versa. Relatively high tariffs intensified the imbalance of payments between the Continent and the United States.

An unfavorable balance of trade between Europe and the United States, coupled with increased competition from goods flowing out of Asia and Latin America and agricultural production slumps, signaled problems for American exports. A depression began in the late 1920s, and in 1930 Congress intensified America’s foreign trade slump by passing the Hawley-Smoot Tariff Act. This piece of legislation raised tariffs to their highest level since the Tariff of Abominations over 100 years before, with agricultural and some manufacturing goods receiving the greatest tariff increases. Congressional motives for this increase stemmed from a “beggar thy neighbor” policy, as governmental leaders who desired to stop the economic slump domestically cared little for the effects of the tariffs on the economies of other nations. However, other countries soon levied reciprocal tariffs against American goods, which further depressed world trade.

President Franklin D. Roosevelt waited until 1934 to ask Congress for legislation to allow negotiation with other countries for lower tariffs. He received the Reciprocal Trade Agreements Act in the summer of 1934. Secretary of State Cordell Hull believed that this precursor to the 1948 General Agreement on Tariffs and Trade (GATT) would reverse the high-tariff policies that he thought had wreaked havoc on American exporting.

As a severe depression developed at home, President Roosevelt set about tackling America’s problems abroad. Between 1935 and 1941, Congress passed what became known as the Neutrality Acts, which imposed an arms and loan embargo against all warring states. Roosevelt, strongly supportive of the Allies but aware that the American public wished to avoid direct involvement in a war, allowed trade policy to dictate foreign policy by attempting twice in 1939 to persuade Congress to repeal the Neutrality Acts and allow for economic intermediation with the Allies. Congress grudgingly acceded on the second attempt and removed the arms embargo but added the stipulation that arms be sold on a “cash-and-carry” basis only. On August 2, 1940, Roosevelt signed an executive order to trade destroyers for military bases, and on March 11 of the following year, Congress authorized a lend-lease proposal after Britain could no longer come up with the cash necessary to purchase American weapons for war. Twenty-six days later, Congress authorized its first lend-lease package, earmarking $7 billion for the Allies. Roosevelt froze all Axis assets in the United States in June 1941.

Just as Germany lost its battle with England for a share of wartime trade with America, Japan, too, found that U.S. trade policy was a dangerous substitute for foreign policy. In the pre-World War II era, Japan remained utterly dependent upon the United States for much of the products it required to pursue its belligerent policy in Asia. After going against U.S. wishes and pressuring France to allow Japanese troops to enter French Indochina, Japan found itself the target of an

American embargo on U.S. iron and steel. In July 1941 Japan further extended its troops in Asia, forcing the United States to freeze all Japanese assets and implement an embargo against the island nation on all products except for food and cotton. Without trade with countries under the U.S. economic sphere of dominion, Japan lost access to 66 percent of its export market and 39 percent of its imports. Far more significantly, Japan imported 84 percent and 80 percent of its oil from the United States in the years 1938 and 1940, respectively. Without U.S. oil, Japan anticipated exhausting its supply in one and a half to two years. The Japanese prime minister, Tojo, considered the embargo an act of war because a lack of oil would destroy the imperial navy even as it rested in port. In his diary, he described America’s high post-World War I tariff policies and the pre-World War II economic blockade as inflicting a mortal blow to Japan.

Trade Policy from World War II to the Present

Roosevelt’s fear of the revival of the protectionism and high tariffs that contributed to the depression and war in the first half of the century led him to take preventative measures. In 1947 and 1948, the administration of his successor, Harry S Truman, helped develop the GATT, which further liberalized trade by gradually reducing and eliminating tariffs, subsidies, quotas, and other trade barriers. In October 1962 Congress passed the Trade Expansion Act at the behest of President John F. Kennedy, allowing the president to cut tariffs by up to 50 percent over five years and to remove many tariffs altogether on goods traded between Western Europe and the United States. This act gave the executive branch leverage in the Kennedy Round of GATT negotiations, which ran from 1964 to 1967, and it also served as an extension of U.S. foreign policy in its pressure on the Soviet Union. The Kennedy Round modified GATT rules and allowed for the lowering of rates across the board instead of on a product-by-product basis. The United States lowered its tariffs on a variety of products. European nations failed to reciprocate by lowering their trade barriers, and in many cases, they increased rates through less visible but equally potent forms of trade restrictions. The most recent round of GATT negotiations, the Uruguay Round (1986-1994), cut tariffs by 34 percent on average (see Table 3). The Uruguay Round agreement revised the rules regarding dumping and export subsidies, and it eliminated voluntary export restrictions (VERs) and extended intellectual property rights internationally. Finally, the Uruguay Round ended the GATT and created in its place the World Trade Organization (WTO), which now supervises the implementation of trade agreements and settles trade disputes.

Members of both the GATT and WTO organized around the liberal economic principles of nondiscrimination and fair national treatment of imports. The goals of these two organizations focused on lowering trade barriers and enacting a rules-based trading system. The GATT and WTO did, however, allow for conditions under which trade restrictions remained permissible. Today, member nations can discriminate against nonmember nations, retaliate against unfairly trading member nations, and establish preferential trading areas that provide trade benefits in excess of the terms of GATT and WTO. Further, certain escape clauses or safeguards permit the temporary exemption of some industries from the rules of trade restrictions.

Table 3 Average tariffs on industrial products (in percentages)_

It was not simply a desire to return to normalcy that led American leaders to encourage trade. The emergence of a bipolar postwar world and the conflict between the communist Soviet Union and capitalist United States meant that America again needed a strong economic base. When Mao Zedong declared China a communist state, President Truman resisted becoming involved in mainland Asian affairs. But the outbreak of the Korean War caused the United States to stress Taiwanese trade and economic development as another Asian check to communist designs in the region. The United States became Taiwan’s biggest trading partner until the 1970s, when Taiwan diversified its commercial relations.

China viewed the exchange of military systems between the United States and Taiwan as an extension of a hostile U.S. foreign policy. It struggled to remain closed to U.S. trade until 1999, when entrance into the WTO induced Chinese leaders to open their market to the United States and lower tariffs in exchange for support of China’s WTO bid. Both countries reached an agreement to phase out quotas on Chinese textiles by 2005.

After World War II, America helped reconstruct the Japanese economy as a capitalist bulwark against Soviet ambitions in Asia. Japan remained the biggest trading partner of the United States for several decades. Although America held a favorable balance of trade with Japan during the early postwar years, by the 1970s this trade balance had shifted. America, which had proved a willing dumping ground for Japanese products while asking little in return, suddenly demanded that Japan rescind its highly stringent import regulations and open its markets to American goods. The Japanese government found that it could placate the United States by implementing voluntary export restrictions against the products that America wished to restrict. In 1971 Japan enacted VERs against textiles, followed in later years by steel and chemicals, then against consumer electronics, automobiles, metal-working machines, and, most recently, against computer chips.

Voluntary export restraints benefited Japan on a deeper level than simply appeasing the United States. VERs essentially represent a collusion between two governments, and Japan stood to gain much economically by implementing them with Washington’s consent. Had the United States simply levied a tariff against the Japanese goods that threatened U.S. businesses, the federal government would have received the tariff revenues, which would have amounted to the difference between the world price and the U.S. tariff-heightened market price. But by voluntarily restricting the supply of their goods, the Japanese theoretically could contract the world supply and effectively drive up the world price for those goods. Japanese manufacturers would effectively absorb the higher profits created by their government’s collusive agreement with the United States. This approach would work particularly well in postwar Japan, whose government remained dominated by the interests of government and large business partnerships known as zaibatsu.. The close relationship between government and industry in Japan made VERs a viable response to U.S. pressure.

The VERs proved effective, helping the yen to appreciate relative to the dollar and causing the Japanese trade surplus with the United States to fall. But they also created long-term difficulties for the United States. In addition to causing the sacrifice of potential tariff revenues to the Japanese government, the VERs also lowered the opportunity cost of the foreign industries for diversifying into another type of manufacture. When they agreed to restrict the export of small automobiles, Japanese businesses found it profitable to begin exporting midsize cars and trucks. Although U.S. trade negotiators pursued short-term U.S. interests, the U.S.-requested VERs have created more problems for domestic industry in the long run.

Nevertheless, Japan’s red tape and its outright ban on certain American imports still angers many Americans. Although Japan remains the largest importer of certain U.S. farm products, not until 1991 did it allow the importation of U.S. beef and citrus products. Enormous tariffs, such as a 70 percent tariff on American beef, still hinder foreign trade between the two nations. U.S. firms clamor against regulations such as the so-called Big Store Law, which prevents large chain stores from operating in Japan, as well as the “closed system” under which the Japanese government exerts protectionism with the consent of domestic big business. These artificial barriers to trade extend monopoly-like powers to domestic industries at the expense of foreign competitors and are seen by many as an unfair restriction of free trade.

The European Union (EU) has proven to be a barb in postwar trade relations between Europe and America. Since 1989 the EU has banned the import of bananas and hormone-treated beef and has not heeded U.S. and WTO objections. In 1999 the United States took action, levying retaliatory tariffs of 100 percent against 15 EU products. As Europe and the United States continue to compete with one another for global trade power, the further liberalization of trade between the two regions remains uncertain.

Although Canada and Mexico are America’s largest and third-largest trading partners, respectively, no serious effort at integrating trade between the three partners has existed since efforts were made toward the Canadian reciprocity treaty of 1854. In 1989 the widely hailed Canada-U.S. Free Trade Agreement (CUFTA) began the process of eliminating all bilateral tariffs either immediately or in equal annual steps. Momentum encouraging free trade generated the North American Free Trade Agreement (NAFTA) of 1992, which created a free trade zone between Mexico, Canada, and the United States. Since it began the 15-year process of eliminating tariffs between the three partners in 1994, NAFTA has created a free trade area rivaling the EU in terms of GDP and population encompassed. Although some difficulties still hamper the implementation of the agreement, the transition has generally been smooth.

Such cooperative trade agreements represent a worldwide trend in the postwar era toward the liberalization of trade. In casting off many of the conservative trade ideologies of the past and paying little heed to Marxist critiques, industrialized nations are seeking to reduce most trade barriers with their biggest trading partners. Some of this reduction in protectionism may have resulted from governments’ increased awareness that protection may force costs on society and even on the domestic industries receiving protection. In addition to the previously discussed flaws of VERs, all forms of trade protection may result in the misallocation of factors of production into industries in which they are utilized less efficiently. Further, industries believing that a government may be willing to extend protection will see potentially great gains in diverting otherwise productive resources into lobbying efforts against the government. Finally, as economists Neil Vousden and Neil Campbell argue, industries characterized by little competition often will not make the effort to succeed in their fields, a phenomenon known as x-efficiency.

What of the future of American trade liberalization in the Western Hemisphere? In 1995 a group of 34 trade ministers from North, South, and Central America met to create a free trade area of the Americas (FTAA), which would be developed through an evolution of the continents’ many subregional trade agreements. If realized, this trade liberalization effort would be the most ambitious example of economic cooperation to date. Additionally, the United States, through participating in the Asia Pacific Economic Cooperation Forum (APEC), has worked toward achieving free trade in the Asia-Pacific region by the year 2020. These goals, if accomplished, would fundamentally change the way America conducts trade through the first quarter of the twenty-first century.