From Fordney-McCumber tariff Act to WTO: An American perspective in trade policy
This research focuses on the development and evolution of the American trade policy and its involvement to create the World Trade Organization (WTO). To better understand how the United States of America intervened and joined in the creation of the WTO the first part of this research will discuss a brief history of US tariffs acts. The second part will be focused on delineate the formation and evolution the General Agreement on Tariff and Trade (GATT), now known as the World Trade Organization (WTO).
American Trade Policy Background
According to Lovett et al. (2004, p.47), the US trade system from the Civil War to Great Depression of 1930 was protectionist. Buterbaugh and Fulton (2008, p.18) supported this statement by mentioning that the most protective period in American history happened during the time between the Fordney-McCumber act and the Smoot-Haley act of 1930. The first tariff act the United States created was the Fordney-McCumber tariff Act of 1922. This act was signed by president Warren Harding. He said it was one of the greatest tariff acts in the history of the United States. He also declared that “it would contribute to the already growing prosperity of the nation” (Kaplan, 1996, p.30). On the other hand, this bill “set the highest tariffs known up to that time” and was criticized by historians and economist who claimed that it would do more harm than good for both the national and international economy.
The Fordney-McCumber tariff triggered international retaliation which in turn was followed by the Smoot-Haley act. The United States emerged from World War I as a creditor nation. This benefit gave America the security and economic strength to increase tariffs to protect its industry. After the end of WWI United States was not the only country that increased its tariffs, Great Britain and Czechoslovakia raised their tariffs too. “As countries moved to protect their industries several conferences were held, one in Brussels in 1920 and another in Genoa in 1922, to protest tariffs and to begin a movement towards free trade” (Kaplan, p.13).
It can be said that Brussels and Genoa were the first attempts to create an international system that supported ‘free trade’. The conferences achieved nothing, “primarily because of the uncooperative nature of the United States, which viewed the tariff as a domestic issue that benefitted the national interest” (Kaplan, p.13). After seeing the negativity of US to lower its tariff duties European and Latin-American countries decided to “retaliate and raise their duties” (Kaplan, 1996, p.14) too.
According to Kaplan (1996, p. 14), between 1925 and 1929 there were 33 general revisions and substantial tariff changes in 26 European nations, and 17 revisions and changes in Latin America. All these increases in duties between nations started tariff wars. The League of Nations, concerned with these wars, organized a ‘World Economic Conference’ in Geneva, Switzerland, in 1927 to negotiate a tariff truce. This intent was in vain and the conference failed since the lack of US leadership and due to many reservations and loopholes demanded by countries.
In 1930, the Smoot-Haley Tariff Act was signed and approved by the US congress and President Hoover. This Act continued the high rates of the Fordney-McCumber Act of 1922 and in some cases rates were even higher in 1930 than in 1922. Also, as mentioned by Buterbaugh and Fulton (2008, p.18), the Smoot-Haley Act played the part of enduring protectionist villain; it has been blamed for the rise of Fascism, radicalism of Japan, and contributed “to the outbreak of World War II” (Lovett et al. 2004, p.54). At the national economic level, “The Haley-Smoot Tariff was passed after the Great Depression had begun. Though it was not cause of the depression, it contributed to the economic misery that existed throughout the nation” (Kaplan, 1996, p.36).
The Smooth-Haley Act “had become the symbol of counterproductive trade policies” (Buterbaugh and Fulton, 2008, p. 19) and as mentioned by Kaplan (1996, p.33) it contributed to an unfavorable balance of trade. Lovett et al. (2004, p.55) confirms this statements made by Buterbaugh, Fulton, and Kaplan by mentioning that the 1930 tariff act disrupted world trade. The only good attribute Buterbaugh and Fulton gives to this act is that “it stimulated reformers to begin to plan for free trade reform” (2008, p.19).
When Franklin Roosevelt was elected President of the United States, changes in the trade policy were expected as part of the Roosevelt ‘New Deal’ program. President Roosevelt “followed his own pragmatic instincts, at attempting to satisfy both protectionist and free traders” (Lovett et al., p. 55). Roosevelt selected as his secretary of state Cordell Hull, Tennessee Senator. Hull was an internationalist reformer and during his secretariat, he focused in international trade policy and was considered the architect of America’s new liberal trade policy.
“The first thing Secretary Hull did was to navigate an ‘emergency’ program through Congress that would bring about the most important change in the institutional history of US trade policy: the transfer of policy power from the Congress to the executive power on a more permanent basis” (Buterbaugh & Fulton, 2008, p. 19). As mentioned by Kaplan (1996, p.44), Hull wanted congress to empower the president to negotiate commercial treaties with important trading nations of the world in order to lower existing tariff rates by as much as 50 percent in return for equivalent concessions for American exports in foreign market. This initiative was called the Reciprocal Trade Agreements Act (RTA). The first American initiative to lower tariffs was made in 1933, when Secretary Hull went to the London Economic Conference. Hull didn’t accomplish much since Roosevelt didn’t submit the bill to the Congress.
In 1934, President Roosevelt asked Congress to pass the RTA Act. “This act allowed the executive Branch to negotiate trade agreements” (Aaroson, 1996, p.3). It was to run for three years and it would to be renewed by the Congress. As mentioned by Kaplan (1996, p. 48), Congress also established the new Export-Import Bank to stimulate trade. With Hull running the RTA programs, trade agreements were quickly made with other countries such as Cuba, Brazil, Honduras, Spain, Guatemala, Belgium, Haiti, etc. By 1940, when Roosevelt’s second term was about to expire, the US had negotiated with twenty-one nations that accounted for sixty percent of its foreign commerce.
General Agreement on Tariffs and Trade (GATT)
During World War II, the United States government started working on ideas to continue close economic cooperation with foreign nations after war. Kaplan (p.52) emphasizes that the RTA program had worked well between 1934 and 1945, but now something more was needed to help Europe recover from the ravages of war. According to Kaplan (1996, p.58), Hull’s vision of a peaceful and prosperous world without trade barriers guided America’s postwar planners. At an influential conference in a small New Hampshire town in 1944, the United States, Canada and Great Britain guided the path in creating what became known as the Bretton Woods System. “At the 1944 Bretton Woods Conference, Britain, The United States, and other Allies agreed upon more collaboration after war.” (Kaplan, p.4) this led to the creation of The International Monetary Fund (IMF), The International Bank for Reconstruction and Development (World Bank), and the International Trade Organization (ITO).
Dormael (1978, p. ix) stated that the Bretton Woods agreements were the first successful attempt consciously undertaken by a large group of nations to shape and control their economic relations. He also mentioned that the stated objective was the expansion and balanced growth of international trade. The principal method to achieve this end was the restoration of orderly exchanges between member countries.
Wilkinson mentions (2006, p.22) that what began as the International Trade Organization (ITO) became the General Agreement on Tariffs and Trade (GATT). Dowlah states (2004) that, the GATT was essentially an institution of what he called the second wave of globalization; the first one was the RTA. According to Pescatore et al. (1991, p.8), originally, the GATT was signed in 1947 during the course of broader negotiations aimed at the establishment of the International Trade Organization.
The original GATT agreement was signed by 23 countries on Geneva in 1947. Eleven of the signatories were developing countries (Brazil, Burna, Ceylon, Chile, China, Cuba, India, Lebanon, Pakistan, Rhodesia, and Syria) and the developed countries that signed were: Australia, Belgium, Luxembourg, Netherlands, New Zealand, Norway, The United Kingdom, The United States, France, Canada, and Czechoslovakia.
As mentioned before, the ITO was to be the third leg of an international economic triad consisting of the World Bank and the IMF . Pescatore et al. (1991, p.8) also mentioned that these organizations were intended to promote economic development, the reconstruction of Europe, and the expansion of the world trade. More specifically, “the IMF, was to provide liquidity to countries running trade deficits so as to enable the ITO to work for the reduction of tariffs and other trade barriers” (Pescatore et al.,1991, p.8)
It is important to mention that the GATT was established with the objective to raise the standard of living across the world, by ensuring full utilization of global resources and expanding production and exchange of goods and services globally (Dowlah 2004 p.30). Other functions of the GATT were to implement and protect the results of tariff reductions that had been agreed upon during the ITO negotiations. Pescatore et al. (1991, p.8) affirms that it was expected that the GATT would promptly be included under the mantle of the ITO once this came into existence. But this moment, unfortunately never did.
This conference by itself was not an important one, but was the beginning for the creation now known as the World Trade Organization (WTO). According to Evans (1971, p.8), the 1947 tariff negotiation conference in Geneva was but one of several preparatory steps intended to lead to the creation of ITO as mentioned above. The GATT created by the Geneva negotiation in 1947 was to have been absorbed into this broader institutional structure. It was not foreseen that the GATT would prove to be the only lasting product of the Geneva Conference. (Evans 1971, p.8).
Pescatore et al. (1991, p.11) point out that the General agreement did not provide for any organizational structure because it was intended that it would be included under the ITO. No secretariat was established and there was no governing body set up either, except for the possibility of having the contracting parties meet and take decisions. Eventually as the GATT evolved, organizational structured was implemented too.
In Geneva 1947, The GATT took the task of organizing a tariff negotiation among twenty countries while adhering to the item by item method. One of the main issues was that twenty- two countries already had a bilateral agreement with US and as mentioned by Evans (1971, p.9) it accounted for 83 percent of all US imports from the group.
Another issue was that negotiating countries, with the exception of the US, Canada and some Latin American countries, seriously needed dollars. “Their active participation was ensured by the prospect of improved access both to the United States market and to the few other markets able to pay for imports in hard currency (gold)”. (Evans, 1971, p.8). Also, The Geneva negotiating techniques were not truly multilateral, countries followed procedures that had been developed in bilateral bargains before.
The results of Geneva were respectable, even thought, in both scope and depth, they fell appreciably short of the combined results of the bilateral agreements of the preceding twelve years. This is because tariffs of the participants started at a considerable lower level than they had in 1934. Evans (1971, p.11) reported that the United States, from 1934 to 1948, received tariff concessions that accounted for 62 percent of their total imports.
The other GATT rounds
The GATT controlled over a succession of rounds of multilateral trade negotiations. The first five rounds (the Geneva Round of 1947, the Annecy Round of 1949, the Torquay Round of 1951, the Geneva Round of 1956, and the Dillon Round of 1960-61) focused on the reformed of import tariffs and quotas. Participation was limited, just twenty-five countries taking part on average, and sensitive areas of trade such as agriculture and textiles were excluded from the negotiations.
Subsequent rounds also covered tariffs and quotas, but progressively broadened the scope of negotiations. The Kennedy Round (1964 – 67) also covered anti-dumping codes, while the Tokyo Round (1975-79) covered a much wider range of issues, including non-tariff measures suach as subsides and countervailing measures, technical barriers to trade, import licensing, customs valuation, government procurement, and trade and in civil aircraft.
The Uruguay Round (1986 -94) went much further. This was the first comprehensive round of multilateral trade negotiations, not only creating the WTO, but also including agreements covering:
• Non-tariffs barriers
• Textiles and clothing
• Trade in services
• Trade-related aspects of intellectual property rights
• Trade related investments measures
• The GATT system
• GATT articles
• Dispute settlement
As mentioned by Jawara & Kwa (2003, p.9), ministers from the 124 governments who were members of the GATT at the time met in Marrakesh, Morocco, between 12 and 15 April 1994 to sign agreements that embodied the results of the Uruguay Round. Prominent among these was the agreement establishing the WTO, under which the WTO was formally established on January 1st, 1995.
The World Trade Organization (WTO) is currently located in Geneva, Switzerland. The WTO was established in January 1st, 1995 at the Uruguay Round. The number of members that it has currently is 153 countries. Some of its main functions are: Administering WTO trade agreements, forum for trade negotiations, handling trade disputes, monitoring national trade policies, technical assistance and training for developing countries, cooperation with other international organizations such as the United Nations.
The main function of the WTO, like the GATT before it, is to ensure that member governments keep their trade policies within agreed limits, and its members sign agreements to this effect every so often, following a long process of negotiation. “Once signed, the agreements provide the legal ground rules for international trade within a multilateral framework, they are essentially binding contracts to which governments which governments are expected to adhere.” (Jawara & Kwa, 2003, p. 10)
A number of country groupings, based on geographical regions (often regional trade blocs) and income, also play an important role in the WTO. Developing countries and regional groups are the two most important ones.
Developing countries make up about four-fifths of the membership and have special provisions within the rules that are mean to deal with their special needs. “It has been agreed that in all aspects of the negotiations particular attention must be paid to the needs of developing countries. Additional trade benefits will be sought for them so as to achieve, among other aims, a substantial increase in their foreign exchange earnings and diversifications of their exports”. (GATT, 1975. p.10)
Jawara & Kwa (2003, p.12) emphasized that the GATT has a special section (part 4) on trade and development, which includes:
• Provisions on non-reciprocity in trade negotiations between developed and developing countries, so that when developed countries make trade concessions for developing countries, they should not expect developing countries to match the offers in return.
• The key provision known as Special and Differential treatment, which states that countries can grant special concessions to developing countries without having to do so for the entire membership.
Regional groups also play an important role in the WTO. As mentioned by Jawara & Kwa (p. 23) the extent of their collaboration varies, from negotiating as a single entity to informal discussions of issues being negotiated. Some countries are members of more than one grouping, while others are in none. The most important ones are:
• The Quad – USA, EC, Japan and Canada
• The European Communities – EU members
• The LDC – Least developed countries
• The ACP (Africa, Caribbean and Pacific group)
• The Africa Group – All the African countries at the WTO
• The NAFTA – North American Free Trade Agreement
Das Las pointed (2003, p.230) that whether or whether not improvement of the multilateral trading system will be possible. There are two strong currents running against it. First, the two principal players, the US and the EU are confident about achieving results in bilateral agreements with different countries. Second, there is a move all around to develop regional trading arrangements. The major developed countries are expanding their opportunities through this process. The US is trying to expand the process of regional arrangements to Latin America and also to South-East Asia. The EU, which already exercises influence in Africa, is also trying to extend its reach in Latin America and Asia. It is important to mention that the bilateral and regional routes are bound to detract from the importance of the multilateral system but it can be arguable that all these sidesteps are not meant to harm the multilateral system.
To conclude, the real situation is that the developed countries and the developing have to work together for their common good. As mentioned by Das Las pointed (p.231), the GATT/WTO system provides a challenge, just as economic disparity may threaten peace and stability within a country, so too can increasing disparity among countries cause tension and instability. International economic relations and linkages can play a significant role in foresting peace and stability in the world. And the multilateral trading system can be a useful instrument for deepening these relations and strengthening the linkages. The pressure occurring from the emerging tensions in the world will make it imperative for all countries, big and small, strong and weak, to work in unison for their common good.
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Name Start Duration Countries Subjects covered Achievements
Geneva April 1947 7 months 23 Tariffs Signing of GATT, 45,000 tariff concessions affecting $10 billion of trade
Annecy April 1949 5 months 13 Tariffs Countries exchanged some 5,000 tariff concessions
8 months 38 Tariffs Countries exchanged some 8,700 tariff concessions, cutting the 1948 tariff levels by 25%
Geneva II January 1956 5 months 26 Tariffs, admission of Japan $2.5 billion in tariff reductions
Dillon September 1960 11 months 26 Tariffs Tariff concessions worth $4.9 billion of world trade
Kennedy May 1964 37 months 62 Tariffs, Anti-dumping Tariff concessions worth $40 billion of world trade
Tokyo September 1973 74 months 102 Tariffs, non-tariff measures, “framework” agreements Tariff reductions worth more than $300 billion dollars achieved
Uruguay September 1986 87 months 123 Tariffs, non-tariff measures, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc The round led to the creation of WTO, and extended the range of trade negotiations, leading to major reductions in tariffs (about 40%) and agricultural subsidies, an agreement to allow full access for textiles and clothing from developing countries, and an extension of intellectual property rights.