Opening America's Market: U.S. Foreign Trade Policy Since 1776

Opening America’s Market

LUTHER HARTWELL HODGES SERIES

ON BUSINESS, SOCIETY, & THE STATE

William H. Becken, editor

Opening America’s Market

U.S. Foreign Trade Policy Since 1776

Alfred E. Eckes, Jr.

The University of North Carolina Press

Chapel Hill & London

© 1995 The University of North Carolina Press

All rights reserved

Manufactured in the United States of America

The paper in this book meets the guidelines for permanence and durability of the Committee on Production Guidelines for Book Longevity of the Council on Library Resources.

Library of Congress Cataloging-in-Publication Data

Eckes, Alfred E., 1942–

Opening America’s market: U.S. foreign trade policy since 1776 /

Alfred E. Eckes, Jr.

    p. cm.

Includes bibliographical references and index.

ISBN 0-8078-2213-2 (cloth: alk. paper)

ISBN 0-8078-4811-5 (pbk.: alk. paper)

1. United States—Commercial policy. 2. Exports—United States—History. 3. Free trade—United States—History. 4. United States—Commercial policy—Sources. I. Title.

HF1455.E28 1995

382´.3´0973—dc20           95-2791

CIP

An abbreviated version of Chapter 4, Infamous Smoot-Hawley, appears as Revisiting Smoot-Hawley in the Journal of Policy History 7, no. 3 (Summer 1995).

Chapters 5, 6, and 7 include some material published first in Trading American Interests, Foreign Affairs 71, no. 4 (Fall 1992): 135-54.

02 01 00 99 98 7 6 5 4 3

THIS BOOK WAS DIGITALLY PRINTED.

Contents

Introduction

Chapter 1 Free Trade and Economic Security, 1776–1860

Chapter 2 Protection and Prosperity?

Chapter 3 Unreciprocal Trade

Chapter 4 Infamous Smoot-Hawley

Chapter 5 Cordell Hull’s Tariff Revolution

Chapter 6 Opening America’s Market, 1960–1974

Chapter 7 Illusive Safeguards

Chapter 8 Curbing Executive Discretion in Unfair Trade Cases

Epilogue

Notes

Bibliography

Index

Tables

2.1 U.S. Customs Duties and Federal Revenue, Selected Years from 1860 to 1992 49

2.2 Comparative Annual Growth of Real Gross Domestic Product in Selected Countries and Western Europe, 1870–1913 50

2.3 Comparative Export Growth Rates in Selected Countries and the World, 1870–1913 51

2.4 Comparative Tariff Levels, 1913 52

2.5 U.S. Growth in Gross National Product and Per Capita GNP, 1890–1910 and 1972–1992 53

2.6 U.S. Growth in Gross National Product and Per Capita GNP, 1889–1929 and 1952–1992 54

4.1 U.S. Tariff Levels, Selected Years from 1828 to 1992 107

4.2 U.S. Dutiable and Duty-Free Imports, 1920 and 1923 113

4.3 U.S. Dutiable and Duty-Free Imports, 1929–1936 114

4.4 U.S. Exports by Region and Principal Country, 1929–1932 126

4.5 U.S. Exports by Product, 1929–1931 130

6.1 U.S. Concessions in Multilateral Trade Negotiations, 1947–1967 198

6.2 Kennedy Round Tariff Concessions on Manufactures: Average Tariff on Dutiable Imports as a Percentage of Cost, Insurance, and Freight Value 204

7.1 Section 201: Escape Clause Filings and Results, 1975–1993 245

8.1 U.S. Introduction of Antidumping and Countervailing Duty Orders, 1960–1990 275

Illustrations

The Goose That Lays the Golden Eggs 32

England’s Candidate for the American Presidency 39

The Declaration of Dependence, July 4, 1888 40

An Old Game 41

Standing Pat 61

Our Choked Up Home Market 72

A Successful Gate 73

Senator Reed Smoot and Representative Willis Hawley 101

Introduction

Congress shall have the power

1. To lay and collect taxes, duties, imposts, and excises ...

3. To regulate commerce with foreign nations, and among the several States, and with the Indian tribes. (emphasis added)—U.S. Constitution, art. I, sec. 8

We’re at war, Deputy Commerce Secretary Clarence J. Bud Brown exclaimed as he arrived at the Capitol Hill Club for lunch.

Have the Russians bombed New York? I wondered, or has President Reagan retaliated against Japanese trade barriers?

At war with whom? I asked.

With Congress, of course, Brown responded.

Brown’s comment in September 1985 reflected the unique culture of Washington, D.C., where Democrats and Republicans shared the government and battled relentlessly for advantage. With one party entrenched in Congress and the other holding the White House, the real enemy often seemed only sixteen blocks away. Until the bitter 1993 debate over the North American Free Trade Agreement (NAFTA) energized ordinary Americans and fractured the two major political parties, trade struggles usually aroused only Washington insiders—a group largely composed of U.S. officials, foreign representatives, and lobbyists. Many of the lobbyists were former presidential appointees who chose to remain near the center of government power representing business interests, especially foreign corporations eager to share the giant American market. This trade policy elite lived and thrived inside the Washington beltway, distant from the farms, factories, and concerns of average Americans.¹

Particularly in the half century after World War II pundits, editorial writers, and cartoonists portrayed inside-the-Beltway conflicts over trade policy as battles in the unceasing war between executive branch free traders and congressional protectionists. Executive officials wore white hats and supported deregulating trade, opening markets, acting as responsible creditors, and promoting economic cooperation among nations. With trade liberalization, Americans would benefit as producers, workers, and consumers.²

Columnists dismissed congressional opponents as troglodyte protectionists, ignorant of generally accepted economic wisdom. Depicted as wearing black hats, these supposedly parochial politicians responded to special interest appeals from local constituents, greedy labor unions, and declining industries. According to the media, the foes of trade liberalization jeopardized America’s role as a world leader when they sought to restrict the president’s trade negotiating authority. If Congress, or the president, took action to aid domestic industries, the press gleefully invoked memories of Smoot-Hawley protectionism, the Great Depression, trade wars, and foreign retaliation.³

Simplistic images, slogans, and myths—all reflecting unfamiliarity with the factual record—still shape American attitudes toward trade policy. As a historian who left academic research and teaching for more than a decade to work as a journalist and serve as a federal official, I believe it is time for scholars and public officials to revisit the historical documents. They should also examine critically the familiar stereotypes and interpretations in light of facts and consider trade policy issues in a more robust manner.

This book has four specific goals. The first is to offer an introduction to, and an interpretation of, some two centuries of American trade policy. While preparing for congressional hearings in 1981, I could find no extensive scholarly study of U.S. commercial policy based on substantial research in archival sources. This book may serve the informational needs of future government officials, opinion makers, scholars, and other interested persons.

My second related goal involves encouraging government officials to examine issues in a historical perspective, paying greater attention to archival records and to the writings of scholars. Policymakers also may find the present discussion a useful supplement to the limited institutional memory available in most government agencies. While serving as a trade decision maker, I was shocked to find that U.S. officials had little information about the origin and evolution of present policies and about the results of previous negotiations. This absence of historical memory is a distinct disadvantage in international negotiations, when frequently inexperienced U.S. officials match wits with adversaries having years of relevant experience.

While researching these issues, I discovered archival evidence and data that compelled me to reconsider key elements of the conventional trade wisdom. Thus a third objective is to correct the public record, and to question several popular myths that continue to influence thinking about international trade policy. My conclusions may spark debate and force public officials and scholars to revisit the empirical record.

Finally, this volume emphasizes, as only the study of history can, how knowledge of the past relates to present and future governance in an area of immense importance to the United States and its people. In a technology-driven world economy without national borders, residents of North America now compete for economic opportunities and jobs with the residents of developing countries around the world. For many professionals and skilled workers economic interdependence has produced new prospects; but especially for the unskilled, more dislocations, anxieties, and alienation.

My own involvement with these issues began in July 1981, when President Ronald Reagan honored me with a nine-year appointment to the U.S. International Trade Commission (ITC), the independent, quasi-judicial, and fact-finding agency responsible for assessing the impact of imports on domestic industries. A few months later, after the Senate confirmed my nomination, this former history professor and editorial page editor became a decision maker in some of the most contentious trade remedy complaints of the 1980s, cases involving many of America’s traditional industries and high technology as well. Thousands of American jobs and hundreds of plants hinged on these administrative decisions. Members of Congress, foreign embassies, and lobbyists quickly discovered that the ITC, a once invisible government agency, had become a major player in the trade process.

From the daily battles over trade administration, I rediscovered the abiding wisdom of cowboy comedian Will Rogers. He compared tariff battles to arguments over religion. [T]wenty men can enter a room as friends, Rogers said, and someone can bring up the Tariff and you will find nineteen bodies on the floor with only one living that escaped.⁴

During my nine years as a trade fact finder and administrator from 1981 to 1990, emotions still ran strong. One angry shoemaker, dissatisfied with a decision rejecting footwear import relief, bought space in the Washington Post to tell Congress and the president what stupid commissioners they have. He said that the U.S. International Trade Commission was as useful as a pitcher of warm ‘spit.’ Seymour Fabrick advised President Reagan to get rid of the commissioners and give them an opportunity to go out in the job market and find some jobs for themselves.⁵

The 1980s were exciting years to serve on the ITC. Measured in terms of caseload, it was the busiest decade in the commission’s history. One cold morning in January 1982 a rental truck pulled up to the docket room at the old Tariff Commission building, at 701 E Street N.W., and domestic steel producers filed ninety-four separate antidumping and countervailing duty cases against European steelmakers. The trade petition deluge had begun. Indeed, over the course of the decade I participated in hundreds of separate steel investigations as the domestic industry utilized provisions of the 1979 trade law to battle injurious imports.

Other industries joined the fray. Over the nine-year period I participated in about 1,500 separate investigations. These ranged from commodities, like pork, tobacco, and potatoes, to leading edge technologies. Machines tools, sparklers, shoes, apparel, and many other familiar items appeared on our agenda. So did brain scanners, cellular telephones, and pharmaceutical products. Even novelty items like Rubik’s cubes and Pac-man video games came to the ITC for trade decisions. Moreover, the president and our congressional oversight committees requested dozens of fact-finding studies assessing changing circumstances of competition.

On the commission my voting record fit neither the free trade nor the protectionist pattern. In assessing the determinations of ITC commissioners on antidumping and countervailing duty cases, University of Wisconsin economist Robert E. Baldwin and his colleague Jeffrey W. Steagall placed me among a middle group of commissioners who voted affirmatively between 50 and 80 percent of the time. Other commissioners in this group were Democrats Paula Stern, David Rohr, and Donald Newquist; Republican Seeley Lodwick; and independent Michael Calhoun. New York Times reporter Clyde Farnsworth correctly concluded that my views on trade are not easy to characterize: clearly they do not fit into the mold of either a strict free-trader or a protectionist.⁶

Service on the ITC afforded a unique opportunity to study changing competitive conditions in America and to examine the evolving international economy. Hearings provided a window to shifting business trends and to the working conditions of average citizens. Powerful lawyers, chief executive officers, and congressmen came to testify—as did representatives of the working people and consumers. Steel workers, shoemakers, potato farmers, copper miners, and fishery workers all appeared. Many retained the assistance of high-priced Washington lawyers, most of whom previously had served in the executive branch or gained public sector experience advising key members of Congress.

During my government years, I viewed trade battles from the front lines and encountered on a daily basis the nasty dilemmas easily ignored in classroom discussions. At ITC import-remedy hearings, the victims of expanded trade had an opportunity to present their perspective. Many could demonstrate that soaring imports from cheap-labor countries had cost them high-paying factory jobs. They often testified that employers had shut domestic plants and moved capital equipment to new manufacturing facilities abroad in cheap-labor countries. On other occasions, the case record showed that foreign governments subsidized exports, or that powerful corporations headquartered in countries with protected home markets engaged in discriminatory pricing to seize market share from American competitors.

Witnesses at ITC hearings frequently presented poignant descriptions of import competition that seemed to conflict with neoclassical international trade theories found in many textbooks. Those discussions assumed away market anomalies and political barriers. Workers dislocated when imports surged rapidly found new high-paying employment or received compensation. Money moved easily within nations but not between nations, and so direct investment flows seldom swamped the gains from trade. With open markets and perfect competition, textbook writers claimed that arbitrage erased incentives to indulge in international price discrimination.⁷

During the 1980s the theories often proved inadequate for understanding policy problems, like the persistent merchandise trade deficit with Japan and the general surge in imported finished goods. Academic economists advanced a variety of fascinating explanations. Some attributed rising imports to a strong dollar. Others claimed that Americans saved too little and borrowed too much and introduced equations with accounting identities as proof. The real world was more complex than these mechanistic theories. When the U.S. government embarked on a program of exchange depreciation in 1985, the bilateral imbalance with Japan showed little improvement. Many other factors—including supply-and-demand conditions in both the exporting and importing countries for a full range of trade products—influenced merchandise trade balances, not simply the price of the dollar.⁸

To one trained in history, fashionable theories did not adequately explain developments in the marketplace or permit policymakers to anticipate future developments with confidence. Joseph Schumpeter, the prominent Austrian-born economist of the early twentieth-century, appreciated this problem: "Nobody can hope to understand the economic phenomena of any, including the present, epoch who has not an adequate command of historical facts and an adequate amount of historical sense or of what may be described as historical experience."⁹

To understand America’s trade problems, I searched the archives of trade negotiations over the last two generations. The National Archives has primary sources and documents about all of the bilateral negotiations conducted under the Reciprocal Trade Agreements Program (RTAP), as well as ample material on developments in the General Agreement on Tariffs and Trade (GATT). For documents about trade policy and negotiations over the period since 1960, presidential libraries proved indispensable. These facilities, dispersed around the country, hold the official files of every administration since President Herbert Hoover. For the perspectives of important trading partners and allies in post-World War II efforts to reconstruct the world economy, I consulted documents in the British Public Record Office and the National Archives of Canada.

Among government officials my preoccupation with trade history was perhaps unique. Most trade policymakers have academic training in economics or law. Many on the federal fast track, leading to service on congressional committees and presidential appointments, acquired their first exposure to trade policy in the State Department where the diplomatic perspective predominates. Few had business experience outside a law firm.

In Washington I discovered that officials seldom have the time or the desire to study extensively the background of contemporary problems. Like Henry Ford, the early twentieth-century automaker, most officials behave as if they believe history is bunk. Immersed in the government process, they frequently approach problems with little specific knowledge of how the concern emerged, or how previous decision makers attempted to address similar issues. Instead, those trained in economics bring classroom theories and stereotypes to policy discussions. Those schooled in the law frequently emphasize narrow legal considerations. When asked to discuss the evolution of a problem, both groups blithely recycle the conventional wisdom.¹⁰

Other countries have more respect for history. Our principal economic competitors carefully review the records of prior negotiations and have a cadre of experienced negotiators with several generations of institutional memory. As a result, they frequently seem to exploit that advantage successfully in trade negotiations. During the bilateral free trade negotiations with Canada in 1986 and 1987, for instance, Canada fielded a team of veteran negotiators, led by Simon Reisman, who had negotiated the 1964 automobile pact. Not only did they have more experience than the Americans, but also the Canadians had a long institutional memory. They knew how specific commodity problems addressed in the free trade talks had been resolved in previous negotiations, particularly the unsuccessful attempt to negotiate a similar agreement in 1947–48. The American negotiators lacked a specific knowledge of this agreement or the one proposed in 1911.¹¹ Oblivious to historical precedents, bright young U.S. officials rely on energy and intelligence in negotiations. Not surprisingly, they sometimes end up reinventing the wheel. Former Commerce Department official Clyde Prestowitz has observed that American officials are sometimes so blind to prior events that they purchase the same horse from experienced Japanese negotiators!¹²

My historical fact-finding journey, conducted over a ten-year period, resulted in this book. Overall, it is my conclusion that too often myths, and not facts, shape public discussion of commercial policy issues. For one thing, many citizens, and some public officials, believe that America rose to world economic and political leadership on the strength of its commitment to free trade policies. That familiar interpretation is incompatible with the factual record. Before the New Deal the United States prospered behind high protective tariffs and used a variety of import restrictions to shelter home market producers from competition, much the way Asian countries have done successfully since World War II.

Nonetheless, among U.S. policymakers there is a pervasive belief that concrete historical comparisons demonstrate the superiority of free trade to protectionism. Indeed, in 1985 the Council of Economic Advisers asserted: "The conclusions ... from such comparisons over the past two centuries are unambiguous: Countries that have followed the least restrictive economic policies both at home and abroad have experienced the most rapid economic growth and have enabled the greatest proportions of their populations to rise above subsistence living standards (emphasis added). During the Reagan administration, Under Secretary of State W. Allan Wallis, an economist, inveighed against the protectionist fallacies. Wallis declared: Prosperity and protection are inconsistent.... Prosperity is our goal; but, ... protection is its enemy."¹³

Historical research indicates that easy generalizations do not capture the American experience. In the late nineteenth century, for example, a protectionist America and a protectionist Germany both outperformed free trade Britain. The relationship between trade policy and economic growth is thus more complex than many theorists and politicians assume. Free trade does not assure prosperity, nor does protectionism automatically produce ruin.¹⁴

My research does not dispute the essential elements of classical free trade theory rooted in deductive reasoning. That theory, explaining the basis for trade in terms of differences in comparative costs, is valid economically if certain conditions exist. For one thing, within participating nations there is internal factor mobility, perfect competition, and full employment, as well as markets that respond rationally to pecuniary signals. Also, capital and labor do not move easily between nations. Under such restricted conditions, free trade does maximize welfare and income—benefiting both individuals and mankind.

To explain why production costs vary among nations, two Swedish economists—Eli Hecksher and Bertil Ohlin—focused on differences in factor endowments. Nations tend to export goods making intensive use of the most abundant factors of production and to import items making intensive use of less abundant factors. A version of this model suggests why populous developing countries export goods intensive in unskilled labor, whereas advanced industrial countries export products intensive in skilled labor. Because the Hecksher-Ohlin theory concludes that free trade tends to equalize factor costs, some economists predict that globalization will narrow the gap between U.S. and foreign wages. It also may widen the gap between the wages of skilled and unskilled workers within the United States.¹⁵

It is important to note that free trade theory focuses on benefits to individuals and to world welfare, not to nations. Even if all the theoretical conditions prevail, nineteenth-century economists pointed out, individual nations may still lose. It is possible for free trade to maximize the wealth of individuals and the global community while it destroys the nation and its social stability.¹⁶ According to John Maynard Keynes, doctrinaire free traders overvalued the social advantage of mere market cheapness. Conceding that protection is a dangerous and expensive method for achieving national economic balance and security, the renown economist concluded: there are times when we cannot safely trust ourselves to the blindness of economic forces; and when no alternative weapon as efficacious as tariffs lies ready to our hand.¹⁷

Since World War II economists have become more sensitive to the shortcomings of classical free trade theory for explaining actual trade patterns. John Dunning, a specialist on transnational corporations, has observed that only a minority of world trade involves arms-length transactions between buyers and sellers. The majority is intrafirm trade among units of transnational corporations. Nineteenth-century free traders simply did not contemplate a world economy in which giant corporations engaged in transfer pricing. Nor did they foresee the mobility of capital.¹⁸

As Chapter 1 makes clear, America’s founding generation—particularly Thomas Jefferson and James Madison—did understand and draw inspiration from laissez-faire economics. The rationale for free trade had intellectual appeal. But this first generation of leaders pragmatically adopted policies that assigned priority to the nation’s economic security and long-term welfare, not the immediate pecuniary interests of consumers. Chapters 2 and 3 consider protectionism and reciprocity, the principal legs of American trade policy during the seventy-year period from the Civil War to the Great Depression.

Chapter 4 questions another familiar legend, the notorious Smoot-Hawley Tariff of 1930. According to the popular wisdom recycled in high school and college textbooks, this act raised duties to record levels, worsened the depression, provoked extensive foreign retaliation, and destroyed world trade. However, official data and archival materials from the United States, Canada, and Great Britain, as well as the related research of other economic historians, led me to less catastrophic conclusions. Smoot-Hawley was a molehill, not a mountain. Partisans and ideologues have long exaggerated its consequences.

My investigation of the post-World War II trade record also produced unorthodox conclusions. As American leaders pursued their grand bipartisan vision for an open international economy, as part of the successful strategy for winning the Cold War, they assigned little weight to the concerns of domestic producers and workers. During the Cold War years the United States treated trade policy as an instrument of foreign policy for fulfilling hegemonic responsibilities, not as an end in itself. Time after time, U.S. diplomats and negotiators promoted trade liberalization in order to advance other immediate, albeit worthy, foreign policy objectives—stability and prosperity in Japan and Western Europe, economic opportunities for developing nations. While the United States pursued such systemic objectives, and vowed to maintain harmony and international cooperation at all costs, pragmatic adversaries, like the French, Japanese, Canadians, and British, pressed their own business interests. As a result, they gained access to the large North American trading market, while amiable U.S. leaders and strategists acquiesced to discrimination against American exports. The United States thus stripped away its tariff barriers, lowering rates on dutiable imports from some 45 percent ad valorem average in 1934 to about 3.5 percent today. Meanwhile, it allowed emerging competitors to waive parallel obligations and to maintain restrictive trade barriers, sheltering their national markets and corporate champions from U.S. competition. The United States and its allies did win a great power struggle with the Soviet Union and establish a more open international economy, but in the process America lost critical commercial battles. This theme—how U.S. officials unilaterally opened the American market without gaining commensurate advantages in foreign markets for the products of American workers and American factories—is developed in Chapters 5 and 6.

Many economic theorists note that the advantages of free trade are so overwhelming that those who gain from trade can easily compensate those temporarily dislocated from import concessions. Chapter 7 shows that shock absorbers—like the escape clause and adjustment assistance—were largely window dressing. The Cold War internationalists generally failed to aid those domestic interests harmed by trade liberalization. Often, as the case record discloses, trade administrators set aside legal obligations to trade losers in order to pursue military and international political objectives considered of greater national importance at that time.

A similar pattern applied to the administration of unfair trade laws, as Chapter 8 demonstrates. Because dumping and export subsidies produce distortions in the marketplace, the General Agreement on Tariffs and Trade authorizes use of antidumping and countervailing duties when such anticompetitive behavior proves injurious to import-competing industries. Until the 1970s, however, U.S. officials frequently took advantage of executive discretion to avoid enforcing such laws when trade remedies conflicted with other foreign policy objectives. For instance, predatory competitors destroyed the domestic television industry when the U.S. Treasury failed to assess and collect antidumping duties. Many other domestic industries also found officials reluctant to perform their statutory duties.

This book rests on extensive research in documentary sources and secondary materials over a ten-year period. It also has benefited from my first-hand experiences in government. In particular, Chairman Russell Long and his colleagues on the Senate Finance Committee, including the late H. J. Heinz III, first alerted me to the trade-off between foreign policy and trade policy. At my confirmation hearings in 1981, Long observed that some officials in the State Department believed that it would be worth practically any price if we could achieve peace in the world by simply making trade concessions.¹⁹

Obviously, I did not write this account to engage in partisan debate, to pursue an ideological agenda, or to settle personal differences, as some memoirists may do. Indeed, I have avoided extensive comment on many individuals and developments during the 1980s until passions have cooled and more abundant documentation becomes available to supplement my own memory and records. Careful readers will note other omissions. The work does not attempt to deal systematically with bilateral trade relations with major trading partners, such as Canada, Japan, and the European Economic Community (EEC), or with East-West issues. Nor does it deal systematically with the General Agreement on Tariffs and Trade and the multilateral trade negotiating process. Moreover, the book focuses on trade in goods and avoids important international trade issues involving investments, intellectual property, and services among others. I hope to address these complex themes in a subsequent volume.

In offering a revisionist interpretation of American trade policy, I do not wish to impugn the reputations of individual officials, the vast majority of whom have worked diligently to promote the national interest. In most cases, U.S. officials have faithfully followed the policy guidance of superiors and operated within legal and political constraints. At the negotiating table trade officials, especially in recent decades, have pressed vigorously for concessions benefiting American businesses and consumers. However, as this account shows, diplomatic priorities drove American trade policy by 1938. Time after time during the Cold War years, when policymakers confronted a conflict between foreign policy and domestic interests, the diplomatic imperative prevailed.

Other disclaimers seem appropriate. I did not write this book to espouse an ideology—such as free trade or protectionism—or to proselytize. Readers also should resist any temptation to impute specific policy prescriptions from this account. An historical work can illuminate the past and help the present generation understand the development of current policies. But history cannot offer policymakers a specific road map to the future. In a decision-making context, officials often encounter unforeseen legal, political, and policy constraints.

The assessments offered in this book reflect my own thinking, and I take responsibility for any errors. A number of government officials, academic colleagues, and business professionals have supplied information and offered helpful suggestions. In particular, I want to thank Susan Aaronson, Italo Ablondi, Fred Beavers, Catherine May Bedell, Donald Bedell, Seth Bodner, Pat Choate, Bruce Clubb, Tom DeLoach, Charles Ervin, Frank Fenton, Lynn Featherstone, Bill Fry, John Gaddis, Bill Gearhart, Veronica Haggart, Alonzo Hamby, Bill Hawkins, Kent Hughes, Jeffrey Lang, Thea Lee, Bill Leonard, Seeley Lodwick, James McClure, Richard McCormack, Diane Manifold, Jock Nash, Stanley Nehmer, Don Newquist, Joan Reed, Bill Reinsch, David Rohr, Eugene Rosengarden, Lyn Schlitt, Michael Stein, Eugene Stewart, Alan Tonelson, Richard Vedder, and Thomas Zeiler. Sheppard Black and Lars Lutton of Alden Library, Ohio University, helped with editorial cartoons from Judge. The courteous and helpful staff of the U.S. International Trade Commission libraries—the National Library of International Trade and the General Counsel’s Law Library—rendered invaluable assistance. So did archivists and librarians at the many depositories cited in the Bibliography.

Here at Ohio University, graduate students David Broscious and Doug Dziak assisted in preparing the manuscript for publication. Finally, I wish to thank all associated with the University of North Carolina Press, particularly executive editor Lewis Bateman and copyeditor Stevie Champion.

1 Free Trade and Economic Security, 1776–1860

[C]ommerce is the grand panacea, which, like a beneficent medical discovery, will serve to inoculate with the healthy and saving taste for civilization all the nations of the world. (emphasis added)—Richard Cobden, 1835

By adopting free trade, we give our markets and our money to foreigners; by adhering to protection, we secure both to our own people . . . the fate of the country depends on the result.—Representative Andrew Stewart, 1846

From colonial times the Spirit of Commerce has inspired and shaped America’s relations with the world. During the eighteenth and nineteenth centuries the founders of U.S. foreign policy pressed to open markets (freedom to trade) and attacked mercantilistic barriers abroad in order to bolster the domestic economy and secure independence. Access to European markets for American ships and commodities, like cotton, rice, and tobacco, they considered essential to the nation’s long-term prosperity and growth.¹

While actively seeking foreign trade opportunities, the first generation of American leaders championed a set of universal principles that would become the foundation for American commercial policy. These included free trade, equality (either national or most-favored-nation treatment), and reciprocity. But the European mercantilists—especially Britain and France—repeatedly ignored American diplomatic appeals, restricted and managed trade, impressed ships and sailors, and engaged in predatory pricing to disrupt infant industries after the War of 1812.²

As a result, the founders reluctantly acquiesced to elements of mercantilism. Recognizing, as Adam Smith had, that defense . . . is of much more importance than opulence, they experimented with retaliation and then adopted a policy of economic nationalism.³ To compel respect for commercial rights, they concluded that the U.S. government must demonstrate its resolve and capacity to retaliate unilaterally against foreign restrictions. As a long-run strategy to protect the national economic security, they embraced interventionist measures similar to those of European competitors. To avoid future economic dislocations and jeopardy to American independence and living standards, early leaders—both Federalists and Jeffersonian Republicans—deliberately used the powers of government to encourage domestic manufactures. Thus industrial policy became a critical element of the nation’s economic strategy. In particular, they regarded tariffs not only as effective instruments for raising government revenue but also as powerful tools for fashioning a diversified manufacturing base. In their paradigm, the so-called American system, the interests of domestic producers and workers took priority over short-term consumer interests. These policies, adopted after the War of 1812, would endure with only brief interruption for the next 120 years.

Free Trade Vision

A vision of open markets, freer trade, and economic interdependence inspired the first generation of American leaders, as it would leaders after World War II. This enthusiasm for free trade preceded publication of Adam Smith’s Wealth of Nations on March 9, 1776. In an essay published two years earlier, colonial merchant Benjamin Franklin argued that commerce should be as free between all the nations of the world, as it is between the several counties of England. He added: No nation was ever ruined by trade, even, seemingly the most disadvantageous.⁴

Franklin was an ardent free trader. Others like Tom Paine and Thomas Jefferson used the slogan more loosely as an abbreviated version of freedom to trade. They opposed mercantile restrictions and favored nondiscriminatory commercial regulations. In his January 1776 pamphlet Common Sense, Paine apparently took that approach: Our plan is commerce, and that, well attended to, will secure us the peace and friendship of all Europe; because it is in the interest of all Europe to have America a free port. Her trade will always be a protection, and her barrenness of gold and silver secure her from invaders.⁵

Jefferson, a thirty-one-year-old lawyer-philosopher, boldly asserted that free trade with all parts of the world was a natural right that no law could abridge. His claim, appearing in a 1774 summary memorandum on the rights of British North America, reflected colonial dissatisfaction with British mercantile restrictions. In subsequent comments, Jefferson continued to embrace free trade in the context of his agrarian worldview. In Notes on Virginia, published in 1785, the author of the Declaration of Independence recommended that the independent American states specialize in agriculture and rely on Europe for manufactures. It is better, he said, to carry provisions and materials to workmen there, than bring them to the provisions and materials, and with them their manners and principles. Added Jefferson: The loss by the transportation of commodities across the Atlantic will be made up in happiness and permanence of government. The mobs of great cities add just so much to the support of pure government, as sores do to the strength of the human body. In July 1785 correspondence with his Massachusetts friend, John Adams, the Virginian effused: I think all the world would gain by setting commerce at perfect liberty.⁶

As Jefferson matured and gained experience in public service, his thinking on commercial issues became less doctrinaire. Although favoring free trade in principle, he understood that the desire for commercial interdependence with Europe might conflict with aspirations for political independence. In August 1785 he warned: Our commerce on the ocean and in other countries must be paid for by frequent war. Privately, Jefferson preferred for the United States to practice neither commerce nor navigation, but to stand with respect to Europe precisely on the footing of China. We should thus avoid wars, and all our citizens would be husbandmen. As a public official, he understood that he was not at liberty to pursue his hermit republic theories. Instead, he was duty bound to implement market-opening policies—throwing open all the doors of commerce and knocking off it’s shackles.⁷

Adams, too, held private reservations about the American enthusiasm for trade, even as this Massachusetts politician prudently spoke up for the freedom to trade. In April 1777 he said: I am against all shackles upon Trade. Let the Spirit of the People have its own way. However, his papers show that privately he had serious misgivings. In one April 1776 letter he criticized the Spirit of Commerce . . . which even insinuates itself into Families, and influences holy Matrimony, and thereby corrupts the Morals of families as well as destroys their Happiness.⁸

On a practical level, Adams perceived that giving liberty to trade would lead to the seizure of American vessels and seamen. In October 1775 he asked rhetorically: "Can the inhabitants of North America live without foreign trade? He answered the question affirmatively, suggesting that Americans might sacrifice some of our appetites [for] coffee, wine, punch, sugar, molasses, . . . silks and velvets . . . (and other imports). But these are trifles, he said, in a contest for liberty."⁹ Despite his personal misgivings, Adams, like Jefferson, supported trade liberalization. He fully understood how much New England merchants wanted to eliminate British mercantile restraints on colonial trade.

More than pecuniary interests stirred American enthusiasm for freer trade. The ideology of commerce and open markets had roots in Enlightenment thought. Among intellectuals in France and Great Britain there was growing support for an alternative to mercantilism, one based on laissez-faire government, individualism, reason, and economic internationalism. French physiocrats, for instance, believed that all political problems would be solved if the right economic principles were followed, the right economic measures adopted. Montesquieu, the eighteenth-century French philosopher and jurist, held that commerce cures destructive prejudices and leads to peace. The spirit of commerce unites nations, he said.¹⁰

In Britain, too, the ideology of commerce had influential friends in Parliament and among intellectuals. In 1773, according to Thomas Boswell, Samuel Johnson said that the great increase of commerce and manufactures hurts the military spirit of a people; because it produces a competition for something else than martial honors—a competition for riches. English economists, especially David Hume and Adam Smith, shaped and benefited from American thinking. Their analysis helped transform antimercantilism into the positive cosmopolitical vision of free trade benefiting humanity. Indeed, many early American leaders, including Thomas Jefferson, James Madison, and diplomat Arthur Lee, were familiar with Scottish economist Adam Smith’s powerful theoretical rationale for free trade presented in the Wealth of Nations. They found his reasoning impeccable, convenient, and compatible with their own instincts and desires.¹¹

Smith gave the American colonists additional intellectual ammunition to oppose mercantilism. As embodied in the restrictive Navigation Acts, British mercantilism rested on the belief that the central government in London could manage trade successfully to augment national power and acquire wealth. Adam Smith observed that the mercantile system sought to enrich British producers and workers with an advantageous trade balance. But the mercantile system also depressed the manufactures of neighboring countries and discouraged colonial production. Smith said that the interest of the consumer is almost constantly sacrificed to that of the producer.¹²

The Quest for Equality and Reciprocity

In July 1776, after declaring independence, the Continental Congress prepared to launch a trade initiative with long-term ramifications. Eager to obtain foreign diplomatic recognition and break the British stranglehold on Atlantic commerce, the Americans prepared to offer the only meaningful lure available: access to the U.S. market. They wanted free trade, meaning a freedom to trade on equal terms with other nations. They also sought reciprocal access to foreign markets.

With assistance from Benjamin Franklin and others, John Adams drafted a model plan for commercial treaties to guide U.S. negotiators; the Continental Congress approved it with only minor changes in September. As adopted, the treaty plan proposed two options: reciprocal national treatment in commercial matters or unconditional most-favored-nation policy. The first, and preferred, provision called for complete equality of treatment with foreign country nationals. In a strict sense, it was not a a call for bilateral free trade, as eighteenth-century governments still depended on tariff revenues to finance government expenditures. In a different sense, however, it would give the subjects of each country far more benefits than a narrow free trade agreement to remove customs duties would confer. Draft article 1 proposed that the subjects of either country pay only duties or imposts imposed on natives and enjoy all other . . . rights[,] liberties, privileges, immunities and exemptions in trade, navigation and commerce that natives or their companies enjoyed. If implemented as drafted, this would have opened European colonies to American commerce.¹³

The most-favored-nation alternative sought a different objective: nondiscriminatory trade conditions equal to those accorded most favored third parties. Because nothing was said about conditionality, it must be presumed that the drafters either envisaged unconditional most-favored-nation treatment, the prevailing practice in Europe at that time, or had not addressed the issue.

In retrospect, it appears that U.S. policymakers wanted assured access to European and colonial markets and proposed to yield European manufacturers unimpeded access to the American market in return. However, neither condition was essential to concluding a commercial agreement. Accompanying instructions told U.S. representatives to insist only on obtaining French aid to nullify the British Navigation Acts and protect American shipping.¹⁴

Although the treaty plan of 1776 had proposed a commitment to equality, the Franco-American Treaty of Amity and Commerce of February 1778, which was the first trade treaty actually negotiated, did not satisfy that objective. It failed to obtain either equality (national treatment) or unconditional most-favored-nation treatment, generalizing the mutual concessions to other parties. Indeed, the Treaty of Amity and Commerce contained only a conditional most-favored-nation clause that gave each party the right to purchase concessions provided to third countries.

Because Europeans had previously employed only the unconditional clause, this first attempt to limit the benefits of most-favored-nation treatment invites questions. Why did the parties choose to restrict the value of their concessions? Why did they insist on compensation for extending such concessions to third parties? Vernon Setser has argued that French negotiators inserted the conditional phrasing hoping to demonstrate to suspicious Europeans that French assistance to the American Revolution was disinterested.¹⁵ The French were prepared to purchase any concessions that an independent America might later extend to third parties with equivalent compensation. I find this explanation overly altruistic and perhaps incomplete. From available records, it is apparent that French officials worried about a possible reconciliation with England, while some Americans desired to dilute and restrict British commercial influence after the conflict. Thus neither France nor America desired to confer gratuitous benefits on Britain from this bargain.

In particular, the Americans wanted Britain and other Europeans to buy access to the American market with reciprocal trading privileges in Europe and their American colonies. Thus Benjamin Franklin and his colleagues had instructions to negotiate a series of separate trade agreements. Yielding unconditional most-favored-nation treatment for the sake of consistency with abstract principles and traditions would have dissipated America’s bargaining chips without gaining assured reciprocal access to European markets. Interestingly, France soon reverted, in 1783, to the unconditional most-favored-nation approach, but the United States consistently practiced the conditional form until 1923, when changed circumstances appeared to warrant a policy shift. Another feature of the 1778 Franco-American Treaty of Amity and Commerce also shaped future U.S. commercial policy. The preamble, Secretary of State John Quincy Adams asserted, was the foundation of our commercial intercourse with the rest of mankind. He claimed that the preamble should be the political manual for every negotiator of the United States, in every quarter of the globe. It placed the true principles of all fair commercial negotiation between independent states on the diplomatic record of nations for the first time. That preamble announced the agreement’s purpose as being the most perfect equality and reciprocity.¹⁶

Despite the joint statement of lofty principles, the agreement failed to achieve perfect equality and reciprocity. It contained some anomalies. For instance, although the United States provided most-favored-nation treatment to France in all of its ports, France confined such treatment to Europe, thus restricting access to the French colonies. As a matter of practice, whereas American ports were open to French commerce and navigation, French ports sometimes discriminated against U.S. ships. In Bordeaux, American traders complained about paying higher than most-favored-nation rates on salt. French merchants sought to limit American imports and to preserve their trade monopoly with the West Indies. During the 1780s the Marquis de LaFayette lobbied the French government to remove mercantile restrictions and promote better access. And French foreign minister Vergennes assured Franklin that the United States shall constantly experience a perfect reciprocity in France.¹⁷

Jefferson, while serving as minister to France, grew frustrated with difficulties in implementing the commercial treaty and diversifying commerce away from Britain. In April 1788 Foreign Affairs Secretary John Jay wrote Jefferson: It is to be regretted that the mercantile people in France oppose a system, which, certainly, is calculated to bind the two nations together, and from which both would eventually derive commercial as well as political advantages. Another part of the problem lay in America, where the thirteen states pursued separate and discriminatory policies to raise revenues and protect local manufactures without regard for treaty obligations. Favoring a stronger central government with Congress having the authority to regulate commerce, Jefferson and his colleague John Adams in London anticipated the day when a national government could use the weapon of trade to influence the European balance of power.¹⁸

American diplomats had hoped to negotiate similar commercial agreements with other European countries based on the 1776 plan, but they found little interest. Consequently, the 1776 trade initiative failed to revolutionize the way European nations conducted commercial relations. The Netherlands and Sweden did sign agreements similar to the U.S. treaty with France, but only the Netherlands yielded most-favored-nation access to overseas colonies.¹⁹ An ally of France, Spain dallied; it was not eager to encourage revolutionaries openly and determined not to admit them to colonial markets.

As the mother country and the principal trading partner, Great Britain retained a strong hand. The Americans might win independence, but they needed British markets, goods, and credit. Thus in the peace negotiations, although Britain flirted with bilateral free trade, national treatment, and reciprocity, it eventually opted to avoid any trade agreement. Although elements in the British government were sympathetic to free trade theories, Lord Sheffield rallied the opposition with a tract opposing any commercial treaty. None was necessary, he claimed, because Britain could buy American products from other sources, and the superiority of British manufactures assured their access to American markets. An embittered King George III also opposed a commercial agreement, and powerful merchants counseled restraint, believing that the prospect of a trade agreement might encourage the Americans to pay commercial debts. During the Confederation period American diplomats launched a second campaign to conclude commercial treaties. In 1784 envoys were instructed to propose treaties based on the most perfect equality and reciprocity and compatible with existing agreements. The last phrase indicated that diplomats were to offer conditional most-favored-nation treatment. Once again the envoys sought to exchange access to the U.S. market for equal access to European markets and in the process gain an important political plumb: diplomatic recognition of the new American nation.²⁰

The American envoys had little success, however. They entered negotiations with Denmark, Portugal, Naples, Tuscany, and Prussia, as well as Britain and Spain. An agreement concluded with Prussia in 1785 resembled the 1778 French treaty. The preamble espoused the twin principles of equality and reciprocity, but the United States gained only conditional most-favored-nation treatment. One of the problems with the American campaign for most-favored-nation treatment was that no country enjoyed preferential treatment in the American market. Therefore, whereas Denmark could expect few immediate export gains from signing a reciprocity agreement with America, some feared that the Americans might use the agreement to gain nondiscriminatory access to the benefits of Denmark’s existing trade agreements.²¹

Given the lack of trade organization in the United States, and the inattention to problems of actually administering the treaty structure, some American officials like John Jay and Elbridge Gerry also considered the quest for commercial treaties unrealistic. After reviewing the draft agreement with Prussia in May 1785, Jay, the Confederation’s secretary of foreign affairs, wrote the American negotiators that, in his opinion, a system for regulating the trade of the United States should be formed and adopted before they enter into further treaties of commerce. Jay thought that such treaties should be accommodated to their system, than that their system should be accommodated to such treaties. Treaties, he said, might embarrass U.S. discussion of possible export duties, discriminatory duties, import prohibitions, and shipping regulations.

Jay had reservations about the use of the most-favored-nation clause. For a variety of reasons, he believed it inexpedient to insist on this provision. For one thing, "we may have reasons for freely granting to one nation what we may have no reason to grant to another. Also, he anticipated conflicts over the application of this clause to colonial areas and over the use of the conditional provision to purchase most-favored-nation benefits. Moreover, Jay recognized that the United States held a weak bargaining hand in such negotiations: our trade is at present free to all, we have few favors to grant to any; whereas, their trade being charged with various duties and restrictions, they need only relax to have favors to grant. In essence, Jay favored bilateral agreements of limited duration, without reference to or connection with any other. Over time, he anticipated that the United States would gain both experience and commercial importance and so increase its capacity to make more favorable agreements. Elbridge Gerry also preferred a strict reciprocity system: This favored Nation system appears to me a system of Cobwebs to catch Flies. Attend to it as it respects Restrictions, prohibitions, and the carrying Trade, and it is equally distant from a Rule of Reciprocity, which is the only equitable and beneficial Rule for forming Commercial Treaties."²²

With Spain and Britain, major European powers having colonies in America, the Confederation government enjoyed no success at all. The Jay-Gardoqui negotiations for an agreement with Spain foundered on sectional issues involving navigation of the Mississippi River. But the proposed commercial provisions, considered attractive to eastern maritime states, also contained disadvantages. Spain still refused access to its American colonies, prohibited tobacco imports, and maintained much higher duties on imports than the American states imposed on Spanish goods. Critics in Congress, like Charles C. Pinckney of South Carolina, complained that the agreement proposes nothing more than she [Spain] will always be willing to grant . . . without a treaty, and nothing which can be termed an equivalent for the forbearance she demands.²³

At the end of the Revolution Britain had avoided a commercial agreement with its former colonies. At first, John Adams and many of his peers remained optimistic that time and circumstances would produce a mutually beneficial treaty of commerce. But throughout the 1780s London continued to reject commercial reciprocity, perceiving that the weak American Confederation had nothing to offer and Britain nothing to gain from such negotiations. Thus London prohibited American trade with the British West Indies and feasted on export sales of manufactures to America. In effect, Britain enjoyed the commercial benefits of empire without the security costs. From his post in London, Adams experienced enormous frustration. Convinced at last that Britain would not sign a commercial treaty and concede true reciprocity, he urged a stronger central government, one having the power to regulate commerce and conduct foreign affairs. Adams also urged retaliation to place pressure on Britain: Patience, under all the unequal burdens they impose upon our commerce, will do us no good. . . . nothing but retaliation, reciprocal prohibitions, and imposts, and putting ourselves in a posture of defense will have any effect.²⁴

The Foundations of American Trade Policy

Institutional weaknesses and the failure to protect national commercial interests under the Articles of Confederation finally produced a more effective union in 1789 under the Constitution. Indeed, Chief Justice John Marshall later observed: it may be doubted whether any of the evils proceeding from the feebleness of the federal government, contributed more to that great revolution which introduced the present system, than the deep and general conviction that commerce ought to be regulated by Congress. He was right. Under the weak Articles of Confederation, trade problems nearly doomed the new government. Customs disputes among the newly independent states and an inability to conduct negotiations with European powers jeopardized the new government. Refusing to grant the Continental Congress taxing power, the thirteen states imposed their own revenue and protective tariffs on goods imported from other jurisdictions. For instance, Pennsylvania levied duties on New England imports; Massachusetts imposed tariffs on foreign products, including goods from New York and Rhode Island. As a consequence of these divisions, support grew to cede Congress the power to regulate commerce and to establish what was in effect a customs union among member states. The result was a Constitution that authorized free trade among the thirteen states, established a common external tariff, and prohibited export duties.²⁵

Concerned about domestic weaknesses and pernicious foreign influences, the authors of the Constitution bifurcated authority in trade matters between Congress and the executive branch. Congress, not the executive,