Historical notes on Free Trade and the US

Early 1800s

The Industrial Revolution is in its early stages. The most economically important industries in the US are:

– cotton, produced in the south by slaves working in plantations, and

– manufactured goods, mainly textiles (fabric, clothing, curtains and bed sheets etc) produced in factories in the north.

Trade is a divisive political issue. Politicians from the southern states want low (or no) tariffs, since this would help them sell more cotton for export. Politicians from the north want high tariff barriers to protect their manufactured products from competition with similar products made in Europe.

Over time there is a trend towards higher tariffs / more protectionism.

[SIDE NOTE: There is no general, numerical definition of ‘trade protectionism’ or ‘trade liberalization’. A 2% tariff on pickled beets could be considered ‘protectionist’ in one context and ‘liberal’ in another. AFAICT a protectionist tariff is simply one that the speaker thinks is too high.]

[SIDE NOTE PART 2: No-one who says they believe in free trade, past or present, actually wants completely free trade. What they want is for certain tariffs, selected by them, to be reduced by a particular amount. No serious political leader, expert, or pundit has ever called for all tariffs to be removed – if they did they would be laughed at and dismissed as a crank whose ridiculous ideas could not possibly be taken seriously.]

1930: Smoot-Hawley Tariff Act

A US law that set tariffs at a high level. This to some extent causes or exacerbates the Great Depression.

1934: Reciprocal Trade Agreements Act

Allows the president to make tariff-lowering trade agreements between the US and other countries.

1950s to 1980s: The Cold War

Following World War 2, US manufacturing booms. With European countries still recovering from the war and much of the rest of the world recovering from colonization, the US emerges as the world’s strongest economy.

Political elites are divided; some call for Free Trade (but see SIDE NOTES 1 and 2) and others call for protectionism. As big businesses become more international, they also become more pro-Free Trade.

[EXCEPTION: Agriculture is protected with huge subsidies and tariffs. This exception is so hugely complicated and important it needs its own blog post.]

International trade becomes a key part of the US’s strategy for winning the Cold War against Russia, China, and other communist countries. Trade agreements bind together the major free market democratic countries, making them allies.

Free Trade also becomes an important part of the story the US tells about itself. Free markets, liberal democracy, economic prosperity; these ideas are used to show that the US and its allies are better than the centrally planned economies of China and the Soviet Bloc.

1950s to 1990s: General Agreement on Tariffs and Trade (GATT)

The US and most other countries in the world sign up to the GATT, which is both an agreement to lower tariffs, and a series of rounds of trade negotiations. It becomes the unofficial governing body in charge of world trade. It is widely accused of being controlled by, and biased in favour of, the wealthiest countries, particularly the US.

In 1995 the GATT gets transformed into a greatly expanded and amped-up version of itself called the World Trade Organisation (WTO). Unlike the GATT, the WTO exists permanently instead of just convening in sessions every few years. It officially governs world trade.

1980s: Bilateral Free Trade Agreements

Until the 80s, the US has done all its trade agreements through the GATT, which meant having agreements with (nearly) all the countries in the world at once. But with the Uruguay Round the GATT process gets bogged down with endless arguments and no agreement in sight. So the US switches to making agreements with one country at a time.

1984: Canada-US Free Trade Agreement.

1988: Mexico wants to join in to make it the North American Free Trade Agreement (NAFTA). This is so controversial it doesn’t become officials until 1993.

The US also makes separate trade agreements with: Jordan, Chile, Singapore, Morocco, Australia, Central America and the Dominican Republic (CAFTA-DR), Bahrain, Oman, Peru, Colombia, Panama, and South Korea.

Sources

Mainly America’s Uneasy History with Free Trade by I. M. Destler; Harvard Business Review; April 28, 2016.

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