Trade Agreement

Agreement, usually between or among governments, that encourages, regulates, and/or restricts elements of trade among the respective countries.

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When two or more nations wish to establish or modify economic relations and set tariffs on international commerce they enter into a trade agreement. Any authorized government official may negotiate such an agreement, but all participating governments must formally ratify the proposed treaty before it becomes effective. As a result, domestic political forces and interest groups exert considerable influence over the provisions of any trade agreement. The United States negotiated few trade agreements in the eighteenth and nineteenth centuries. Domestic political pressures determined how high or low import taxes (tariffs) would be. From the earliest debates in the First Congress, some political leaders favored low tariffs designed to raise revenue while others favored much higher rates to protect domestic producers from foreign competition. Lower rates generally prevailed through the 1850s, but protectionist tariffs were sponsored by the dominant Republican party during and after the Civil War. To encourage particular types of trade within the forbiddingly high post–Civil War tariff structure some leaders favored bilateral trade agreements in which each nation agreed to reduce rates in return for reciprocal reductions.

In the 1870s the United States signed a reciprocal trade agreement with the then-independent Hawaiian government that gave Hawaiian sugar exporters tariff-free access to the U.S. market. In the early 1890s Secretary of State James G. Blaine negotiated reciprocal trade agreements that softened the effect of the highly protectionist McKinley Tariff Act of 1890, but the 1894 Wilson Gorman Tariff Act made such agreements impossible. With the exception of the Underwood Act, which passed in 1913 but never went into effect because of World War I, protectionist rates remained until the Great Depression, when it appeared that the nation's high import duties were not only detrimental to world trade but also might be harmful to the domestic economy.

In the election of 1932 the Democrats came to power on a program involving "a competitive tariff" for revenue and "reciprocal trade agreements with other nations." Cordell Hull, President Franklin D. Roosevelt's secretary of state, was the driving force behind congressional action in getting the Trade Agreements Act made law on 12 June 1934. The Reciprocal Trade Agreements Act of 1934 permitted reduction of trade barriers by as much as half in return for reductions by another nation. Moreover, the new act, in form an amendment to the 1930 Tariff Act, delegated to the president the power to make foreign trade agreements with other nations on the basis of a mutual reduction of duties, without any specific congressional approval of such reductions. The act limited reduction to 50 percent of the rates of duty existing then and stipulated that commodities could not be transferred between the dutiable and free lists. The power to negotiate was to run for three years, but this power was renewed for either two or three years periodically until replaced by the Trade Expansion Act of 1962. In the late 1930s and 1940s U.S. negotiators arranged a great number of bilateral trade agreements. In fact, between 1934 and 1947 the United States made separate trade agreements with twenty-nine foreign countries. The Tariff Commission found that when it used dutiable imports in 1939 as its basis for comparison, U.S. tariffs were reduced from an average of 48 percent to an average of 25 percent during the thirteen-year period, the imports on which the duties were reduced having been valued at over $700 million in 1939.

Although Congress gave the State Department the primary responsibility for negotiating with other nations, it instructed the Tariff Commission and other government agencies to participate in developing a list of concessions that could be made to foreign countries or demanded from them in return. Each trade agreement was to incorporate the principle of "unconditional most-favored-nation treatment." This requirement was necessary to avoid a great multiplicity of rates.

During World War II the State Department and other government agencies worked on plans for the reconstruction of world trade and payments. They discovered important defects in the trade agreements program, and they concluded that they could make better headway through simultaneous multilateral negotiations. American authorities in 1945 made some far-reaching proposals for the expansion of world trade and employment. Twenty-three separate countries then conducted tariff negotiations bilaterally on a product-by-product basis, with each country negotiating its concessions on each import commodity with the principal supplier of that commodity. The various bilateral understandings were combined to form the General Agreement on Tariffs and Trade (GATT), referred to as the Geneva Agreement, which was signed in Geneva on 30 October 1947. This agreement did not have to be submitted to the U.S. Senate for approval because the president was already specifically empowered to reduce tariffs under the authority conferred by the Trade Agreements Extension Act of 1945.

After 1945 Congress increased the power of the president by authorizing him to reduce tariffs by 50 percent of the rate in effect on 1 January 1945, instead of 1934, as the original act provided. Thus, duties that had been reduced by 50 percent prior to 1945 could be reduced by another 50 percent, or 75 percent below the rates that were in effect in 1934. But in 1955 further duty reductions were limited to 15 percent, at the rate of 5 percent a year over a three-year period, and in 1958 to 20 percent, effective over a four-year period, with a maximum of 10 percent in any one year.

In negotiating agreements under the Trade Agreements Act, the United States usually proceeded by making direct concessions only to so-called chief suppliers—namely, countries that were, or probably would become, the main source, or a major source, of supply of the commodity under discussion. This approach seemed favorable to the United States, since no concessions were extended to minor supplying countries that would benefit the chief supplying countries (through unconditional most-favored-nation treatment) without the latter countries first having granted a concession. The United States used its bargaining power by granting concessions in return for openings to foreign markets for American exports.

Concessions to one nation through bilateral negotiations were often extended to all others through the most-favored-nation principle. Many international agreements included a clause stating that the parties would treat each other in the same way they did the nation their trade policies favored the most. If in bilateral negotiations the United States agreed to reduce its import duties on a particular commodity, that same reduction was automatically granted to imports from any nation with which the United States had a most-favored-nation arrangement. The high tariff walls surrounding the United States were gradually chipped away through bilateral agreements that established much lower rates for all its major trading partners.

From the original membership of twenty-three countries, GATT had expanded by the mid-1970s to include more than seventy countries, a membership responsible for about four-fifths of all the world trade. During the numerous tariff negotiations carried on under the auspices of GATT, concessions covering over 60,000 items had been agreed on. These constituted more than two-thirds of the total import trade of the participating countries and more than one-half the total number of commodities involved in world trade.

With the expiration on 30 July 1962, of the eleventh renewal of the Reciprocal Trade Agreements Act, the United States was faced with a major decision on its future foreign trade policy: to choose between continuing the program as it had evolved over the previous twenty-eight years or to replace it with a new and expanded program. The second alternative was chosen by President John F. Kennedy when, on 25 January 1962, he asked Congress for unprecedented authority to negotiate with the European Common Market for reciprocal trade agreements. The European Common Market had been established in 1957 to eliminate all trade barriers in six key countries of Western Europe: France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg. Their economic strength, the increasing pressure on American balance of payments, and the threat of a Communist aid and trade offensive led Congress to pass the Trade Expansion Act of 1962. This act granted the president far greater authority to lower or eliminate American import duties than had ever been granted before, and it replaced the negative policy of preventing dislocation by the positive one of promoting and facilitating adjustment to the domestic dislocation caused by foreign competition. The president was authorized, through trade agreements with foreign countries, to reduce any duty by 50 percent of the rate in effect on 1 July 1962. Whereas the United States had negotiated in the past on an item-by-item, rate-by-rate basis, in the future the president could decide to cut tariffs on an industry, or across-the-board, basis for all products, in exchange for similar reductions by the other countries. In order to deal with the tariff problems created by the European Common Market, the president was empowered to reduce tariffs on industrial products by more than 50 percent, or to eliminate them completely when the United States and the Common Market together accounted for 80 percent or more of the world export value. The president could also reduce the duty by more than 50 percent or eliminate it on an agricultural commodity, if he decided such action would help to maintain or expand American agricultural exports.

After Kennedy's death, President Lyndon B. Johnson pushed through a new round of tariff bargaining that culminated in a multilateral trade negotiation known as the Kennedy Round. The agreement, reached on 30 June 1967, reduced tariff duties an average of about 35 percent on some 60,000 items representing an estimated $40 billion in world trade, based on 1964 figures, the base year for the negotiations. As a result of the tariff-reduction installments of the Kennedy Round, by 1973 the average height of tariffs in the major industrial countries, it is estimated, had come down to about 8 or 9 percent.

Although both Johnson and President Richard M. Nixon exerted pressure on Congress to carry some of the trade expansion movements of the Kennedy Round further, Congress resisted all proposals. Since 1934 U.S. trade negotiations have been an executive responsibility, but Congress has maintained a strong interest in both procedures and outcomes. In the 1960s and 1970s it called upon the U.S. Tariff Commission to identify "peril points," where reduction of specific duties might cause serious damage to U.S. producers or suppliers. Other federal legislation provided for relief measures if increased imports cause injury to a domestic industrial sector. The crisis in foreign trade that developed in 1971–1972 was the result of stagnation as well as of an unprecedented deficit in the U.S. balance of payments. Some pressure groups from both industry and labor tried to revive the protectionism that had flourished before 1934, but they had had small success except on petroleum imports by the mid-1970s.

The world's acceptance of more liberal trade agreements has had different effects on U.S. producers. Most likely to benefit are those engaged in the nation's traditionally export-oriented agricultural sector. Production costs are relatively low in the U.S. heartland, so a freer market tends to benefit domestic agricultural exporters. At the same time, labor-intensive industries, such as textiles, electronics, and automobiles, have suffered from the gradual reduction of import restrictions. U.S. wage rates range far higher than comparable rates in certain countries that have built very efficient textile mills and fabrication plants for electronic devices and appliances. The recovery of the U.S. auto industry in the 1990s, however, demonstrated that increasing the use of industrial robotics and automated assembly lines can help undermine the cost advantage of foreign manufacturers. As more liberal trade agreements promote competition among producers, each nation is likely to develop stronger and weaker economic sectors that complement those of its global trading partners. The ultimate trade agreement is one in which all national barriers disappear. The European Union (formerly the European Economic Community) represents an approximation of that goal, as does the 1993 North American Free Trade Agreement (NAFTA) among the United States, Canada, and Mexico. NAFTA cancels all major barriers to exchange of goods and services among the participants, leaving the GATT structure in control of imports and exports outside the free-trade area.

Bibliography

Grinspun, Ricardo, and Maxwell A. Cameron, eds. The Political Economy of North American Free Trade. New York: St. Martin's Press, 1993.

McCormick, Thomas J. America's Half Century: United States Foreign Policy in the Cold War and After. Baltimore: Johns Hopkins University Press, 1995.

McKinney, Joseph A., and M. Rebecca Sharpless, eds. Implications of a North American Free Trade Region: Multi-Disciplinary Perspectives. Waco, Texas: Baylor University, 1992.